Troubled Projects – It Happens

By John Paul Hanna and David M. Van Atta © all rights reserved

(An excerpt from Hanna & Van Atta On California Common Interest Developments)•

Troubled projects in general

Troubled projects is a general euphemism for different occurrences that could result in the need for drastic action to be undertaken by the association for a common interest development, or on behalf of an association, the developer, project lenders or others. Common interest developments, which are generally and most commonly condominium projects, or planned development projects, can experience trouble because of dire financial situations, natural catastrophes, casualty events, or project obsolescence. We will first discuss issues that may result from adverse financial situations. We will then touch on concerns that arise in the event of natural catastrophes, casualty events, or project obsolescence.

Failure of sales program

Market conditions might compel the developer of a new residential project to change its business plan from a for-sale project to a rental project. This can also happen in a conversion where the unsold units are already occupied by tenants and the developer is faced with the option of having to cease promoting the project as a for-sale project, and instead continue to operate the unsold units as a rental project.1 The ramifications of taking such steps must be evaluated, such as potential claims from unit buyers as to misrepresentation by the developer and the impact on qualifying the units in the project for financing. Most loan underwriters have limitations on the percentage of units in a project that can be rented. If too high a percentage of the units are rented, this could impact resales of units in the project.

Change from sales program to leasing

Where the developer elects to terminate or suspend sales and instead pursue a program of leasing units or lots there are disclosure issues to consider. If the rental program was not already mentioned in the public report, a switch from a for-sale project to a rental project may require the issuance of an amended public report by the Department of Real Estate.2 In addition, an amended budget may or may not be required, depending upon how much time has lapsed since the issuance of the most recently issued public report for the project. The developer - declarant will continue to be liable for payment of assessments on the unsold units which are to be included in the rental program. In a phased project, the developer may chose not to add units to the project, but instead rent them out separately from the project's operation. However, issues may arise as to obtaining access to those units over private roadways and to any project common areas and amenities for use by the occupants of the rental units. The owner of the rental units that are not yet part of the project and subject to the CC&Rs will need to make arrangements for easements or obtain a license agreement for use of the project's share of common facilities and payment of an appropriate fee for such shared use.3

Operations by a bulk purchaser

One result of a troubled project may be that the entire project, or the remaining lots or units in the project, are sold in bulk by the developer or the project lender to a subsequent purchaser, often called a "bulk buyer." The bulk buyer that takes over a troubled project by acquiring the remaining unsold units from the original developer faces a number of issues that may impact its use and operation of the property. The nature of these issues may depend on whether the bulk purchaser will continue with the marketing program or whether it will switch to a rental program. If the bulk buyer intends to sell units in the future, it will need to obtain an amended public report.4 Depending upon the length of time since the issuance of the then existing public report, a new budget may be required. In addition, any other material changes will have to be disclosed. There could be substantial delay from the date of acquisition of the project by the bulk buyer and the date that sales can be commenced. Note that there is a limited exception stated in Business & Professions Code section 11010.5 to the requirement for obtaining an amended public report in the case of a foreclosure action or deed in lieu of foreclosure by certain lenders, including a bank, life insurance company, industrial loan company, credit union, or savings and loan association licensed or operating under the provisions of a state or federal law. This exception is available only if there have been no material changes in the information stated in the existing public report. This may not be the case for a troubled project, because material delinquencies in assessments and other changes to the project may have occurred.

Title to the project should be examined closely by the potential bulk buyer. Not only should the bulk buyer obtain title insurance on the acquired units, it will also want to be sure that it obtains valid title to common areas that have not yet been annexed (in the case of a phased project). The bulk buyer will also want to reassure itself that the governing documents have provided easement rights for the bulk buyer to have access to the common areas of the project for construction and other purposes.

Financing concerns will need to be considered by the bulk buyer. If the bulk buyer intends to continue marketing the project as a for-sale project, it may face financing issues with respect to the availability of financing through FHA, VA, Fannie Mae and Freddie Mac. For example, FHA requires that at least 50% of the units must be owner-occupied, and this could have a major adverse effect upon marketing of a project where 50% or more of the units are rental units. FHA also requires that no more than 10% of all units may be owned by one investor. As well, at least 30% of all units must be sold before FHA-backed loans will be made available, with the threshold increasing to 50% in 2011.5 In addition FHA, Fannie Mae and Freddie Mac may not underwrite loans where assessments are delinquent for over 15% of the units in the project.6

If the bulk buyer intends to rent the acquired units, this may have adverse ramifications on the persons who had already acquired units in the project. Any refinancing or resale of those units may be adversely impacted if the requirements imposed by Fannie Mae and Freddie Mac as to the limitation on the percentage of rental units cannot be met.

The bulk buyer will also want to review the financial condition of the project as to the status of reserve accounts as well as the currency of collection of assessments. The bulk buyer will also want to be sure that the selling developer is current in its assessments, and, depending upon the remaining number of unsold units, arrangements may have to be made for the assumption of the existing assessment bond or the posting of a new assessment bond by the bulk buyer who intends to continue selling units. In addition, the status of any completion bonds for common area improvements should be reviewed.7

The DRE budget for association operations may have to be updated. If the last budget was approved by DRE more than two years before a bulk purchaser acquires a troubled project, or if the amount of assessments under the current budget has increased by more than 20% or decreased by more than 10%, DRE will most likely require an updated budget to be submitted (Title 10 § 2800(j)).8 A minimum of 30 days should be allowed for revisions to a budget in connection with an application for an Amended Public Report. If a new public report is to be applied for, the minimum time would be more likely 60 or 90 days for DRE review.

The bulk purchaser who is considering acquiring a troubled project should be very concerned about the content of the existing Final Public Report. Inquiry should be made as to whether there any material changes have occurred that would require disclosure to the Department of Real Estate that mandate obtaining an amendment of the Public Report.9 Note: if the only change in the Public Report is a change of the name of the owner, with no change in the budget, or collection of assessments or physical condition of the offering, it should not take more than two or three weeks to obtain an amendment. However, if there are changes to the budget and to the other material matters stated in Public Report, the process may take two months or more, depending on how many changes there are. If a new Public Report is required, because the prior one has expired or there are substantial changes in the project, the processing time can be as long as six months.

Association operation review by bulk purchaser

The bulk purchaser of units or lots, or the foreclosing lender that forecloses on remaining units or lots in a common interest project, should investigate the status of the project association operations before acquiring the units or lots. If the developer is selling off its inventory in bulk, or has allowed its inventory in the project to go to foreclosure, there is some likelihood that the developer may not have paid sufficient attention to the details of operating the association. The bulk purchaser or foreclosing lender should consider undertaking an "audit" of the association's operations and affairs, not just a financial and bookkeeping audit, but an audit of the various functions of the association, such as the holding of association membership and board meetings, elections of directors and officers, adoption of rules and regulations, the sending out of the appropriate forms and notices to members, the filing of forms with the Secretary of State and other agencies, filing of tax returns, filing for exemptions from taxation, adequate recording keeping, appropriate insurance having been obtained, the appointment of any architectural review committee, and similar details that would need attention.10 In addition, the budget needs to be scrutinized and a determination needs to be made as to whether a reserve study is necessary.11

Shared use agreements

In situations where a project has been set up in more than one phase, the bulk purchaser or a foreclosing lender will have heightened concerns about control over the operations and management of the troubled project. In a multiple phase project, particularly in the case of a conversion (where the yet to be annexed phases are occupied by tenants), control of the shared recreational facilities can be very critical. In many phased projects, the recreational facilities, such as pools, meeting rooms, fitness centers, and playgrounds, are included in the first phase. In most cases such facilities would be owned and controlled by the owners association. At the outset, the original developer will have control of the association's board of directors during the marketing of the first phase. However, if the project becomes a troubled project early in the phasing program, this control of the association may have lapsed. The bulk purchaser has to be concerned about the operation and control of the common area facilities and the right to have access to and use of the common facilities for the remainder of the project. The bulk purchaser should consider whether there needs to be a shared use agreement that provides use and access rights for the occupants of the units which have not yet been annexed over the initial project and for use of the recreational facilities and other facilities of the initial portions of the project. The agreement should also provide for payment for a proportionate share of the association's costs for such use.

Triggering of assessments

A bulk purchaser should be aware as to when assessment might commence for the units or lots that it acquires in bulk. The commencement of assessments on units occurs upon the close of escrow on the sale of the first unit in the project, or in the case of phased projects, assessments on the units in a particular phase are triggered upon the close of escrow on the sale of the first unit within that phase. There can be an issue as to whether a bulk sale of units (as opposed to the sale of a single unit under the authority of a public report) will trigger assessments for the acquired units. The bulk purchaser should review the CC&Rs to see whether the trigger (the sale of a unit under a Public Report), includes a bulk conveyance which may or may not be exempt from Public Report requirements. The bulk purchaser also needs to know whether the original developer of the project has entered into any subsidy agreements or any maintenance agreements, which in either case would obligate the developer to subsidize the project either by payment of money aside from and/or in addition to assessments, or to furnish certain services to the association for little or no cost to the association. If the original developer as the declarant under the project's CC&Rs is so obligated, then there is a question as to whether the bulk purchaser coming into the project will assume the position of a subsequent declarant and take over the rights and obligations of the declarant.12

Budget and construction deficiencies

The bulk purchaser or a foreclosing lender will need to investigate the status of the association's budget and assessments. One concern will be whether the original developer's budget is adequate. Another is whether the assessments as established have been paid by the unit buyers and by the developer for its unsold units. If and to the extent that the budget underestimated the cost of maintenance, insurance and operation of the project, the budget may have to be revised and assessments may have to be increased. In addition, the bulk purchaser or foreclosing lender will need to review the association's reserves. Have they been established and fully funded? The most recent reserve study (reserve studies are required to be conducted every three years) should be reviewed and analyzed for adequacy. If the defaulting developer while in control of the association has failed to fund the reserves in accordance with the original DRE approved budget, or if a more recent reserve study shows that the reserves are inadequate, then a bulk purchaser or foreclosing lender may find it necessary to increase assessments to fully fund the reserve. If the bulk buyer or lender holds voting control of the association and controls the board of directors by virtue of its voting power, it may have a fiduciary obligation to revise the budget, increase the assessments, and fully fund the reserves. Note: To obtain a public report, the prior developer would have generally provided financial assurances required by the Department of Real Estate for payment of assessments. If there is a shortfall in payment of assessments, a possible recourse may be to pursue an action on the bond or other financial assurances posted by the prior developer.13

Completion of the common area improvements of the project by the prior developer should also be examined by the bulk buyer. The prior developer will most likely have made representations about providing certain common area amenities and facilities. If these facilities have not been completed, the bulk buyer will have concerns about how to fund the completion of these improvements. The prior developer may have provided financial assurances for completion of these facilities when it obtained its public report. The bulk buyer working in concert with the association may be able to seek recourse from these financial assurances.14

The association's bank account(s) should also be reviewed and arrangements should be made to change signature cards, etc. If and to the extent that the association's bank account is short of funds, either because the funds have been withdrawn by the outgoing developer, or because the outgoing developer has failed to collect assessments, then the incoming declarant will have to take appropriate action to make sure that the bank deposits are what they are required to be.

Successor declarant

A bulk purchaser or foreclosing lender should evaluate whether it should become a successor declarant under the project CC&Rs. The recorded CC&Rs for a project will contain provisions which reserve certain rights to the "declarant" and at the same time will impose certain obligations upon the declarant. A bulk purchaser or foreclosing lender may or may not be in a position to take on the role of the "declarant."15 The CC&Rs should be reviewed in each case to see whether the bulk purchaser or foreclosing lender automatically takes over the position of declarant and assumes the rights and responsibilities of a declarant, or whether it is required that the would be successor declarant record a document in which the successor declarant assumes the role of declarant and agrees to perform the declarant obligations. The reserved rights can be very important in terms of enabling the successor declarant to control the maintenance and operation of the project, to complete any uncompleted construction, and to complete the marketing of units within the project. Other significant declarant rights and privileges include the right to elect a majority of the board or to control the board either by weighted voting or by board appointment rights, and exemption from architectural controls, sign controls, and other restrictions that might otherwise hamper the sales and marketing efforts of the successor declarant. The successor declarant cannot accept the privileges that go along with declarant status and avoid assuming the obligations and responsibilities that also accompany declarant status. In a case where declarant status does not automatically switch to the incoming bulk purchaser or foreclosing lender, it would be well to consider and weigh the pros and cons of achieving declarant status by recording a document providing for the assumption of declarant status if that is what is provided for in the project CC&Rs.

Control of the board of directors of the association

The bulk purchaser or foreclosing lender needs to determine whether the original declarant has retained control of the board of directors or whether control is now in the hands of the non-declarant owners who have purchased units in the project. The CC&Rs will generally provide the declarant with weighted voting rights for a specified period of time. Those rights (generally the right to have three votes per each unit owned) should be automatically assigned to the successor declarant, assuming the bulk purchaser or foreclosing lender has elected to assume declarant status or has automatically acquired declarant rights.16 If the outgoing declarant has appointed board members who are still serving, arrangements should be made for the declarant directors to resign concurrently with the appointment of their replacements. [Note: some project lenders wisely provide for such resignations and appointment in their project loan documents.] The newly appointed members who represent the incoming declarant would serve for the remaining terms of the directors that have resigned and been replaced. At the next election the incoming declarant will have to decide on its strategy for the election, including nomination and exercise of voting privileges, or, in the alternative, exercising its right to appoint members to the board of directors.

Sales documents – bulk buyer issues

If the incoming bulk purchaser or foreclosing lender is going to continue with the project sales program, it will have to decide whether to continue to use the developer's form of deposit receipt/purchase agreement previously approved for use by DRE, or, in the alternative, use its own deposit receipt/purchase agreement. If the decision is to use a different form, then the revised version of the deposit receipt/purchase agreement must be reviewed and approved by DRE. In the event there are pending escrows that have not closed, the escrow documents should be reviewed. The incoming bulk purchaser or foreclosing lender will also have to determine what to do with existing escrows that have been opened. Some of the buyers may be reluctant to close escrow in view of the bulk sale or foreclosure, and may be looking for ways to get out of their contracts. The purchase agreement forms need to be reviewed to see what liquidated damages provisions may apply.

If the project is a conversion project, the bulk purchaser or foreclosing lender, before selling units, must make full disclosure as to the state of repair of the project, with particular emphasis on any known defects or deferred maintenance. If the converter had chosen to disclaim any warranties, the bulk purchaser or foreclosing lender will want to do likewise.17 The Civil Code has requirements for disclosure for conversions. (See Civil Code § 1134) The Department of Real Estate has special disclosure requirements for conversions and for the sale of projects where the property is more than 3 years old.18

If the bulk purchaser or foreclosing lender is going to be in any way involved in completion of construction or the construction of for sale units, the incoming bulk purchaser or foreclosing lender will want to familiarize itself with the warranty program offered by the original builder. If the bulk purchaser or foreclosing lender will be involved at all in new construction, or the completion of construction, then it needs to pay attention to the document entitled "SB 800 Notice" or something equivalent, which document may have an effect on the commencement of the various statutes of limitation that apply under SB 800.19

Construction defects and warranty concerns

The bulk buyer or foreclosing lender should consider the issue of construction defect liability and warranty liabilities. A foreclosing lender who takes over a troubled project will, in most cases, suspend individual sales of lots or units, and will attempt to find a bulk purchaser who will purchase the entire remaining inventory. In such instances, if a construction defect claim has been made by a buyer of a unit, the lender would probably not be held responsible under a strict liability theory for the construction defects. This should particularly be the case if the lender had nothing to do with the design or construction of the project and the lender did not sell directly to the individual making the construction defect claim. In the case of a bulk sale by a foreclosing lender to another entity that undertook to obtain an amended public report and then offered the units for-sale to the public, the bulk sale by the lender should not be characterized as a sale of residential units to the public. Strict liability is imposed upon all "Builders" under SB 800 Civil Code section 895 et seq.20 Under SB 800, a "Builder" includes the "original seller, who at the time of sale was also in the business of selling residential units to the public for the property that is the subject of the homeowner's claim…" (Emphasis added. Civ. Code § 911(a).) However, if the foreclosing lender should make some sales to individual purchasers, an argument could be made that the lender in such case is "in the business of selling residential units to the public", and therefore would come under the definition of "Builder" in Civil Code section 9.11. As a result, the lender, as to those units, could be exposed to strict liability imposed under SB 800 (Civ. Code §§ 895 et seq.) If the foreclosing lender is required to complete construction of any of the improvements in the subdivision, under those circumstances the foreclosing lender would most likely be characterized as a "Builder" and under SB 800 would be subject to strict liability to the same extent as a merchant builder would be under those conditions.

Where a bulk buyer (not a lender) takes over a troubled project, the bulk buyer whose business plan includes selling the units to the public, will be required to obtain an amended public report in its name. That bulk buyer will also, in the case of a newly constructed project, assume the status of a merchant builder and become strictly liable for construction and design defects in the event that that bulk buyer is the "original seller" of the units. (Civ. Code § 911.) This will certainly be the case with respect to any improvements that are constructed, or the construction of which is completed by the bulk buyer. It will most likely also apply to the previously completed construction of units and common facilities, even though the bulk buyer was not personally involved in such construction.

SB 800 does not apply to condominium conversions. (Civil Code § 896.)21 Therefore, if the foreclosing lender or other bulk buyer is taking over a conversion project, the exposure of the foreclosing lender or bulk buyer for sale of units to the public would most likely be limited to defects in the property of which the foreclosing lender (as the seller) knew, or should have known.22 In the case of a conversion, the bulk buyer who ends up selling the units to the public after obtaining an Amended Public Report will be liable for construction defects only if they are connected with reconstruction or renovation work done by the bulk buyers, or if the construction defects associated with the project are known, or should have been known, to the bulk buyer.23 The bulk buyer should be careful in its analysis of the project to determine if there is the possibility of improper construction or defects, or whether the association budgeting has been adequately handled to cover items that may require reserves or increase in reserves. It is recommended that the bulk buyer engage knowledgeable experts to review the physical condition of the project as well as the association's budgeting and accounting.

Civil Code section 3434 provides that a construction lender shall not be held liable for construction defects which are the responsibility of the borrower, unless resulting loss or damage is a result of an act of the lender outside the scope of the activities of a lender of money, or unless the lender has been a party to misrepresentations with respect to the property. Once the lender has foreclosed on the property then the question becomes whether the actions taken from that point on are within the scope of the activities of a lender. In such cases, it would be important for the lender to try to limit its participation in the ongoing operation or marketing of the project to the minimum of activities that are necessary in connection with protecting the lender's security interest, if that can be done.

Lenders frequently apply to the courts for appointment of receivers to manage and operate the property before foreclosure occurs. (Code Civ. Proc. §§ 564(b)(2) and Civ. Code § 2938(c)(1).) The receiver and the order of the court appointing the receiver should consider the issues pertaining to lender liability and the possibility of having to notify the Department of Real Estate before any sales are made.

The foreclosing lender should inquire as to the existence of product liability insurance available to the original developer. The developer may have a wrap policy which included the lenders as named insured, or additional insured. If there is such coverage, the foreclosing lender should take steps to make sure that the coverage is still in effect and that it will remain in effect for the balance of the ten year statute of repose.24

The bulk purchaser and the foreclosing lender need to understand the approach taken by the original developer in connection with SB 800. In the case of a newly constructed project, some sort of warranty agreement would most likely have been offered by the developer. The foreclosing lender and the bulk purchaser need to review that warranty agreement and the corresponding provisions in the deposit receipt/purchase agreement and in the recorded declaration, to see what (if any) changes should be made. If the builder has offered an "enhanced protection agreement" as provided for in Civil Code section 903, the foreclosing lender or the bulk purchaser will probably want to write a new warranty agreement without the enhanced protection provisions, which will mean also making corresponding revisions to the deposit receipt/purchase agreement, and possibly to the recorded declaration.25

Regarding the statute of limitations under SB 800 for construction defect claims, the provisions of Civil Code section 895(e) may be an issue. This section includes dates for purposes of starting a running of various statutes of limitation; however, this section includes a postponement of the running of the statute until "the date the builder relinquishes control over the association's ability to decide whether to initiate a claim under this title…" Therefore if the original developer has not already provided in a recorded document relinquishment of the authority to exercise control over the association's ability to decide whether to initiate a construction defect claim, and the original developer still controlled a majority of the board of directors at the time of the bulk purchase or the lender's foreclosure sale, then the running of the statutes of limitation may not have commenced, particularly if the bulk purchaser or the foreclosing lender arranges for a majority of the directors of the association to be appointed by or controlled by the foreclosing lender or the bulk purchaser.26

Excessive delinquencies

When the economic situation declines, the level of delinquencies in the assessments levied by the common interest development's association increase. This creates issues for both associations and developers. The association must review its possible courses of action for dealing with unit owners who are delinquent in assessment payments. These include bringing legal action on the debt owed27 or enforcing the association's lien rights.28 If there is a high level of delinquencies, resulting in substantial loss in revenue, the association will not be able to conduct its operations as mandated by the project's documentation. It may be necessary for the non-delinquent owners to agree to a special assessment, or series of special assessments, in order to keep the project viable. If the association actually forecloses on units, it will have to deal with issues as to either renting out those units or attempting to resell the units. The association must struggle to keep control of its cash flow through aggressive collection procedures as the normal flow of assessment payments diminishes. In such troubled times, many of the unit owners may have also defaulted on their loan payments. If the mortgage loans or taxes on the units are prior to the association's lien rights, the ability of the association to collect will be jeopardized. In California, an association's rights to actually foreclose on an assessment lien are constrained by statute: the lien amount must be over $1,800 or must be delinquent for more than one year. (Civil Code § 1367.4(c).) In addition, if there are delinquent assessments, there are disclosure issues for the developer and for the association regarding the Department of Real Estate and potential new buyers.29

Catastrophic destruction

Natural catastrophes can raise major issues for owners associations and the unit owners. The most likely causes of catastrophic destruction of a common interest development project would be fire, earthquake and flood. Most projects would likely carry sufficient fire insurance to permit the project to be restored and to remain viable. However, issues frequently arise as to how to handle payment of the deductible amounts under the insurance for such a casualty event. Project documents do not always cover this subject. If the association has collected reserves, it may be able to use the reserve fund to apply to the deductible. If the reserves are not sufficient, then a special assessment may be required. Most common interest development projects do not carry earthquake insurance or have access to sufficient earthquake insurance proceeds to pay for the rebuilding of a project with extreme damage in the event of a major earthquake. The problems faced by common interest projects after the Loma Prieta earthquake in Northern California in 1989 and the Northridge earthquake in 1994 are examples of the difficulties in dealing with catastrophic destruction where there was no insurance or inadequate insurance. Several projects were simply abandoned by their owners. To a lesser extent, the same is true with respect to a major flood. Most flood insurance policies provide only minimal coverage.

In the event of a major catastrophe, where insurance is insufficient to restore or rebuild, the association and the owners must first look to the project documents (generally the recorded CC&Rs) to see what specific provisions apply in that situation. It may be necessary to take a vote of the members to resolve the question of whether to adopt a special assessment in order to rebuild the project, or to dissolve the association, terminate the project, and sell the property. In the event the owners vote to terminate the project, or in the event that the project documents provide for the termination of the project in the event of a failure of a sufficient number of members to vote for rebuilding of the project, the issue then becomes how to allocate the eventual net proceeds of the sale. The project CC&Rs should contain a method for the allocation of net proceeds of sale. The most common provisions would call for the appraisal of each of the units in the condominium project. Using the appraised value of the unit as the numerator and the total appraised value of all units as the denominator, the percentage of the total net proceeds of sale would then be calculated and allocated to the owner or owners of each unit.30 Civil Code section 1359(b) provides for court ordered partition of condominium projects after destruction or substantial damage.31

In the event of the decision to rebuild, using a combination of insurance proceeds and special assessments approved by the requisite majority of owners, the association and its members would have to deal with several concerns. These would potentially include zoning, general plan and building code issues, particularly if the project was originally built many years ago. Other concerns may arise in a case of a mixed-use project. One concern may be what happens if the owners of the residential portion wish to rebuild their portion and the owners of the commercial portion of the project do not wish to rebuild, or vice-versa. Do the governing documents provide a solution in the case of unwillingness of one group of owners to rebuild? (For example, are there provisions for one group of owners to buy out the interests of the other group of owners?) In the event that any of these issues arise the project governing documents should be reviewed to determine if those governing documents provide for a process for resolving the issue. In addition, the Davis-Stirling Act may provide some remedies.

Obsolescence

A project may become obsolete due to the passage of time and the deterioration of structural elements of the project, or for other reasons. In such event the provisions of the governing documents and/or the applicable provisions of the Davis-Stirling Act or other statutes may provide a road map for the eventual sale of the project and the partition of the sales proceeds among the owners, after making provision for payment of lenders. For condominium projects, Civil Code § 1359 provides for court ordered partition if the project is over 50 years old, is obsolete and uneconomic and the owners holding more than 50% ownership in the common area are opposed to repair.32, 33 For planned developments or stock cooperatives there is no similar statutory provision for court ordered partition and sale of the obsolete project. Sometimes the project governing documents may provide for a process for dealing with an obsolete project. In some instances, the provisions of Code of Civil Procedure §§ 872.210 – 250 may provide a remedy. However, the application of these provisions to most common interest developments would seem very limited.


John Paul Hanna and David M. Van Atta are the principals in Hanna & Van Atta, a Palo Alto law firm specializing in real estate law with emphasis on land use and development, and residential and commercial common interest developments. The firm represents developers, associations, both residential and commercial, and residential and commercial builders (see web site at www.hanvan.com).


  • All Section references herein below refer to the book, Hanna & Van Atta On California Common Interest Developments.
  1. See Section 19:107 (discussion of conversion from sales to leasing.)
  2. See § 15:80 (discussion of actions that constitute material changes).
  3. See § 19:109 (discussion of shared use agreements).
  4. See § 15:12 (discussion of sale to builder/developers).
  5. See § 13:22 (discussion on FHA requirements).
  6. See § 13:18 (discussion of Freddie Mac requirements), § 13:19 (discussion of Fannie Mae requirements) and § 13:22 (discussion of FHA requirements).
  7. See §§ 15:45 - 15:54 (discussion of completion of improvements).
  8. See § 15:80 (discussion of actions that constitute material change).
  9. See § 15:80 (discussion of material changes).
  10. See generally, §§ 19.12 - 19.22 (discussion of association management and operational issues).
  11. See generally §§ 19.24 - 19.30 (discussion of reserve requirements).
  12. See § 19:113 (discussion of successor declarant).
  13. See § 15:41 (discussion of assessment guarantees).
  14. See §§ 1 5:46 - 15:51 (discussion of on-site improvement guarantees).
  15. See § 13:29 (discussion of lender liability).
  16. See § 19:113 (discussion of successor declarant); see § 13:27 (discussion of lender liability).
  17. See § 17:80 (discussion of warranty disclosures).
  18. The DRE has a specific form for this Existing Subdivision Interest Disclosure Statement stated in its regulations. (Cal. Code Regs., tit. 10, §2790.9). See §15:63.A (discussion of Existing Subdivision Interest Disclosure Statement).
  19. See § 21:87 (discussion of statutes of limitations for construction defect litigation).
  20. See §21:82 (discussion of SB 800 effect on negligence and strict liability).
  21. See §21:75(A) (discussion of SB 800 - condominium conversions).
  22. See Pollard v. Saxe & Yolles Dev. Co., 112 Cal. 3d 974; 115 Cal. Rptr. 648 (1974).
  23. See Pollard v. Saxe & Yolles Dev. Co., 112 Cal. 3d 974; 115 Cal. Rptr. 648 (1974).
  24. See § 21:87 (discussion of statutes of limitations for construction defects).
  25. See § 21:75(8) (discussion of enhanced protection agreements).
  26. See § 21:87 (discussion on statutes of limitation in construction defect litigation).
  27. See § 19.69 (discussion of suit for assessment collection).
  28. See §§ 19:47-19:54 (discussion of lien foreclosure).
  29. See § 15:80 (discussion of material changes).
  30. See § 19:78 (discussion of common area improvements, repairs and reconstruction).
  31. See § 3:12 (discussion of partition of condominium project).
  32. See § 13:2 (discussion of partition for condominium projects).
  33. See § 2:25 (definition of partition) and § 3:12 (partition of condominium project).