The Court of Appeal handed decided a case involving an HOA board that approved a construction project that violated the association's architectural guidelines. In addition, the board failed to monitor the project they approved.

Construction Project. Homeowner Daniel Lass submitted plans to the Sagewood Homeowners Association to combine two condominiums into a single unit, convert a carport into a garage and convert ~1,000 square feet of common area to his personal use.

Conditional Approval. The board gave Lass approval subject to the following major conditions: (i) obtaining building permits; (ii) depositing a $5,000 performance bond with the HOA; (iii) executing a maintenance and hold harmless agreement protecting the HOA, (iv) receiving approval of at least 67% of the membership.

Violations. None of the conditions were met prior to construction and the board took no action to enforce them. To make matters worse, Lass assured his neighbors the project would take no more than six months to complete but then took two years during which his neighbors were subjected to noise, fumes and dust on weekdays, weekends, holidays and evening hours.

Board Inaction. One neighbor, Ted Telford, repeatedly informed the HOA of the violations but the board took no action. When finally completed, the project varied materially from the approved plans and again the board took no action. Lass was alleged to have a personal and business relationship with the board president.

Lawsuit Filed. Telford sued alleging the Association had a duty to the owners to act in good faith and with reasonable prudence in approving Lass’s construction project and a duty to ensure that Lass complied with the governing documents.

Decision. The Court ruled as follows:

1. Owner's Right to Enforce. When an association fails or refuses to enforce its CC&Rs, homeowners can sue for damages and compel the association to enforce the covenants.

2. Business Judgment Limited. Although decisions of the board are granted deference under the business judgment rule, deference is accorded only if the association acts upon reasonable investigation in good faith with regard for the best interests of the association and its members. Accordingly, the board had a duty to monitor the project once it was approved.

3. Consistent with CC&Rs. Boards must exercise their authority to approve architectural improvements in conformity with the CC&Rs and they must do so in good faith, consistent with their fiduciary obligations to homeowners.

4. Exculpatory Clause. The association argued that the CC&Rs expressly exempted the association from liability resulting from the approval of any construction plans or the performance of any work whether or not pursuant to approved plans. The court concluded that the exculpatory clause did not relieve the association from liability for the board's breach of its fiduciary duties.

RECOMMENDATION: Although the court's decision is unpublished, its reasoning is consistent with other cases. Boards have discretion in how they enforce their documents but the clear message is that boards must investigate and take some form of good faith action. They cannot sit on their hands and do nothing. This was the same message given by the court in the Affan v. Portofino Cove case where the board failed to investigate and take action to fix a sewer line. To read more, see Telford v. Sagewood HOA.