Who Is Responsible for Quake Repairs?

QUESTION: I serve on the board of directors in a condominium association whose property was damaged in the Northridge earthquake. The association does not have earthquake insurance. There is damage to the common areas of the building as well as some interior damage in several of the condominium units. Is the association responsible for all repairs? What, if anything, would the unit owners be responsible for repairing? What about balconies that are designated as “exclusive use common area” in the association’s legal documents? Can the association apply for assistance from the Federal Emergency Management Agency (FEMA) or should the individual owners apply?

ANSWER: Your legal documents should be reviewed by the association’s attorney to determine responsibility for specific repairs. If your association has not consulted an attorney in the past, I recommend that you contact an attorney who specializes in community association law.

The attorney will refer to your association’s condominium plan and the declaration of covenants, conditions and restrictions (CC&Rs;) to find out where the association’s responsibility ends and the owners’ responsibilities begin. In general, the association is responsible for repairing the structure of the building and all common areas. For instance, common area includes the common walls, the framing, studs and wallboard. The unit owner is responsible for the paint or wall covering or other improvements on the interior surface of the perimeters of the unit. Therefore, tiles that fell from the bathroom wall or a broken shower door in an individual unit would be the unit owner’s responsibility to fix.

Regarding exclusive use common area, many associations have CC&Rs; that state that the owner is responsible for maintaining areas such as garage spaces, entry doors and balconies. The state law clarifies maintenance responsibility if your documents are unclear regarding exclusive use common area. Many attorneys believe that the owner’s responsibility to maintain in this context means keeping the area clean, and possibly even repainting as the need arises, but the owner’s responsibility would not extend to major balcony repairs of a structural nature. The board of directors should rely on expert legal advice regarding the meaning of the documents and the California laws that apply in your situation.

The association can apply for FEMA assistance and then your association will be referred to the Small Business Administration for a loan application. Lisa Cookie, public information officer of the SBA, states that the individual owners also can apply for assistance in paying one lump-sum special assessment that the association’s board or membership approves. The association or individual owners can apply for assistance prior to determining the specific amount of damage or the total cost of repairs. Subsequently, the loan can be declined if you find that it is not needed.

The association’s board of directors can vote to use reserve funds for emergency repairs to the common area and other related expenses such as hiring structural engineers and other experts. The board should then replenish the reserves by approving an emergency or special assessment. Proper 30-day notice must be redistributed to all of the owners prior to the due date for the special or emergency assessment.

The board can approve a special assessment that is less than or equal to 5% of the current year’s total assessment. If the association’s expenses exceed the 5% ceiling, the board has two choices. They can either submit the special assessment to the owners for approval or they can approve an emergency assessment and distribute the necessary documentation to the owners.

Since the earthquake recovery expenses were an unforeseen expense at the time that the current fiscal year’s budget was adopted, the board of directors has the authority to approve an unlimited emergency assessment.

The board should consult an attorney to be certain that the association complies with all requirements of the legal documents and the California Civil Code, Section 1366. The individual owners can also apply to SBA for assistance to pay for repairs within their units.

Again, if you find that the assistance is not needed, you can decline it in the future.

How Does Board Start Picking Up Pieces?

Q: Our condominium was damaged extensively by the earthquake. Although we have earthquake insurance coverage, the insurance deductible is a major expense that some of our owners will probably be unable to pay. Some unit owners have told the board of directors that they plan to abandon their units. It appears that the association may be unable to rebuild even with the insurance proceeds.

There are so many complex issues that my fellow board members and I need some advice so that we can set some priorities. Where do we start?

A: For many association board members, aftershocks aren’t the only cause of sleepless nights. As board members, in addition to your own personal losses and concerns, you must deal with the association matters too. You are undoubtedly getting numerous phone calls from anxious owners wanting to know what is being done. You should not be embarrassed to tell the other unit owners that you just don’t have all of the answers yet.

I recommend that the board schedule a special meeting of owners to let them know what is happening and what the board is doing. If possible, invite the association’s attorney, insurance agent, manager and any other professional who can assist the board in answering the owners’ questions.

Attorney Leonard Siegel, with the law firm of Wilner, Klein & Siegel in Beverly Hills, recommends that the board’s first priority is to review the association’s declaration (CC&Rs;) concerning destruction and condemnation of the project. The law firm has prepared an excellent checklist for community association boards of directors that are dealing with post-earthquake issues.

The checklist states, “Most likely, the CC&Rs; of your association will contain provisions that will require that the board take certain actions as a result of the earthquake.

Because the CC&Rs; of your association are unique, your board should review your CC&Rs; for pertinent provisions with the assistance of the association’s attorney.

“For example, CC&Rs; of a community association may contain provisions which require that the structures be rebuilt where damage is extensive, provided that insurance proceeds are sufficient to finance some percentage (often 85%) of the costs of rebuilding the project. Likewise, your CC&Rs; may require that the board initiate the reconstruction pursuant to existing plans. However, if the board wishes to modify these plans, your CC&Rs; may provide that reconstruction in accordance with modified plans requires approval of some percentage of the association’s members and some percentage of the holders of the first trust deed (‘senior lenders’).

“If the insurance funds are not sufficient to finance the stipulated percentage of the rebuilding costs, your CC&Rs; may provide that rebuilding may only be initiated with the approval of members and senior lenders. Your CC&Rs; also probably address how insurance proceeds must be distributed, to whom and on what basis.

“In the event your project will not be rebuilt, your CC&Rs; probably authorize the partitioning of units, and require that certain notices be made.

“Finally, if the buildings of your project have been condemned, your CC&Rs; should address how these condemnation proceeds are to be distributed, to whom and on what basis. You must review your CC&Rs; to determine the rights and obligations of your board and your members.”

I have added some of my comments and summarized Wilner, Klein & Siegel’s checklist of steps that the board of directors should take:

1--Notify the homeowners about damage, liability and other issues as soon as reliable information can be obtained. Try to limit the information to statements of fact that can be substantiated. Be sure to disclose the statements or conditions that need further research or clarification and put a date on the material that is distributed. As the information is updated or revised, owners will be able to see from the date which information is most reliable. If the board has consulted with independent sources or professionals, inform the owners. For example, your notice could state, “The board of directors has been advised by the association’s insurance agent that. . . .”

2--Apply for Federal Emergency Management Agency assistance. Call FEMA at (800) 462-9029 or (800) 525-0321. They will mail to you the Small Business Administration (SBA) loan application. All loans are processed through the SBA.

3--Obtain a list of all senior lenders (first mortgagees) for all of the condominium units. Your insurance agent may be able to help with this. The association CC&Rs; probably state that the senior lenders have the right to vote on any decision not to reconstruct and the senior lenders are entitled to their pro rata share of any insurance proceeds or condemnation awards.

4--Notify the lenders and the unit owners of any actions that may require their approval. Some lenders may have already filed an official request for notification of any occurrence that may affect their interests.

5--If any units are uninhabitable, advise the owners to check their individual insurance policies to see if relocation expenses are covered. The owner should check with their insurance agent regarding the specific coverage and then keep records of reasonable expenses resulting from the relocation. I assume that most insurance companies will challenge a claim that includes five-star accommodations with caviar on the room service bills. Many hotels are offering discount rates to those who are displaced by the earthquake.

The owners may have earthquake coverage under their individual condominium owners’ insurance policies. One of the options available is “earthquake loss assessment coverage,” which protects the unit owner when a special assessment is approved by the board or the association members.

6--The board should retain a structural engineer as soon as possible to identify the extent of the damage and estimate the cost of repairs and the estimated time that repairs will require. The board should consult the association’s attorney for referrals to engineers, architects and other professionals. Relying on the advice of these professionals will tend to reduce the board’s liability.

7--Adopt a plan for funding the reconstruction. The board must decide how the insurance deductible will be paid and how to finance any repairs that are not covered by insurance. Consult the association’s attorney regarding the procedures for special assessments and emergency assessments.

8--If the association is already a party to a loan agreement, consult the lender regarding deferred loan payments, an increase in the line of credit or any other special benefits that the lender might offer to the association. Advise owners to check with their mortgages about deferred loan payments or other special arrangements that will temporarily ease their financial burden.

9--Review vendor contracts and equipment leases if revision or termination seems advisable. Consult your attorney regarding any changes that are needed.

10--Advise homeowners to contact the county assessor’s office about a reassessment of the property taxes on their unit.

11--Inform homeowners about their responsibility for repairs to the interior of their units. Wilner, Klein & Siegel’s advice is, “Under the CC&Rs; of your association, homeowners may be responsible for the repair of damage to the interior of their units (including the interior surfaces of walls, ceilings and floors), as well as fixtures and personal property in the units, to the extent that these damages are not covered under the association’s master insurance policy. Typically, this will be true if there is not major exterior damage to your project.” After consulting an attorney, the board’s written notice to the owners should cite the attorney’s advice regarding the owners’ responsibilities.

12--Consider hiring a construction engineer and/or architect before hiring a contractor. Most of the law firms that I have talked with advise associations to complete the repair work that the structural engineer has recommended. Damage must be inspected, reconstruction plans need to be designed and specifications need to be prepared so that contractors can submit competitive bids. A construction engineer or architect may be able to assist the board in reviewing the bids, inspecting the work of the contractor as it progresses and interfacing with the insurance carriers. The additional cost can be submitted as part of the insurance claim.

Wilner, Klein & Siegel advises the association board to “exercise the same care with this reconstruction as you would with any construction project your association undertakes. Many of our clients advise us that they are under great pressure to reconstruct their project as quickly as possible, even if this means neglecting to take the kind of precautions they would take under ordinary circumstances. These precautions include soliciting competitive bids, checking references, having your construction agreement reviewed by the association’s attorney, and monitoring the work performed to ensure that no payments are made unless the work to date has been satisfactory and all lien releases have been obtained.

“Although exercising this level of care may delay the date your project is reconstructed by several weeks or more, these precautions are essential. A year from now, if your project has been reconstructed properly, no homeowner will care that the board proceeded methodically. However, if in the upcoming year the workmanship is so poor that the board has to hire a substitute contractor to complete the job, and at great additional time and expense, no homeowner will forget and many may not forgive the board.”

Free Quake Seminar

A free seminar for homeowner association directors and members entitled “After the Quake: Rights, Responsibilities and Relief” will be presented from 10 a.m. to 1 p.m. Saturday, Feb. 26, at the Encino Community Center, 4935 Balboa Blvd., Encino, by the greater Los Angeles chapter of Community Assns. Institute.

Speakers will include representatives from the Federal Emergency Management Agency (FEMA), Small Business Administration (SBA), California disaster-recovery agencies and Michael Kennedy, from Sunrise Bank in San Francisco, who will share his experiences of community associations’ recovery from the Loma Prieta quake.

Marc Goldsmith, an attorney with the law firm of Wilner, Klein & Siegel, will explain whether condominium associations or the individual owners are responsible for uninsured damage to homes. He will also talk about the associations’ authority and owners’ rights regarding reconstruction, special assessments, approval of bids and the decision not to rebuild.

Insurance agents Timothy Cline and Steve Segal will discuss what kinds of earthquake-related damages are covered under an association’s fire-and-casualty policy without earthquake endorsements and the types of losses that are included and excluded under typical association and condo owners’ earthquake policies.

Disaster-recovery resource materials from several government agencies and the Red Cross will be available.

Call Kathleen Daniels at (310) 285-8286 for more information.