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FAQ – LFMWC

Below are commonly asked questions about Lake Francis Mutual Water Company and its relationship to Lake Francis Estates. As many of you are aware, there has been much confusion about the proper role of the Lake Francis Mutual Water Company, Inc. (“LFMWC”) as it relates to the properties located in the Lake Francis Estates development. The Board of LFMWC has investigated these questions, consulted and vetted the answers with its retained legal counsel, and prepared this FAQ to assist shareholders. It is our hope that the answers to the below-listed questions clarifies the relationship between LFMWC and the Lake Francis Estates development.

Frequently Asked Questions (FAQ)

Lake Francis Mutual Water Company (LFMWC)

Lake Francis Mutual Water Company (LFMWC) is a private water utility corporation registered with the State of California, for the sole purpose of developing, distributing, supplying or delivering water to its members who are property owners within Lake Francis Estates.

Currently, the fees for water for domestic and irrigation use is a flat fee of $1200 per year for a developed lot, and $300 for an undeveloped lot. At this point all connections are unmetered, however this may change sometime in the future.

No. In order for an entity to be subject to the Davis-Stirling Common Interest Development Act, it must fall into the definition of an association. Civil Code Section 4080 defines an association as "an unincorporated association created for the purpose of managing a common interest development."

Because LFMWC has no authority to manage a common interest development because its only purpose is limited to the delivery of water to the Lake Francis Estates development, as established in Section One of the Articles, it cannot be an association under the Davis-Stirling Common Interest Development Act.

No and No. Neither LFMWC's Articles of Incorporation or its Bylaws allow for any oversight over Lake Francis Estates ACC or its CC&Rs. Additionally the Articles of Incorporation specifically state that "The only lawful act or activity, for which this corporation is formed, is to develop, distribute, supply, or deliver water for irrigation or domestic use, or both, to its members at actual cost, plus necessary expenses."

This shows that the only relationship between LFMWC and the Lake Francis Estates development is that LFMWC supplies drinking water to the Lake Francis Estates development.

Additionally, upon the text of the CC&Rs, LFMWC lacks any standing to enforce the provisions of the CC&Rs, and because it lacks standing, it is prohibited from enforcing violations of the CC&Rs.

Therefore, if LFMWC did attempt to enforce the CC&Rs, it exposes itself to legal risk violating its fiduciary duties, and the members of the LFMWC Board of Directors could even be held personally liable for these fiduciary duty violations.

The CC&Rs specifically state that the right to enforce the CC&Rs by legal remedy is up to individual subdivision property owners. Section 10 of the CC&Rs provides:

"Except as otherwise provided herein, any person or persons owning any property situated within said Subdivision shall have the right to prosecute at law or in equity any proceedings which may be appropriate against any person or persons violating or attempting or threatening to violate or failing to comply with any one of the restrictions, covenants or conditions hereof, and to maintain against any such person any action for injunction, damages or other relief which may be proper in the matter. "

Please also see the letter from the law office of BAYDALINE & JACOBSEN Re: Relationship Between Lake Francis Mutual Water Company and the Lake Francis Estates CC&Rs

There is nothing that prohibits the LFMWC from appointing an Assistant Vice President or Water Manager, but neither position has any express authority to act on behalf of the Board of Directors.

The Bylaws and Articles are silent on the question of providing compensation to individuals in exchange for service to LFMWC. This means LFMWC can provide compensation to individuals in exchange for service to LFMWC, so long as this compensation furthers the purpose of LFMWC to develop, distribute, supply, or delivery water to the people or entities entitled to receive water from LFMWC. LFMWC can also hire a third party to provide professional managerial experience and expertise to help the LFMWC Board achieve LFMWC's purpose.

The Fifth Section of the Articles addresses this question. It provides: "The shares issued by the corporation shall be appurtenant to the land described in the certificate issued therefore." This provision establishes that LFMWC stock is connected with the land owned by the member. The definition of the land to which a LFMWC stock applies is the definition of the land that is located in the legal description of the certificate of the stock. For example, if three lots are merged into one lot, this merger does not alter the definition of the land located in the certificate of the stock. As a result, merging three lots into one does not also convert three LFMWC stocks into one. Instead, the owner of the merged lot now owns three LFMWC stocks.

This interpretation is consistent with Corporations Code Section 14302, which describes the process of how stocks run with the land and can be transferred to subsequent owners. It provides, in relevant part:

"Whenever the owner of real property to which water stock by the terms of the certificate thereof is appurtenant . . . transfers to another the real property with the appurtenances belonging to the property . . . the secretary of the water company that issued the stock shall, upon exhibition to him or her of a deed of the land duly recorded, or the necessary court order duly recorded, issue to the grantee named in the conveyance a new certificate of stock for the number of shares appurtenant to the land as shown by the books and records of the company. The secretary of the water company shall enter the name of the grantee upon the books of the company as the owner of the shares of stock and shall cancel on the books the number of former shares of stock so appurtenant to the land in the name of the grantor or of any previous owner of the land, or of any other person."

The bolded portion of Corporations Code Section 14302, as provided above, shows that the essential factor for determining ownership of stock is based upon the books and records of the company. Therefore, if the books and records of LFMWC base stock ownership on the legal definition of land prior to the land being merged, then merging multiple lots into one does not also merge the appurtenant LFMWC stocks into one. Instead, the LFMWC stock continues to exist as shown on the books and records of LFMWC, which is shown on each certificate of stock.

LFMWC has easements under and across LFMWC shareholder properties. These easements allow LFMWC to service its roads, wells, pumps, and water lines that it owns.

LFMWC does not actually own the property where its easements are located. Instead, the land that LFMWC easements run under and across is owned by the property owner. Therefore, according to California law, LFMWC can only use the property subject to these easements for the specific purpose of the easements — unless LFMWC is specifically undertaking the specific duties of the water company, such as performing improvements or repairs to its utility infrastructure located in the easement. When performing these maintenance duties, LFMWC has the right to cross a person's land only to the extent necessary to access its easement.

There have been instances in which LFMWC granted express permission to property owners to encroach on its easement, such as in the placement of a fence. Or there has been a known open & notorious encroachment of an easement for longer than 5 years, defined by law as a granted prescriptive easement.

In the above cases, LFMWC has no legal authority to require these encroachments be removed, until such encroachments interfere with LFMWC's use of its easement in order to service its utility infrastructure. An interference would occur if a fence crossing over an easement prevents LFMWC from performing repairs to the infrastructure located in its easement. In this situation, LFMWC has the right to seek a court order mandating the removal of the fence in order to access the easement. Unless LFMWC needs to perform emergency repairs to infrastructure in an easement, LFMWC will make an effort to make arrangements with owners or to provide notice to reduce any inconvenience to the owner when LFMWC needs to access its easement.

In the past, there has been much confusion about the proper role of the Lake Francis Mutual Water Company as it relates to the properties located in the Lake Francis Estates development. Because of this, rather than make a determination themselves, the Board of LFMWC consulted and vetted these answers with its retained legal counsel. Likewise, the Board will only welcome opposing opinions of the law unless they also come from an attorney. The letter must be sent via postal mail on the attorney's letterhead, specifically addressed to LFMWC, citing the legal arguments which have led them to a contrary opinion.