December 18, 2001

All Members
Chalet Woods Homeowners Association
c/o Mr. Robert Rosenberg
Massingham and Associates
42840 Christy St. Suite 201
Fremont, CA 94538

Re: Chalet Woods Homeowners' Assn. :
Disclosure Letter regarding Settlement of Ongoing Litigation

Dear Members:

1. Settlement of Lawsuit Against the Developer and Others.

The purpose of this letter is to advise you that the Association's lawsuit against the developer and others has been settled for the sum of Five Hundred Twenty-Five Thousand Dollars ($525,000). The settlement was achieved on Friday, December 7-just a few days prior to the onset of daily depositions, which would have consumed tens of thousands of dollars of the Association's money. These expenses would not have been recoverable by the Association, even if you had proceeded to trial and prevailed. The settlement was recommended by me and by the Special Master, since it represented a good recovery, given the legal problems with the case that developed on account of the California Supreme Court's decision in the Aas case, which will be discussed below.

2. Background of Lawsuit

As you know, my firm was engaged to assist your Association to investigate the design and construction problems with your buildings and resulting property damage and to take legal action to pursue your claims. The Law Offices of Ann Rankin has been assisting associations with such investigations and claims since 1982 and has a great deal of experience in this area. In May of 1999, we filed a lawsuit on behalf of the Association for construction defects and property damage against the developer and the general contractor. Since that time, various responsible subcontractors have been brought in as defendants.

3. Summary of Alleged Defects.

The Association hired the firm of Weir/Andrewson to do a more comprehensive and detailed investigation of the construction problems with your buildings and resulting property damage. In June of 2000, the Association produced a comprehensive statement of claims and estimate for repairs prepared by their experts. The following is a summary of the reports' findings. (Copies of these reports are in the Disclosure file located at Massingham & Associates.)

The following is a list of the defective conditions discovered to date and reported by Weir/Andrewson and sub-experts:

1. Defective site grading and drainage in violation of building codes.

2. Improper building and fence clearances to earth or concrete.

3. Improperly installed anchor bolts, shear wall and roof diaphragm systems, and interrupted shear walls.

4. Improperly installed tile roof in violation of building codes and non-compliance with roofing manufacturer's requirements for drainage provisions for product.

5. Improperly installed building paper, siding and trim. Hardboard siding shows signs of water intrusion which has caused the siding to warp and buckle. Water intrusion stains and damage on interior wall finishes.

6. Defective installation of flashing which has allowed water intrusion and caused damage to building paper, siding, shear wall sheathing, shear wall fasteners and interior finishes.

7. Improperly installed windows in violation of building code for fire restrictive construction.

8. Improperly installed doors which do not close sufficiently and do not provide weather seal required by code.

9. Unsealed outdoor electrical outlet and failed caulking at siding splices and siding to trim.

10. Improperly primed siding and trim.

11. Gaps and omissions in fire wall construction and improper exterior walls at property lines in violation of building code requirements.

12. Gypsum wall board deficiencies causing cracking.

13. Inadequate bracing of water heaters and deficient pressure relief valves. Plumbing pipe penetrations in some areas are not fire stopped.

14. Defectively designed and installed ducting in mechanical room which fails to allow for proper ventilation.

15. Electrical system defects in violation of electrical building code requirements.

During settlement discussions, the Association's consultants advised legal counsel that the most important conditions to repair were those which, if left unrepaired, would allow ongoing damage to the buildings from water intrusion. The consultants' estimates of the cost of performing the most important items of work varied from $375,000 to $731,000. The consultants also advised that with some "value engineering," and after obtaining competitive bids, the necessary repairs could be done for significantly less than the amount of the Saarman bid.

The consultants do not consider the buildings to be dangerous, despite the presence of some Building Code violations. The consultants would like to see some structural and firewall repairs performed, and can recommend ways to achieve them that will be significantly less expensive than the repairs that were presented during the litigation.

4. Defendants' Responses to Association's Claims.

The defendants asserted that some of the claims are barred by applicable statute of limitations; that many of the problems are caused by improper building maintenance by the homeowners; and that repairs, if any, can be done for a lot less than the amount of the Saarman estimate.

5. Supreme Court Decision Reduces Value of Association's Case.

In December, 2000, the California Supreme Court decided the case of Aas v. Superior Court. This case significantly changed California law by eliminating the ability of the Association, and of other property owners, to recover on negligence and strict liability theories for building code violations and other defects that have not yet caused property damage or bodily injury. This case adversely affects claims for issues like incorrectly-constructed shearwalls and firewalls.

Under the Aas case, the Association cannot recover for these problems from the defendants on negligence and strict liability theories unless and until the buildings collapse or burn down, causing bodily injury and/or property damage. The Supreme Court is the highest court in the State, so there is no way to appeal this decision. Many of the design and construction problems at Chalet Woods are of the type that are adversely affected by the Aas decision.

Counsel for the Association determined that the value of the Association's case was significantly less than it was before the case was decided, but that the Association still had many valid claims that are recoverable, because they involved property damage.

The Association's legal counsel has recommended that the Board of Directors meet with the Association's consultants and construction estimators to prioritize the repairs and to determine whether any repairs that are necessary to avoid further property damage and safety conditions will need to be performed in excess of those that can be paid for with the proceeds of any settlement. If so, the Board will have to make a business decision about what repairs to perform and how to pay for any repairs that will cost more than the amount obtained from the lawsuit.

Based upon recent discussions with the Association's consultants, it is currently believed that all or most of the high-priority repairs can be accomplished with the proceeds of the settlement, and that the shortfall, if any, will be manageable. Furthermore, if the case had not settled on December 7, the Association would have incurred legal fees that would have been unrecoverable, and that would definitely have created a shortfall unless the Association obtained far more money after a trial than it was being offered in settlement. Based upon the problems created by the Aas decision, the Association's attorneys and the Special Master thought that this was unlikely to occur.

6. Your Disclosure Obligations.

Please be aware that you must disclose known defective conditions when you sell your property. Otherwise, a potential buyer could sue you for fraud once he or she discovered the problems.

The Board members, the management company and I will continue to keep you informed of developments.

Very truly yours,


Jane K. Penhaligen