It is not uncommon to hear complaints about Homeowner Association (HOA) fees. People in the real estate business frequently hear such complaints in connection with the fees that are assessed when a unit changes hands. Transfer fees and the fees for providing copies of association documents can run into the hundreds – sometimes high hundreds – of dollars.

"There ought to be a law," people will sometimes say, thinking that it is the job of the legislature to prevent undesirable things from happening. Well, as a matter of fact, there is a law, and it is disarmingly simple. "An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied." (California Civil Code, Section 1366.1) What could be more straightforward?

Given that this law has been in place for some time, how is it that HOAs can routinely charge fees that may clearly appear to exceed the cost of the service provided? How can members be charged $50 for being provided a 35-page document? Or have a $75 charge tagged on as "collection fees" for a delinquent assessment payment? Etc.

While such sentiments are understandable, they turn out to be misdirected. As noted, the law about HOA fees is simple. But one needs to be careful about its application.

A recent California Appellate Court decision (Brown v. Professional Community Management, 4th Appellate District) clarifies the matter.

In this case, Ms. Brown had brought an action charging that PCM, the management company for a Lake Forest HOA, had, along with the association, violated Civil Code 1366.1 by charging assessments or fees that exceeded the amount necessary to defray the costs for which such assessments or fees had been levied.

The essence of the complaint had to do with the fact that PCM, the management company, charged the HOA fees for preparing such things as "late letters" and "lien letters" and that those charges were then added on to the fees and fines being imposed by the association.

Suppose, for example, that the association had a $50 late fee for delinquent dues, and that the management company charged the HOA $25 for preparing a "late letter." A delinquent member, then, might receive a late letter indicating a $75 charge to the member. (Note: The court's discussion does not include these or any actual numbers from the complaint. These figures are for illustrative purposes only.)

Is this a violation of Civil Code 1366.1? "No," said the appellate court. The court noted that the code section applies to what the association can charge, but it does not limit what a management company can charge the association. Under the civil code, an HOA is a nonprofit, but, the court pointed out, although the law does impose a variety of duties on a management company, it "does not require a managing agent to be a nonprofit entity."

In short, if PCM set fees that made them a profit on such activities as sending out "late letters," copying and providing documents, etc., so be it. They are entitled to make a profit. As to whether or not their fees might be too high, that is a matter for market forces to decide.

The HOA has every right to pass through the fees charged to it by the management company. That does not constitute a fee in excess of its (the association's) costs. What the HOA can't do is to tack on a surcharge to the fees charged for the service. In the example above, it couldn't assess $100, and then pocket the extra $25.

Management companies are in business to make a profit. Of course their fees will exceed their costs. Whether their fees are too high is something decided in the market place. If HOA members think the management company charges too much, that is something to be discussed with the directors who contract with the company. Perhaps the profit made on infrequent services provided for individual members (late letters, transfer fees, parking notices, etc.) help to keep the overall service contract fees lower, thus benefiting all members. This issue may start out looking simple, but reveal itself to be more complicated.

Published: July 8, 2005

Use of this article without permission is a violation of federal copyright laws.

Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .