The legislature believes that more laws are needed to assure that community managers – those who control the assets of common interest developments (“CIDs”) – do not take advantage of their clients by entering into secret agreements with vendors. While in our experience instances of such manager misconduct are rare, the legislature has a theoretical concern which these new laws attempt to address.
To this end, effective January 1, 2018 two existing managing agent disclosure statutes have been amended and two new statutes have been added to the Davis-Stirling Common Interest Development Act (“Act”).
These statutory provisions create new mandatory disclosure requirements for community managers and their companies when submitting bids for services, before entering into a management agreement and at the time of contract renewal. These new laws reflect the intent of the legislature to promote ethical management of community associations across the state. California legislature believes that increased transparency is in the best interests of every community association, their members and professional managers and their companies.
Summary of the New Laws
The “disclosure statutes” require managers and management companies to disclose: (1) any business or company they have an ownership, profit-sharing or other monetary incentive relationship with; (2) any referral fee or monetary benefit they receive from a third-party document provider; (3) any potential conflicts of interest, including referral fees, from any business or company that provides products or services that benefit the association; and (4) any ownership interests or profit sharing arrangements it has with vendors it recommends or is used by the association.
Purpose Behind the New Laws
According to the California Assembly, the purpose of the legislation is to ensure that CID Boards have the tools necessary to make informed decisions about management company relationships with those providing other services to associations. It appears that the legislature felt there is a problem of property manager self-dealing and kickbacks in CIDs.
Effects of the New Laws
These disclosure requirements do not limit the companies with whom a property manager could contract for the services that the CID needs.
This law, however, requires a prospective CID property manager to disclose to the CID board of directors the following information about potential conflicts of interest before entering into a management contract:
- any business or company in which the CID manager or CID management firm has any ownership interests, profit-sharing arrangements, or other monetary incentives provided to the management firm or managing agent; and
- whether or not the CID manager or CID management firm receives a referral fee or other monetary benefit from a third-party provider distributing documents pursuant to existing disclosure requirements.
Further, this law requires a CID property manager to disclose if it is receiving a referral fee or other monetary benefit from a third-party provider distributing the documents that are required to be provided to an owner when he or she sells a separate interest.
And finally, this law requires a CID manager or CID management firm to disclose in writing any potential conflict of interest when presenting a bid for service to the CID board of directors. Civil Code Section 5375.5 defines “conflict of interest” as any referral fee or other monetary benefit that the property manager might derive from a business or company providing products or services to the association, or, alternatively, any ownership interests or profit sharing arrangements that the property manager has with service providers that the property manager uses or recommends that the association use. The following matrix provides a summary of the disclosure requirements:
|Prospective Manager||Disclose information required in Section 5375 of the Civil Code, including a referral fee from a third party provider of documents pursuant to Section 5300 of the Civil Code.||As soon as practicable but no more than 90 days before entering into management agreement.||In writing.|
|Prospective Management Firm||Disclose information required in Section 5375 of the Civil Code including a referral fee from a third party provider of documents pursuant to Section 5300 of the Civil Code.||As soon as practicable but no more than 90 days before entering into management agreement.||In writing.|
|Manager||Any potential conflict of interest defined in Section 5375.5 of the Civil Code.||When presenting a bid for service.||In writing.|
|Management Firm||Any potential conflict of interest defined in Section 5375.5 of the Civil Code.||When presenting a bid for service.||In writing.|