Avoid the Collapse of Deferred Maintenance

By Andrea O’Toole, Rachel Miller, Tim Stauffer and Mary Prados Peterson

By now, most have seen the awful images of the collapsed Champlain Towers which resulted in nearly 100 deaths, countless injuries, property damage and unanswered questions about how this could have happened. While not every case of deferred maintenance has such catastrophic results, the Bay Area is not without its own examples. Six people died following a 2015 balcony collapse in Berkeley. That tragedy resulted in legislation affecting apartment buildings and, subsequently, condominium buildings. The protection of human life and avoidance of injury should be primary goals in determining why, when, and how community associations undertake maintenance, repair, and replacement. At the same time, protection of the property, and the association members’ significant investment in it, is also a key objective.

The authors of this article – a structural engineer, a community association project manager, a construction defect attorney, and an association corporate attorney – have teamed up to address the thorny issues relating to deferred maintenance, inherited defects, fiduciary duty, liability, funding issues, and everything the in-between.

ASSOCIATION’S DUTY TO MAINTAIN, REPAIR, AND REPLACE

Building components and systems require maintenance. An association is responsible to maintain, repair, and replace common area and to repair, and replace exclusive use common area. (Cal. Civ. Code § 4775 (a)(1); (a)(3).) An owner has a corresponding responsibility to maintain, repair, and replace their unit and to maintain any exclusive use common area appurtenant to their unit. (Civ. Code § 4775 (a)(2); (a)(3).) The CC&Rs can shift these statutory obligations; however, in almost all cases, the structural elements of a condominium building will be characterized as common area and fall to the responsibility of the association.

It is also important to understand that building components and systems have a useful life. Ignoring or shortcutting that maintenance will shorten the life of the component or system as well as other portions of the building. Many different components and systems require different frequencies and types of maintenance. Think of it like changing the oil or buying new tires for a car. An oil change is different than a tire change and will typically be needed more frequently. The same is true of building components.

Association boards and their managers must identify which consultants and contractors are necessary to advise on maintenance and repair of a particular component. They will need to gather useful documents such as drawings, repair and maintenance records, previous inspection reports, and other documents the consultant may find useful to review. Good maintenance recordkeeping by the association can result in dollars saved on future projects.

There are several things associations can do to help identify problems both before and when they exist. Associations can and should encourage owners to report maintenance issues and concerns. The association should document those reports and address them promptly. Associations should perform site walks regularly. Many associations conduct these visual inspection site walks monthly; however, they can be more frequent or less depending on need. Reserve studies should be reviewed and referenced frequently to determine how much longer a component can be anticipated to last. Boards and management should use these reporting, inspection, and recordkeeping tools to look for maintenance and deterioration trends throughout the project, which can provide an earlier warning of a larger, more systemic issue.

BUDGETING CHALLENGES

Each year, associations should review upcoming projects. Dust off that reserve study at the beginning of each year, identify the components that are due for repair or replacement, and create a one- to five-year plan. Associations may find themselves under budget for the necessary maintenance of the community. Often, boards find that the assessment income is not adequate to address the maintenance concerns for the year and will need to investigate possible funding options. Putting together a multi-year plan will help ensure funds (some or all) are there when needed.

Improper planning too often results in delayed projects and special assessment needs to complete the maintenance projects. It is important to review needed projects far in advance, increase reserve contributions for the components, and increase assessments (yes, even if it is unpopular) to fund these future projects. When a component has served its useful life, which frequently occurs before associations anticipate, there is no guarantee the funds will be there as other factors contribute to the project costs (e.g., unexpected cost increases in the construction industry). The funding plan is an entirely separate consideration and should be revisited by the board frequently to ensure the association remains on track for prudent financial management.

Deferred maintenance doesn’t mean the necessity for repairs will go away. Boards and their fellow members sometimes refuse to increase assessments on a consistent basis and will then need a special assessment to fund the required maintenance. This is often a difficult funding plan to sell to the membership. Members may assume that the current assessment is adequate to fund 100 percent of the association’s future maintenance obligations and may be less than thrilled when they realize the need for a special assessment.

Associations should start planning now for large maintenance projects coming up in the next two to five years where the board is already anticipating a shortfall in funding, Establish current funding for the projects as well as percentages contributed to the reserves each year. If the projection indicates a funding deficiency, the association should plan to increase the reserve amounts for the component. It is imperative that the board review the reserve study and the useful life of each association-maintained component with the community manager and other industry professionals annually. Boards should also enlist experts needed to inspect the useful life of major components and adjust the budgets accordingly.

A SNAPSHOT OF THE PROCESS

When the maintenance or repair issue has been identified and a determination has been made that it is the association’s responsibility, the next step is to figure out what is causing the problem. This can be the most challenging part and is arguably the most important step in the process. Identifying the cause, and ultimately the repair, is the best way to ensure the problem will not reoccur in the future. In short, treat the problem rather than the symptoms.

Once the repair is determined, consider the cost of making that repair. The association’s board must evaluate whether the association has sufficient available funds for the repair and, if not, how the funds will be obtained. Lack of sufficient funding is a leading factor in why maintenance and repairs are deferred; associations reprioritize maintenance and repair projects, extend the existence of components whose useful lives have long since expired, and phase projects, which only further prolongs these inefficacious components.

Funding options include the use of existing reserve funds, increased regular assessments, special assessments, emergency assessments (if applicable), and borrowing funds from a bank. (Cal. Civil Code § 5600 et seq.) Notwithstanding which option (or combination of options) is selected, ultimately, the members must foot the bill. Loans are paid and reserves are funded using assessments collected from the members. At the end of the day, the only source of income is the members.

Almost the only source. Where projects under 10 years old are experiencing maintenance and repair issues, and those issues arise in part or in whole from defects in design and/or construction, the process should be handled somewhat differently, and non-assessment funds may exist to help with maintenance and repairs. Experienced defect counsel should be retained who can properly advise on the appropriate process for inspections and repairs. The primary difference with newer projects is that the experts are looking for design and construction errors. Counsel, using qualified experts, will ensure that the defects are properly documented for litigation purposes to preserve the necessary evidence to maximize the association’s ability to seek reimbursement from responsible parties. With older projects, they are evaluating performance and trying to maximize the useful life of the buildings. If repairs are needed, the costs are entirely borne by the association.

Once the funding plan is in place, it is time to engage the services of a project team. This includes professionals who have the qualifications, experience, and expertise to appropriately advise the board on the project (e.g., engineers, architects, construction managers, etc.). The project team can also include the community manager, in-house project support services, legal counsel, banker, and insurance professionals. Once in place, the real project planning can commence.

STATUTORILY MANDATED INSPECTIONS

As noted, associations should be deferring to their CC&Rs, reserve studies and qualified consultants and contractors to determine the appropriate inspections, maintenance and repairs necessary for the project. However, sometimes the requirement to undertake inspections or repairs are expressly mandated by statute.

The Bay Area’s most recent call for action for deferred maintenance is SB 326, the "Balcony Inspection Bill," which was in response to the devastating 2015 deck collapse in Berkeley. The collapse of a deck extending off the exterior of the fourth floor of a building led to a heightened awareness of the danger posed by original construction defects and deferred maintenance.

SB 326 is now codified in the Civil Code Section 5551 and requires California condominium associations with three or more units to conduct visual inspections of not just balconies, but all "exterior elevated elements," which may include balconies, decks, stairways, elevated walkways and railings. Any components that extend beyond the exterior walls of the building to deliver structural loads and are supported in whole or in part by wood, or wood-based products, are included in these inspection mandates.

Inspections are required every nine years, using a licensed, qualified structural engineer or architect who will determine if there is an "immediate threat to safety of occupants." The first inspection is required by January 1, 2025; or for brand new construction where building permits are issued after January 1, 2020, the inspections are required no later than six years from a certificate of occupancy. When it comes to state mandated inspections, associations should not unnecessarily delay, as there will likely be a rush to the market to hire licensed, qualified experts as the impending deadlines approach.

There are special considerations for associations where construction was completed within the last 10 years because the original developer and its insurance may be presented with these inspection and repair costs under SB 800 (Civil Code §§ 895 et seq.). The ability to conduct the required Civil Code Section 5551 inspections in connection with potential construction defects claims may relieve those associations that are 10 years and younger (and have not yet pursued construction defects claims) from the significant costs associated with the inspections and subsequent required repairs. In short, if there are defects, and the association presents a claim to the builder under SB 800, the Section 5551 inspection requirements are a recoverable cost.

Most statutorily mandated items, like in the case of the "Balcony Bill," are well known vulnerabilities. Another example of inspections and repairs required by law are soft story retrofit projects to prevent collapse during an earthquake. Associations would be wise to determine whether they have buildings or components subject to any state mandated inspections or repairs. These types of statutes and ordinances typically have mandated timelines, so start the planning process sooner rather than later. An association that fails to comply could find itself the subject of a code enforcement matter, some of which carry penalties.

FINDING THE RIGHT CONSULTANT OR CONTRACTOR

Sometimes it can be difficult to know where to start, and the question of who to retain to assist is not always a simple one to answer. In some cases, a generalist might be sufficient; whereas, in other cases, one or more specialists may be necessary. In addition, building engineers, maintenance personnel, on-site managers, and other staff (and in some cases directors, officers, and committee members) can be a wealth of information and should be engaged in the inspection and potential repair process.

A generalist is a good resource and will see the big picture, coordinate projects, and build the right team of experts for the association. Generalists can be a good place to start, and it can be very useful to establish a relationship of mutual trust with a generalist who will get to know the project well and work to the association’s benefit in addressing maintenance issues proactively and as they arise. Keep in mind, however, that many projects will require specialized consultants and contractors.

Specialists should be periodically utilized for main building systems such as electrical, plumbing, and HVAC. While one may not always be necessary, never having a specialist inspect and advise on main building systems is not a prudent approach. Specialists should also be utilized when it comes to lifesafety issues including fire protection and structural project components. Likewise, in cases of legally mandated inspections or repairs, a specialized consultant may be required. For example, the Section 5551 inspections require the use of a licensed architect or structural engineer.

It is important to work with corporate counsel to ensure that appropriate contracts are drawn up prior to engaging either generalist or specialized consultants and contractors, with care taken to ensure the risk is appropriately apportioned between the parties and that the consultants and contractors engaged by the association are not conflicted in any way. Associations should be cognizant that some companies offer "free" inspections to generate work for their companies or, in some cases like balcony inspections, construction defect claims. While associations can consider these offers, it is important to understand what is covered in the offer and what is not (e.g., visual inspection, destructive testing, written reports, etc.), who will perform the actual inspections, and what financial obligation the association will have to these companies following the "free" portion of the work.

THE CONSULTANTS’ PROCESS

Associations should have a basic understanding of the process that a consultant or expert will likely follow. This will allow them to ask good questions and ensure that they receive the information needed to make decisions and spend their already stretched budgets wisely.

A Phased Approach. Not uncommonly, a review or investigation will be conducted in a phased approach. The first phase is often a high-level visual review of relevant building systems or components to see if there are any safety concerns or obvious problems, and to plan future investigative work. Since we often cannot see the problem, consultants are looking for the symptoms – indications or warning signs. These may include premature wear and tear, signs of neglect or distress, improper installation of components, and even visible damage. Based on the findings of this initial phase, more detailed or extensive observations, destructive testing, component testing, or material sampling may be recommended. In the case of structural components, structural analysis to determine the anticipated loads and expected capacities of damaged elements may be necessary.

Associations are encouraged to work with their consultants and ask questions so that they understand the planned investigation. However, the process is often iterative, meaning later portions of the work cannot be planned in detail until earlier portions of the investigation are complete, so being flexible is important. Consultants may be looking at many different factors to gain an understanding of the building performance and current conditions, including sun and rain exposure, past repairs or modifications, and use history.

Structural Concerns. Following the tragic collapse of Champlain Towers in Miami, structural concerns are on the minds of many associations. If an association has concerns regarding any structural components, they should not hesitate to contact an engineer. Be ready to describe your concerns and discuss criteria with them. Asking "is my building safe" does not necessarily yield a useful answer, as the answer can be quite subjective.

Engineers will typically evaluate a building to a defined criteria or in accordance with an accepted standard. It is important to understand that existing buildings are generally evaluated to a lower standard than new buildings are designed. Here in California, seismic performance has several options for types of evaluation and expected performance. If the association’s engineer finds structural concerns, they may recommend installing emergency supports (referred to as shoring), closing portions of a building, or even evacuating the building in serious conditions. As discussed, such recommendations may be based on a preliminary review, and further evaluation will likely be recommended.

Based on the severity of the condition, an engineer may decide to or be obligated to notify the local jurisdiction. Regardless of what is found, these issues should be taken seriously, and associations should engage in conversations with their engineer.

Reports. At the conclusion of a condition review or investigation, most consultants will issue a report. While the format and length can vary widely, most will typically include the following:

• Purpose of the inspection or evaluation: periodic review, inspection of damage, repair project scoping, etc.
• What was included: document review, site observations, destructive testing, etc.
• Summary of major observations or findings
• Discussion and conclusions
• Recommendations: may include further investigation, follow-up analysis, or repairs

It is important to be clear with the consultant on the audience and purpose for the report. For instance, can the report be quick and simple to document a condition, or will it be used to set a precedent for future repairs and so needs to be more thorough. Will the report be reviewed by the board and used to make decisions on future action, or will it be sent to other consultants or even repair contractors for review? Boards also need to realize that sometimes much of the consultant report is a formality to document what was looked at. Consultants know their report may be used by other professionals in the future (and changing board members), so there may be more discussion/detail than is strictly necessary for the current need. Regardless of the use of the report, a good report should be actionable, and include a summary that a non-technical board member or homeowner can review and understand.

MINIMIZING LIABILITY AND AVOIDING RISK

The Business Judgment Rule and Judicial Deference. The standard of maintenance will necessarily depend on provisions of the CC&Rs. Many require associations and owners to maintain "in good condition and repair" the components for which they are responsible, some set the standard higher with "first class condition" or "like new," and still others are silent. An owner can sue the association for damages and seek an injunction to enforce the provisions of the CC&Rs. (Posey v. Leavitt (1991) 229 Cal.App.3d 1236, 1246.) This rule also applies to an association’s alleged failure to maintain common areas. (Lamden v. La Jolla Shores Clubdominium Homeowners Association (1999) 21 Cal.4th 249, 252-253, 255.)

In Lamden, the California Supreme Court fashioned a rule of judicial deference to community association decision-making when members seek to litigate ordinary maintenance decisions entrusted to the discretion of their board of directors. The rule provides that the court should defer to the board’s authority and presumed expertise concerning maintenance decisions and it protects those discretionary maintenance decisions so long as they are not the product of fraud, bad faith, or gross overreach. (Ritter & Ritter, Inc. Pension & Profit Plan v. Churchill Condominium Ass’n (2008) 166 Cal.App.4th 103.) The business judgment rule and/or rule of judicial deference preclude recovery against the association or a volunteer director. (Lamden at 269-270.)

Of course, to benefit from these protections, associations and their volunteer directors must exercise judgment in good faith, in a manner they believe to be in the association’s best interest, with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (Cal. Corp. Code § 7231(a).) When volunteer directors become aware of maintenance issues, they must retain appropriate experts and make decisions. A decision not to do something is still a decision; however, an association is not immunized against liability where its volunteer directors were aware of maintenance issues but ignored them. (Affan v. Portofino Cove Homeowners Ass’n (2010) 189 Cal.App.4th 930.)

Insurance Coverage. In addition to sound decision-making, associations and their volunteer directors can avoid out-of-pocket liability exposure by ensuring that the association carries the right types and amounts of coverage. Liability policies (commercial general and directors & officers) offer indemnity and defense to associations and their volunteers when covered claims are brought against them by association members and, in some cases, third parties. While most liability policies (and casualty policies) will not pay for an association’s deferred maintenance and resulting common area property damage, claims against the association and its directors might result in some coverage or defense obligations on the insurer’s part depending on how a claim is pled. Associations and their managers should work with qualified association insurance brokers and corporate counsel to identify the types and amounts of insurance that should be procured and maintained.

Personal Liability of Directors. In addition to the business judgment protections discussed here, volunteer (i.e., unpaid) directors are afforded statutory protection from personal liability while they serve on the board so long as: the act or omission was performed within the scope of the director’s duties, was performed in good faith, and was not willful, wanton, or grossly negligent; and the association had in effect at the time the act or omission occurred one or more liability insurance policies to cover liability of the association and directors and officers in statutorily required amounts. (Cal. Civil Code § 5800(a).) Associations and their directors and managers should ensure that these insurance safeguards are in place.

Many associations’ governing documents contain exculpatory provisions which would further immunize volunteer directors and officers and provide that the association must indemnify and defend them when claims are brought against them arising from the course and scope of their service to the association. Associations that do not have such protective provisions may find it difficult to get members to serve on the board. Immunization from personal liability is not a free pass to avoid making prudent maintenance decisions. While a director may be immunized from personal liability, the association’s exposure is not eliminated.

COMMUNICATIONS WITH THE MEMBERSHIP

Members are entitled to receive copies of the reserve study, budgets, and other financial documents, as well as executed contracts and minutes of open board meetings. (Cal. Civil Code § 5200 et seq.) With access to these association records, members can remain reasonably well informed if they know what to ask for. While associations are not obligated to notify the members in writing of upcoming maintenance or repair projects, it is always a good idea to provide additional notice of ongoing major maintenance and repair projects. Such projects can be disruptive to the residents’ daily lives, and many members have a genuine interest in the association’s activities. Erring on the side of transparency will foster trust and confidence in the board and management.

When it comes to deferred maintenance, communication with the membership becomes increasingly more important. There are often negative consequences to having deferred maintenance, such as property damage to residence interiors. Large projects to correct deferred maintenance often come with a hefty price tag, which can result in increased assessments, special assessments, and the association seeking project financing from a bank. The members will, necessarily, be advised of these negative consequences and it is better if the first time they hear of the deferred maintenance issues is not when they are being asked to approve a large special assessment.

It is rarely the case that the board solving the deferred maintenance problem is the same board that deferred the maintenance resulting in the problem. Nonetheless, it is important to focus on productively solving the problems and not playing the blame game. Counsel can assist in drafting appropriate communication to the association’s members.

FINAL THOUGHTS

Circling back to the original theme of this article, it is important to remember that the most important reason to not defer maintenance and to engage in prudent maintenance of association structures is the preservation of human life. No person wants to be residing in, serve on the board of, be the lawyer to, or insuring the next Champlain Towers. Save for a natural disaster, these problems are human-caused and entirely avoidable. It is time for associations to take a more proactive approach to maintaining these components and responsibly planning for the financial impact of it. Associations, boards, and community association managers who are already doing that should pat themselves on the back and keep it up.

Andrea O’Toole, Esq. is a founding partner of O’Toole Rogers, LLP. She advises, counsels, and provides litigation services to community associations throughout California and can be reached at [email protected]. Rachel Miller is the senior partner of The Miller Law Firm. Representing homeowners associations statewide for 25 years, Miller is a recognized Super Lawyer in construction litigation and Lawyer of Distinction, as well as a recognized Top Attorney by The American Registry. She can be reached at [email protected]. Tim Stauffer, S.E., is a senior structural engineer with Avelar and can be reached at [email protected]. Mary Prados Peterson is a project manager with Common Interest Management Services. She has served the community association industry since 1995, working with law firms, construction, and property management, and has served as a board member for the CAI Bay Area and Northern California chapters and is a speaker for multiple industry organizations.