Business Real Estate

Board member opens can of worms with list of 'problems'

Question: All owners in my association received a letter from the board's vice president along with photos showing everything that's wrong in our building. Some things that were listed as "wrong" have been dormant for dozens of years, and still this high-rise has not fallen down and his issues do not pose a liability. Some things have been deliberately tampered with by the vice president so he could say that they are "wrong." Now that he has sent this list to all owners, what are the ramifications if we want to sell our units? Must we, and all the real estate salespersons, disclose all of these "wrong" things to a buyer?

Answer: Part of the board of directors' duties include repairing, maintaining and replacing common area facilities. During its mandated inspections of association property the board usually conducts a preliminary determination of what may need attention. In keeping with the board's due diligence, these items are then discussed at an open board meeting and, depending on their priority, repair estimates are sought and bids are received. Then the board chooses a contractor, owners are notified and the work begins. Until a solid determination is made as to the status of a pending "problem" in common area facilities, a unilateral determination emanating from the board might cause problems for the board and the association.

Because the board is vested with decision making concerning repair and maintenance of association property, it should also be making repairs on a regular basis. The board makes decisions at open meetings and as a group. A director's personal belief that problems exist or things are "wrong" does not substantiate his flier alerting all owners of "potential" problems.

The board should send out fliers to alert all owners and guests of dangerous conditions. If such conditions exist, the board has a duty to warn residents, visitors and owners, then take immediate steps to correct the problems. Such warnings should be posted throughout the development until the conditions are rectified.

If liability occurs and/or pending sales are lost in the building because of the vice president's notification and the board's failure to fix problems in a timely manner, an owner might have a cause of action against individual board directors, the board as a body and the association. So, too, would a buyer have a cause of action against the association for its failure to formally warn — that is, warn "on the record" — of such known conditions before sale.

The board needs to have a consistent protocol in place for situations like this and for avoiding liability. By sending out this flier, the vice president, by innuendo, claims that prior boards may have been derelict in their duties, when in fact such may not be the case. Or his actions could be a political ploy designed to keep himself on the board so he can exert an undue amount of influence on other board directors. Even if the vice president is sincere in his statements, these proclamations do nothing to correct the situations to which he refers and do not establish that anything is truly wrong.

If the vice president created some of the problems himself in hopes of raising funds for the association and his pet projects, his actions could constitute fraud.

If the vice president is a licensed contractor or engineer, he may have a basis for creating the list. If not, then this person's list of "wrongs" is nothing more than his personal observations that need to be discussed within the bounds of a duly noticed meeting.

Unfortunately, California law imposes a rather general "good faith" obligation on sellers to disclose anything that may be material to the decision-making process of a prospective buyer. This list may contain things that have merit, some that do not and some that you may not be sure about, but having that information requires you to disclose the same to potential buyers. In effect, sending out this list has put all the owners on notice, requiring them or the board to conduct a more formal investigation and to initiate the process for remediation and repairs.

Situations like this are a red flag to buyers to perform thoughtful due diligence, ask questions and obtain written assurances from sellers regarding such disclosures before making an offer and closing the sale.

Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.

Copyright © 2014, Los Angeles Times
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