Can HOA Covenants and Conditions be Enforced in California?

This issue was answered in the recent decision in Ridley v. Rancho Palma Grande Homeowners Association.

The appeal was from an injunction requiring supplemental repairs to a condominium. The underlying suit arose out of flooding in the crawlspace beneath the condominium owned by Doug Ridley and Sherry Shen.

Because this crawlspace is a common area controlled by the homeowners’ association, Rancho Palma Grade Homeowners Association (HOA), the HOA rather than the homeowners was responsible for investigating and remedying the water intrusion.

The HOA took more than 19 months to remove the water and begin making meaningful repairs, and in the interim the homeowners’ unit suffered severe damage.

Accordingly, the homeowners sued the HOA and its now-former president, Steve Moritz.

After an unusually long bench trial lasting more than 60 court days, the trial court found in favor of the homeowners on all their claims. While many repairs were subsequently performed, others were not, and the trial court issued an injunction requiring the HOA to perform the remaining repairs and compensate the homeowners for lost rent and other expenses.

The HOA and Moritz appealed, arguing that the trial court erred in finding in the homeowners’ favor on any of their claims.

The appellate court concluded that the trial court properly found in the homeowners’ favor on the claim that the HOA breached its duties under the condominium complex’s covenants and conditions, and because this claim supports the injunction being appealed, the appellate court affirmed the judgment.

Rancho Palma Grande is a condominium complex in Santa Clara with over 100 units. In 1981, the complex’s developers executed a Declaration of Covenants, Conditions and Restrictions (the CCRs) dividing the development into condominiums and establishing a “Home-Owners Association” to manage the complex.

The CCRs grant the HOA a number of powers and duties. One set concerns the maintenance and repair of common areas: The CCRs grant the HOA the power and the duty “[t]o manage, operate, maintain, repair, paint, landscape, care for and preserve the Common Area, and all its facilities, improvements, and landscaping . . . to the standard of maintenance prevalent in the neighborhood . . . .”

The CCRs contain an exculpation clause limiting the HOA’s liability. Under the clause, the HOA generally is not liable for property damage or personal injury “caused by the elements” or “resulting from electricity, water, rain, dust, or sand which may leak or flow from outside or from any parts of the buildings.” However, this limitation on liability does not apply to damage or injury “caused by gross negligence of the Association.”

In 1991, Doug Ridley, who is now 85 years old, purchased a unit in Rancho Palma Grande located at 2006 Stone Pine Court (the homeowners’ unit). Ridley later married Sherry Shen, and the two lived in the homeowners’ unit for a decade before they moved out and began renting the unit for retirement income. In 2017, Steve Moritz became president of the HOA.

In April 2018, tenants in the homeowners’ unit reported flooding in the crawlspace underneath the unit. The homeowners and the HOA initially thought that the water was from a leaky pipe, which is an owner responsibility.

However, a plumber hired by the homeowners did not see anything wrong with the plumbing and concluded that the water came from an underground well or spring. In addition, a plumber hired by the HOA learned from the City of Santa Clara (City) that the water was likely caused by an abandoned but undestroyed well.

Because the crawl space is a common area, the HOA accepted responsibility for remedying the water that intruded into it from outside the homeowners’ unit. However, the HOA permitted the homeowners to finish installing a sump pump to remove some of the water.

In May 2018, hoping to get the City or the Santa Clara Valley Water District to pay for remediating water in the crawlspace, the HOA hired a law firm. The firm contacted the Water District, which reported that it, too, believed that the water was from “an unknown, unregistered well.”

The Water District also gave the firm a map showing where there likely was an abandoned but undestroyed well from a farm previously on the land where Rancho Palma Grande is now located.

In early June, a water restoration consultant, the Anderson Group, recommended that the HOA dry out the crawlspace to reduce the risk of mold developing in the homeowners’ unit. The Anderson Group proposed to use air movers, scrubbers, and filtration devices at a total cost of a little over $7,000. The HOA rejected the proposal.

The HOA also received a report finding high moisture levels and mold in the homeowners’ unit and recommending remediation measures. However, the HOA did not implement the recommendations.

A series of drilling contractors confirmed to the HOA that there was likely an undestroyed well underneath or near the homeowners’ unit. In early July, the Pitcher Well Drilling Company informed the HOA that there appeared to be a well either under or close to the rear foundation of the homeowners’ unit. However, Pitcher’s excavator was so large that it could not be used to dig for the well without causing major damage to the homeowners’ unit.

Later in July, a second drilling contractor, Dan Lynch, estimated that it would cost $7,500 to open the floor of the homeowners’ unit with a mini-excavator, dig into the crawlspace, and expose the suspected wellhead. The HOA rejected this proposal.

In August, Lynch examined the crawlspace and discovered a hole full of water with bubbles coming up, a sign of a well, which Lynch believed was either under the crawlspace or just outside the rear foundation. Lynch advised the HOA that the hole could continue to grow and sink, and the HOA should move quickly to avoid any further deterioration.

Lynch offered, at a cost of $150 per hour, to research historical documents and attempt to triangulate the location of the suspected well, to use a metal detector to look for the well, and to install a fan in the crawlspace. The HOA rejected these proposals as well.

In November, the HOA consulted a third driller, Randy Dougherty. Dougherty noted several possible sources of the water in the crawlspace—an improperly capped well, an underground spring, or a high water table—but advised that an undestroyed well was “probable” and that the well was likely near the rear foundation or close by. Dougherty suggested that the HOA use a magnetometer or ground penetrating radar to search for the well. The HOA did not do so.

Sometime later, the HOA changed course. It stopped trying to locate and destroy a well underneath the crawlspace and decided instead to pursue the previously rejected option of installing a French drain, which would cause less damage to the homeowners’ unit and thus be less expensive.

Notably, however, the board’s secretary emailed the board that, based upon the latest information received, it did not appear that opening up the homeowner’s unit to find and cap the suspected well would entail “catastrophic expense,” and the trial court observed that the HOA withheld this “critical” communication until right before trial.

In March 2019, two months after Barber represented to the City and Water District that the water intrusion in the crawlspace was a one-time event, the crawlspace flooded. This flooding was worse than the year before, and three to four feet of water remained in the crawlspace through June.

Nevertheless, the HOA took no steps to remove the water beyond operating the sump pump that Ridley had installed. During this time period, plumbers hired by the HOA dug exploratory trenches in the backyard of the homeowners’ unit but found no water in the trenches.

In April 2019, the HOA hired an engineer specializing in drainage, Jim Toby, to design a French drain for the homeowners’ unit. Toby was not told that there might be a well underneath the unit, and therefore the plans that he created did not address the problems that a well and the debris surrounding it would create.

In June, Toby informed the HOA that he believed that there was a well under the crawlspace. Nevertheless, the HOA did not reconsider its decision that there was no well underneath the homeowners’ unit. To the contrary, in July 2019, after the homeowners sued and sought a preliminary injunction, Moritz represented to the trial court that the water in the crawlspace was most likely not from an abandoned well but rather than from “a high ground water table under the subject property.”

This theory was contradicted by the exploratory trenches dug by HOA’s plumbers: Although a high water table would have saturated the entire area, not just the crawlspace under the homeowners’ unit, as noted above, there was no water in the trenches.

At the end of September, an engineering contractor discovered a sinkhole in the crawlspace. The City prohibited occupation or use of the homeowners’ unit and ordered the HOA to correct the violation. Rather than resume searching for the suspected well, the HOA decided to remove soil from the crawlspace and pour concrete on top of the sinkhole.

Accordingly, in January 2020, workers hired by the HOA cut a hole in the floor of the homeowner’s unit and began removing soil. After about two hours, they discovered a wellhead. The workers were not told that there might be a well underneath the soil that they were removing.

The homeowners sued the HOA in June 2019. They claimed breach of the CCRs in addition to claims for violating the Davis-Stirling Common Interest Development Act (Civ. Code, § 4000 et seq.), breach of implied warranty, negligence, nuisance, and breach of fiduciary duty.

The homeowners amended their complaint in July 2021 to add Moritz, the HOA president, to the negligence and breach of fiduciary duty claims, added a constructive fraud claim against both the HOA and Moritz, and abandoned the warranty claim.

In April 2022, the case went to trial. The trial lasted 67 court days and produced a trial transcript of approximately 7,700 pages. In September 2022, after the parties had rested, the trial court informed the parties that it would issue an interim order concerning disputed repairs and indicated how it would rule. However, it does not appear from the record that the trial court issued a written order, and the trial judge took a medical leave of absence. Upon returning, the court issued further orders concerning, among other things, remediation of the crawlspace.

The trial court found in favor of the homeowners on all their claims. The court awarded damages for restoration costs, lost rent, utility, and emotional distress. In addition, finding the defendants’ behavior despicable, the trial court awarded $250,000 in punitive damages against the HOA and $25,000 against Moritz.

In concluding that the HOA breached the CCRs, the trial court determined that the HOA’s duty to repair and maintain common areas included subsidiary duties to investigate and to make repairs in a reasonably timely fashion.

The court then found that the HOA failed to properly investigate the suspected well, the mold or the terminate damage and that it is also failed to timely repair the resulting damage. Indeed, the trial court observed even by the trial, six years after the initial flooding, the HOA had not restored the homeowners’ unit to a livable condition.

The trial court also found that the HOA had engaged in “a pattern of falsehood [and] deception.” The court found that in the spring and summer of 2018 “everything pointed very strongly to a well and suggested very strongly that the well was either directly in the crawlspace or just beyond it.

“Nevertheless, the HOA decided “to use any means necessary” to convince the City and the Water District that the HOA did not need to locate and destroy the suspected well. Among other things, the HOA failed to disclose the suspected well to experts in an attempt to manipulate them into providing opinions the HOA desired.

The trial court found that neither the CCRs’ exculpatory clause nor the business judgment rule and the related rule of judicial deference to condominium associations protected defendants. The court ruled that the exculpatory clause did not protect the HOA because much of plaintiffs’ damages was caused by the HOA’s failure to repair rather than the water intrusion, because the clause was against public policy and unenforceable, and because the HOA was grossly negligent.

In particular, the court found gross negligence because the HOA’s conduct was an extreme departure from the ordinary standard of conduct and because the HOA showed a passive or indifferent attitude to the injurious consequences of its conduct.

The court also rejected the HOA’s business judgment rule and rule of judicial deference defenses because the HOA did not conduct a reasonable investigation into the suspected well and because the HOA did not act in good faith. In finding bad faith, the court noted the HOA’s disregard of the advice it received and its “extreme acts of dishonesty.”

Although the HOA appealed from the injunction issued after trial, it did not challenge the appropriateness of injunctive relief or the terms of the injunction. Instead, the HOA challenged the claims underlying the injunction.

As a general rule, a condominium association’s covenants and restrictions are enforceable equitable servitudes, which benefit all condominium owners (Civ. Code, § 5975, subd. (a)), and individual owners may enforce the covenants and restrictions against the association.

In addition, because the promises in such covenants and restrictions are of a “contractual nature,” their enforcement is subject to contract principles.

It was undisputed that the crawlspace underneath the homeowners’ unit is a common area and that the HOA’s duty to maintain and repair that area includes subsidiary duties to investigate water intrusions and to make repairs in a reasonably timely fashion.

The HOA argued that the homeowners failed to present sufficient evidence that the HOA breached these subsidiary duties.

There was substantial evidence that the HOA failed to conduct a reasonable investigation.

The HOA made little effort to locate the suspected well. It rejected a proposal to bring in a mini-excavator to dig into the crawlspace to search for the well, which would have required cutting a hole in the floor of the homeowners’ unit. It also refused to take less costly measures. For example, although one of the drillers consulted by the HOA proposed to conduct historical research to better locate the well at a cost of $150 per hour, the HOA rejected the offer and instead Moritz did his own research (but located only one photograph).

The HOA likewise rejected recommendations to search for the suspected well using ground penetrating radar, a magnetometer, or a metal detector.

In addition, in late 2018, the HOA adopted the position that the water in the crawlspace was not from an undestroyed well and stopped looking for such a well. The HOA had no basis for this decision. None of the HOA board members had experience dealing with wells; for example, Moritz, who took the lead on the issue, was a librarian for a laboratory, not an engineer.

The trial court had more than adequate grounds for finding that the HOA failed to conduct a reasonable investigation.

There was also substantial evidence that the HOA failed to repair the homeowners’ unit in a timely fashion. The evidence provided ample basis for the trial court’s finding that the HOA failed to remedy the water, mold, and termite damage in the homeowners’ unit in a timely fashion.

The HOA argued that nothing in the CCRs required it “to rely on certain experts.” While that may be true, the trial court did not interpret the CCRs to require the HOA to rely on any particular expert.

Instead, in finding that the HOA failed to conduct a reasonable investigation into the water intrusion, the trial court noted that the HOA ignored the opinions of all the drilling contractors it consulted, the City, the Water District, and the civil engineer it hired to construct the French drain that there was likely an undestroyed well under the crawlspace.

While the HOA asserted that it was reasonable to reject several specific recommendations and to delay remediation of some items, it does not—and cannot—argue that the trial court lacked a solid basis for finding that the HOA failed to conduct a reasonable investigation.

Finally, the HOA asserted that the trial court rewrote the CCRs to require the HOA to perform maintenance within a specific time frame. Far from adopting a specific deadline, the trial court recognized that the CCRs “do[] not provide a specific time that something has to be done” and that therefore repairs had to be done “in a reasonable time.”

However, the court concluded that the HOA did not make repairs within a reasonable time because the homeowners’ unit remained in an unlivable condition six years after the initial water intrusion in the crawlspace, not because it failed to meet any specific deadline.

In reaching this conclusion, the trial court observed that the CCRs required homeowners to begin repairs within 60 days of the damage to be prepared. However, the trial court did so only to provide guidance on what constitutes a reasonable time for repairs, not to impose a specific deadline.

The HOA also challenged the trial court’s rejection of its rule of judicial deference and business judgment rule defenses. The trial court rejected these defenses based on well-supported findings that the HOA failed to conduct a reasonable investigation and did not act in good faith.

Condominium boards are protected by the rule of judicial deference. Under this rule, decisions by condominium boards concerning maintenance and repair of common areas are entitled to judicial deference if, among other things, they are made upon reasonable investigation and in good faith.

Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant development statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.

The HOA is also protected by the business judgment rule. Although the business judgment rule does not apply to all condominium associations, it applies here because the HOA is incorporated.

Much like the rule of judicial deference, the business judgment rule creates a presumption that decisions by corporate directors are based on sound business judgment and prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.

Both the rule of judicial deference and the business judgment rule are affirmative defenses.

As a consequence, defendants invoking these rules bear the burden of establishing the requirements for their application.

The trial court held the rule of judicial deference inapplicable because it found that the HOA did not conduct a reasonable investigation.

The trial court also found that the HOA did not act in good faith in refusing to search for a well or remediate the homeowners’ unit. This finding was also well supported.

The HOA ignored the opinions of the City, the Water District, and its drilling contractors without any colorable basis, and it decided without any expert advice to pursue a remedy—the French drain—that it had rejected earlier as not adequately addressing the undestroyed well.

Moreover, the HOA tried to manipulate other experts into supporting this remedy by not informing them of the possibility of a well.

Gross negligence has been defined in California and other jurisdictions as either a want of even scant care or an extreme departure from the ordinary standard of conduct.

Thus, gross negligence may be proven in two different ways.  First, a defendant is grossly negligent if it exercises so slight a degree of care as to raise a presumption of conscious indifference to the consequences  as, for example, where a person’s state of mind is simply, “I don’t care what happens.

Second, a defendant is grossly negligent if its conduct constitutes an extreme departure from what a reasonably careful person would do in the same situation to prevent harm to oneself or to others.

The trial court found both an extreme departure by the HOA from the ordinary standard of care and an indifference towards the consequences of its conduct. Both findings were supported by substantial evidence.

The HOA did not show any error in the trial court’s finding of gross negligence.

The appellate court therefore affirmed the court’s rejection of the HOA’s exculpatory clause defense and, because the court’s finding of breach was otherwise justified, it affirmed the determination that the HOA breached the CCRs and the injunction issued based upon that breach.

LESSONS:

1.         As a general rule, a condominium association’s covenants and restrictions are enforceable equitable servitudes, which benefit all condominium owners (Civ. Code, § 5975, subd. (a)), and individual owners may enforce the covenants and restrictions against the association.

2.         Condominium boards are protected by the rule of judicial deference. Under this rule, decisions by condominium boards concerning maintenance and repair of common areas are entitled to judicial deference if, among other things, they are made upon reasonable investigation and in good faith.

3.         Much like the rule of judicial deference, the business judgment rule creates a presumption that decisions by corporate directors are based on sound business judgment and prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.

4.         Gross negligence has been defined in California and other jurisdictions as either a want of even scant care or an extreme departure from the ordinary standard of conduct.

5.         Thus, gross negligence may be proven in two different ways.  First, a defendant is grossly negligent if it exercises so slight a degree of care as to raise a presumption of conscious.

6.         Second, a defendant is grossly negligent if its conduct constitutes an extreme departure from what a reasonably careful person would do in the same situation to prevent harm to oneself or to others.