HOA Law Blog

You Need an Allowance for "Bad Debt" in Your New Budget!

Builders, who couldn’t build homes fast enough a year ago, are offering substantial discounts and/or incentives such as swimming pools and upgraded amenities, even cars, to sell new homes.

Not only is there a substantial inventory of new homes on the market, resales of existing properties are on the rise, in addition to hundreds of homes and condominium units that have been foreclosed on by banks and associations, which are now being offered for sale.

Hardly a day goes by without some news report addressing the rising number of foreclosures. According to DataQuick Information Systems, Californians lost their homes to foreclosure in record numbers. They report over 24,000 foreclosures in the second quarter of 2007, “besting the previous record by 39%.” Default notices – the first step toward foreclosure – rose to 72,571 for the first three months ended September 30, breaking a record set in 1996.

The Associated Press recently reported that foreclosure filings across the United States nearly doubled in September 2007 compared with September 2006 “as substantially strapped homeowners already behind on mortgage payments defaulted on the loans or came closer to losing their homes to foreclosure.”

RealtyTrac, a service which lists foreclosed properties for sale, reports that across the country, there were 223,538 foreclosure filings in September 2007, up from 112,210 in the same month a year ago.

Foreclosures are a major problem throughout the country, particularly in certain states, including California, where its foreclosure rate was one filing per 253 households. California reported the most foreclosure filings of any single state with 51,259 in September 2007 alone, a fourfold increase from September 2006. The U.S. housing market has seen sales decline and home prices fall or remain flat, making it harder for homeowners who can’t afford to make their mortgage payments or pay their association assessments to sell their homes or seek refinancing. Many of these troubled homeowners were among those who took on adjustable rate mortgages that are now adjusting to higher interest rates, translating into payments they can no longer afford to pay. Many of these homeowners were first time buyers of condominiums.

The rising number of delinquencies and foreclosures has lead the mortgage industry to tighten money standards, further limiting options for homeowners struggling to pay their mortgage. The effects of the “subprime crisis” are trickling down to community associations. If you are preparing your association’s budget for 2008, you need to add a line item for an allowance of perhaps as much as 10% of the association’s total budget to address the possibility that some homeowners will lose their homes to foreclosure, wiping out any association lien and with it the ability of the association to recover any unpaid assessments. Chasing down these homeowners in small claims court may result in a judgment but not result in a recovery – if the homeowners can’t pay their mortgage or the assessments, they probably don’t have the money to pay their debt to the association.

We realize that many associations’ boards of directors may not have considered how the subprime loan crisis was going to affect their association’s bottom line. The fact is that we are entering a real estate market recession. If you owned property back in the early 90’s (the last time we saw a serious decline in property values), you will remember a time when many properties were “upside down,” meaning that the owner owned more to the bank than the value of the home and had no equity. Today, this situation is also known as “negative equity.” For about the past twelve years, community associations have not needed to worry much about the effect of delinquent assessments on cash flow. As home prices increased, homeowners had equity they wanted to protect, so foreclosures, especially by associations for unpaid assessments, were a rare circumstance. This is evident by the fact that the number of foreclosures has quadrupled during the last twelve months alone. There is no question that many – if not most – California community associations will suffer some financial loss resulting from a homeowner that loses their property through foreclosure. Most businesses budget for “bad debt,” and as associations are small businesses, we are recommending that for 2008 you seriously consider allocating a bad debt allowance in your association’s budget.

This situation means that boards of directors will have to pay more attention to the association’s delinquencies. Each month, boards must carefully review the delinquency list and strictly comply with the association’s delinquent assessment policy. Associations can no longer afford delaying action if they want to protect their ability to collect assessments. And, despite what you may have heard, California community associations do not have to wait for the owner to owe $1,800 (or be one year delinquent) before beginning the collection process, including the recording of the all-important lien to secure the obligation.

David C. Swedelson, Esq. and Sandra L. Gottlieb, Esq. are partners in the community association law firm of Swedelson & Gottlieb and are principals of Association Lien Services, with offices throughout Northern and Southern California.

2007-2008 Annual Budget and Disclosure Checklist
Follow the link below to download Swedelson & Gottlieb's 2007-2008 Annual Budget and Disclosure Checklist for California homeowner associations.

This information is provided as a courtesy and does not constitute legal advice. Please consult an attorney.

Download 20072008_annual_disclosure_checklist-1.doc

Owner of Record - What Does That Mean?

It comes up all the time. A resident wants to attend and participate at a board meeting or wants to serve on the board of directors. That resident may be a tenant or the significant other of an actual owner of that property, or perhaps the beneficiary of a trust or shareholder of a corporation that owns the property. Often, governing documents state that only an "owner of record" can serve on the board, and the Open Meeting Act states that "any member of the association may attend a meeting of the board of directors of the association." Electing a non-owner to the board of directors, when the governing documents require ownership as a qualification, could jeopardize the legality of the board's decisions, and perhaps even insurance coverage.

Black’s Law Dictionary defines an "owner" of real property as a person who is vested with title to property and has a right to enjoy that property and do with it as he or she pleases. The "Record Owner" is usually defined in the CC&Rs as the "owner of the Title" at the time of notice. But does this mean that the association is required to go out and check Title? Not necessarily. Typically, the owner of record at a community association is the owner on the association's records based on the information that was provided, perhaps through escrow, when the unit was sold. Some management company agreements obligate the manager to a higher level of record keeping by requiring that the manager keep not only a list of the homeowners, but rather a "current list." This rather innocuous phrase could actually place an ongoing obligation on the manager to verify correct ownership. If that's your intention, great; if not, contracts should be rephrased. The association is entitled to rely on its records, unless it is provided proof by way of a recorded deed, that ownership (in whole or in part) has been transferred to someone new. A resident may present the association with a copy of a quit claim deed, showing that he or she may own all or a portion of the property, but that deed may not have been recorded. Then that person would not necessarily be the "owner of record," at least not recognized by the County Recorder's Office as the owner, and thus should not be considered by the association to be an owner.

Record Owner

It is important to determine who the owner of the property is because many activities (read most) at common interest developments require the owner to be the Record Owner of the property. Only a Record Owner can make decisions on behalf of a unit/lot as it relates to association matters. Association disputes over ownership generally arise over the issue of "legal ownership" and are usually easily resolved by determining identity of the property owner as listed on the recorded grant deed.

Prior planning and organization should allow a board or manager to ascertain who the true Record Owner of the property is prior to mailing ballots or holding official meetings of the members. Most CC&Rs require homeowners to provide the association with the names and addresses of the Record Owners. In fact, Corporation Code Section 8320 places the obligation on the corporation or unincorporated non-profit association to maintain a list of all homeowners and their addresses. It is the association's obligation, even prior to an annual meeting, to ascertain who is the record owner for the purpose of collecting assessments and enforcing the governing documents. Because state statute provides that the levy of assessments is a debt of the owner at the time the assessment was levied, going after the correct owner for payment is important, not only to the association's financial health, but also to limit the association's liability for proceeding against the wrong person or entity for a debt.

Under California law, a recorded interest has priority over an unrecorded interest. That means if two owners claim a right of ownership to a piece of property, the association should treat the Record Owner, the person listed on the recorded grant deed, as the true owner. The same holds true even where a homeowner acquires title to their unit/lot by a quit claim deed, provided, of course, that the deed is recorded. When an unrecorded grant deed is involved or if more than one person claims a right of ownership under a separate recorded grant deed or a representative of a trust claims the ownership, the issue can become murky. If no recorded deed exists or more than one recorded deed is discovered. Management should, based on the Davis-Stirling Common Interest Development Act, refer to recorded interests only. Other statutes, not specific to homeowner associations, provide that a grant deed is valid and enforceable even if not recorded as long as the grant deed gives notice to all. However, what is more commonly found is that the notice of ownership has not been given to all prospective buyers and does not provide legal notice as required by law.

First In Time, First In Right

If there is an ownership dispute between record owners and management does not know who to allow to vote (who gets the ballot), management should rely on Civil Code Sections 1213 through 1220, which provide, when more than one grant deed exists, the "Record Owner" will be the person(s) whose grant deed was recorded first. For example, if a homeowner were to record her or his deed to a unit/lot in 2002 and a subsequent grant deed for that same unit/lot was recorded by another person in 2003, without there being a chain of title that satisfies the transfer of property, the Record Owner would be the homeowner who recorded first.

Trust Ownership

A problem occurring more and more frequently arises when property is owned in trust. When conducting check in at an official meeting or sending out a written ballot, if a trust ownership is presented, the association should require official verification that the person who wants to vote on behalf of the trust is authorized to do so. The individual is usually the trustee of the trust. Interestingly, although the trustee does not own the property, the trustee has the same legal rights to act on behalf of the property as those that would be afforded any other ownership rights of the association. It is incumbent upon associations to advise homeowners that, if they are a trustee of a trust, they need to provide trust documentation to establish that they have the authority as referenced above.

Most times it seems the ownership issue is a problem only in contested elections or when certain members of the association have an agenda. Management's agenda is to make sure the right owners are representing the memberships in the association. Following the above guidelines will guarantee your success.

2006-2007 Annual Budget and Disclosure Checklist

Click here to download the Annual Disclosure Checklist.

Once again, it’s time for community managers and board members to begin preparing association budgets as well as preparing to distribute other required disclosure documents. As we do each year, Swedelson & Gottlieb is pleased to provide you with our updated Annual Budget and Disclosure Checklist.

The provisions of the California Civil Code governing community associations require that you provide members with an ever-growing list of disclosure information, including the “pro forma operating budget,” which must include, among other things, information regarding the association’s expenses, income and reserves.

Other required disclosures include information concerning owners’ rights as members of the association. Much of the information required by the Civil Code must be distributed to homeowners within a 60-day window “not less than 30 days nor more than 90 days” prior to the beginning of the association’s fiscal year.

For those community associations operating under a fiscal year that coincides with the calendar year, the disclosures must be distributed not later than December 1, 2006. For those community associations whose fiscal year commences on a date other than January 1, 2007, the information in this newsletter should be utilized by calculating the appropriate calendar deadlines prior to the commencement of the new fiscal year. Keep in mind that there are important legislative changes effective in 2007, some of which will affect what disclosures are required.

BUDGETING FOR BAD DEBT

As indicated in last year’s Annual Budget and Disclosure Checklist, we advised that real estate experts expected real estate sales and price increases to slow down and foreclosure activity to rise in 2006 due to the large number of risky 100% financed “interest-only” and variable interest rate mortgages retained by buyers, and we advised you to consider budgeting for the likelihood that some owners would not pay their assessments. Indeed, the California real estate market is in a slowdown and foreclosures have tripled from September 2005 to September 2006, which includes a 19% increase from August to September alone. We are optimistic that our Association Lien Services company will continue to successfully collect delinquent assessments, but if a home is foreclosed on by a senior trust deed, it is not always possible to collect assessments. Do the words “upside down” mean anything to you? For those of us who have been around awhile, back in the old days (before 1995), many owners found that they had no equity as the value of their homes were less than their loans. Many let their homes go as they were “upside down.”

As this trend shows few signs of weakening and there are still a large number of high-risk mortgages encumbering California real estate, we continue to advise you to allow for a reasonable amount of bad debt in your 2007 budgets.

BUDGETING FOR COST OF DOCUMENT INSPECTION BY OWNERS

As of July 1, 2006, new Civil Code Section 1365.2 greatly expanded the types of documents homeowners are entitled to inspect. Now, homeowners are not limited merely to inspecting financial reports, but are able to see bank statements, cancelled checks, contracts and other financial documents. An association has an obligation to redact, which means to edit a document to omit confidential and/or privileged information, such as information relating to the names of employees, social security numbers, account numbers, etc. Unfortunately, the legislature only allows an association to charge a homeowner $10 per hour and a maximum of $200 for preparing and providing the requested documents. It is expected that some associations will require an attorney’s assistance in the proper preparation of confidential and/or privileged documents that may be requested by a homeowner.

Although associations are only allowed to charge homeowners $10 per hour (up to $200 total) to prepare requested documents, which costs include attorney services, management companies may charge the associations their extra hourly fees for their services, if required. Additional fees charged by management for these services are probably justified, and associations are encouraged to add additional monies into their budgets for these additional management services. The amount that should be budgeted depends on the size of the association and the history of the association’s homeowner requests for documents.

ANTICIPATING SPECIAL ASSESSMENTS

The California Civil Code also details what is required to be stated or presented in an association’s budget and financial reports. In addition to the budget and other required financial disclosures, the Code requires that associations, through their boards of directors, prepare a statement as to whether “the association has determined or anticipates that the levy of one or more special assessments will be required to repair, replace or restore any major component or to provide adequate reserves therefore.” The Civil Code now imposes greater disclosure obligations regarding reserves and the precise amount of increased assessments for the association’s fiscal year.

Associations need to take a good, hard look at their proposed budgets and anticipated expenses for the new fiscal year and determine whether any special assessments will be required.

This has been an issue with several associations where the board knew, or should have known, of the need for a special assessment to fund the cost of a common area repair, or replacement project, for which there were no monies in reserve, but failed to advise the members.

Some associations are purposefully choosing to under-fund reserves and rely on special assessments for common area repair or replacement projects under the theory that the homeowners who will benefit immediately from the repair should pay for it. While such a practice may be in technical compliance with Civil Code requirements because an association is not required to establish reserves, the 2005 changes to the Civil Code require that the board of directors carefully review what projects it believes will need to be undertaken and determine whether the association has sufficient funds or will require a special assessment and make the appropriate disclosure.

Some associations are disguising assessment increases by calling them “special assessments.” Rather than increase the regular assessment, some associations are levying special assessments of a set amount, per month, to fund repair programs or reserves when, in reality, this money should be part of the regular assessments. Such a practice could be challenged by homeowners. In order to be in compliance with Civil Code mandates, it is appropriate to present this information in the budget.

DISCLOSURE OF ALLEGED VIOLATIONS OF GOVERNING DOCUMENTS

There is another important disclosure that some association boards are failing to make: escrow notification of alleged violations of association governing documents. Although not part of the annual disclosure obligations, not only can this disclosure assist the association in CC&R and Rules and Regulation enforcement, but the association’s failure to make such a disclosure may adversely effect an association’s enforcement rights.

Along with all other documents delivered to escrow on behalf of an owner, the California Civil Code requires associations to provide a copy or summary of any notice previously sent to an owner that sets forth any alleged violations of the governing documents which remain unresolved at the time of the request. This means that associations are obligated to disclose to prospective owners any CC&Rs or Rules and Regulation violations alleged to have occurred on a homeowner’s property. Disclosure may compel the seller to correct the violation, as the prospective buyer will not want to inherit the problem.

THE NEW ELECTION LAW AND ITS IMPACT ON ASSOCIATION BUDGETS AND DISCLOSURES

As you hopefully are aware, as of July 1, 2006, California Civil Code Section 1363.03 sets forth the requirements that community associations are required to follow for association elections and certain other votes by association members (if this is news to you, please visit our blog and see our updates at www.hoalawblog.com). Some associations can expect to incur additional costs relating to printing of envelopes, ballots, election materials and potentially fees to retain an independent third party as inspector of election, such as an accountant, to provide the services needed during a membership vote. While you may avoid some of these expenses by finding a willing volunteer to serve as inspector of election, associations should examine their alternatives and budget accordingly.

The new election law creates additional disclosure responsibilities for associations. Election rules adopted pursuant to Civil Code Section 1363.03 are operating rules and must be sent to the members for a 30-day review period prior to adopting or changing the election rules. Associations must also give notice that the board has adopted the election rules within 15 days of their vote to adopt the rules (the procedure described in Civil Code Section 1357.130 for operating rules listed in Civil Code Section 1357.120). Additionally, within 15 days of an election, the board must publicize the tabulated results of the election in a communication directed to all members.

NEW REQUIREMENTS REGARDING INITIATION OF FORECLOSURE

The changes to California Civil Code §1365.1 and §1367.4 now require that delinquent assessments amount to at least $1,800 or are one (1) year delinquent prior to initiating foreclosure.

Associations are prohibited from foreclosing on an assessment lien unless either: (1) The amount of the assessments owed (not including costs, interest, or accelerated assessments) is $1,800 or (2) one (1) year of delinquency has passed on any unpaid assessments.

Note that payment plans do not stay the running of the one (1) year of delinquency. Here’s a tip - when levying a large special assessment, do not levy with monthly payments. Instead, have the whole amount of the special assessment due in thirty (30) days, or offer a payment plan as an accommodation. This protects the Association against an owner that sells, allows for acceleration if there is a default, and provides other benefits.

BOARD OF DIRECTORS MUST VOTE TO RECORD A LIEN

California Civil Code §1367.1(c)(B)(2) now requires that a majority of the Board of Directors must vote to decide to record a lien at an open Meeting (not Executive Session). The decision of the Board must then be recorded in the minutes of the meeting.

Note that there is no language in the statute that requires that the owner remain anonymous at this point in the proceeding, but there are requirements that the owner’s information be kept confidential in the minutes of the Executive Meeting that votes on whether to notice the sale. There is, however, the potential liability for slander (spoken) or libel (written in the minutes). Do not use the owner’s name.

David C. Swedelson
Sandra L. Gottlieb

Click here to download the Annual Disclosure Checklist.

Civil Code Section 1363.03 - New Election Law FAQs

As you hopefully know by now, as of July 1, 2006, the way all California community associations conduct elections and membership votes was changed. Among the major changes is the requirement that all elections and certain other membership votes be held by secret ballot pursuant to operating rules. This includes votes for the selection and removal of members of the board, amendments to the governing documents, votes regarding assessments, and the grant of exclusive use common area. In addition, the role of the inspectors of election has grown significantly, and the use of proxies, while still permitted, may not be as prevalent as in the past. This new law affects all community associations, irrespective of their size. Failure to comply with the new law could subject an association to a challenge in small claims court. Because this new law is so complex, we are receiving a lot of questions. In response, we present the following frequently asked questions:

1. Our Association has always had secret ballots; can't we just keep on holding our annual elections as we have been doing for years?

The simple answer is no. The new election law was adopted because Senator Battin from the Coachella Valley somehow came to believe that fraud was rampant within association elections. This was news to us. If an association does not comply with the new law, which includes, among other things, the adoption of election rules and procedures, which specify procedures for voting by secret ballot, designating and detailing the responsibilities of the inspector(s) of election, the voting results can be challenged and a fine imposed on the association. We do not believe that the new election law is required as we certainly do not see rampant fraud at associations, but it is the law and if you do not fully comply, there are potential serious consequences.

2. What is required for the election rules and procedures - do they need to be approved by the members?

New Civil Code Section 1363.03 provides that the new election rules and procedures must provide, among other things, that the association allow for equal access for all candidates or members to advocate their point of view in all association media (via newsletter, websites, etc.); that the association provide access to common area meeting space at no cost to all candidates and members who advocate a point of view during a campaign; set forth the qualifications of candidates for the board; set procedures for the nomination of candidates; set qualifications for voting; establish a method for selecting the inpector(s) of election and who can serve as an inspector of election. This new law specifically provides that these rules must be treated like other "operating" rules and sent out to the members for their comment thirty (30) days before being adopted by the board of directors. However, regardless of member comment, it is the board's decision whether to adopt the rules; the members do not vote on them.

3. What happens if we don't have election rules and procedures?

The failure to adopt election rules and procedures means that actual results of the voting can be contested in small claims court.

4. Do these voting rules and procedures only apply to the election of board members or to voting on other matters as well?

The new law provides a list of different votes that are taken by the members in accordance with the election rules - the election or removal of the board members, voting regarding assessments, amendment of the governing documents, and the grant of exclusive use common area.

5. We are a small association of only 10 units. My board does not want to have to make rules or follow the new law regarding secret ballots. Can a majority of the homeowners decide that we don't want to follow this new law?

Unfortunately, Senator Battin (and the California legislature) did not believe that there was any need to differentiate between larger and smaller associations; all community associations subject to the Davis-Stirling Act must follow the new election law. Any homeowner that wants to challenge the results of an election may do so by going to small claims court, and a small claims judge not only has the power to invalidate the election results, but also has the power to impose a fine of up to $500 per violation. Although there may not be any homeowners today that even know about these new election laws, it only takes one disgruntled homeowner to file a small claims action involving the results of your election. This does not even take into consideration the question that if the results of the election are invalidated, is there a board of directors in place to make decisions, sign checks, etc.?

6. What exactly has to be provided in the upper left hand corner of the outer secret ballot envelope?

The following must appear in the upper-left hand corner of the outer secret ballot envelope:

• Written or pre-printed voter’s name
• Written or pre-printed voter’s address or separate interest identifier that entitles him or her to vote (such as parcel, unit or lot number - can simply be the voter's full address)
• Voter’s signature

7. What if a homeowner doesn't know their parcel or lot number?

By recent amendments to Civil Code Section 1363.03 (effective 7/1/06), it is no longer necessary that an owner place their parcel or lot number as long as the voter can be identified from the information provided (address and unit number may be sufficient).

8. Does everyone need to fill out a candidacy notice, including existing Board members who are running for reelection?

Some election rules provide for candidacy notices to be sent out to the membership, and the answer would depend on how your election rules are drafted since the code does not address candidacy notices. Candidacy notices are just one way to provide equal access for those persons running for election. It is a good idea to provide in your election rules that all candidates, regardless of whether they are running for reelection, must fill out a candidacy notice.

9. Should the inner envelope say only "SECRET BALLOT" or does it also need to include an address?

The inner envelope should say no more than: "Secret Ballot, to be opened by the Inspector of Election only." It should not be marked with any identifying information by anyone.

10. Do we need to send homeowners a proxy? How do we let homeowners know that they can give a proxy to someone and what needs to be on it?

If the governing documents don’t require the Association to send a proxy, you are not obligated to do so. The requirements for proxies are set forth in the Corporations Code and should be addressed in the election rules. The Inspector(s) of Election validates proxies. All proxies must be exchanged for Secret Ballots because the proxy itself can’t be voted.

11. Is it 1 Inspector under 100 units and 3 for 100 + units?

No, it's one or three at the Board’s discretion. If the Board fails to designate the Inspector(s), the members may vote on the appointment.

12. What if five members are up for election, all five want to run again and no candidacy notices are received by the deadline? What is the use of having nominations from the floor if a member can't change their vote once it has been mailed?

Recently amended Civil Code Section 1363.03 makes clear that nominations may be allowed from the floor if provided for in the rules and not prohibited by the governing documents. This helps in cases where nominations are not received in advance of the meeting. A member may wish to refrain from voting until the meeting itself in order to ensure the member knows all of the choices available. The member shouldn't mail their ballot unless they are sure of their vote. Another option is to write in a candidate that is not yet nominated, mail the ballot, and then nominate that candidate from the floor at the meeting. It is obviously an advantage for a candidate to return the candidacy notice within the time provided so that candidate is on the ballot. Also, elections by acclamation are no longer allowed (a vote must still be taken where the number of candidates is equal to the number of open board positions).

13. Do only members not planning on attending the meeting need to mail in their secret ballots? The members attending can bring them in but they must be in the 2 sealed envelopes...correct?

Yes. But mailing in your ballot does not mean you cannot attend the meeting. Members can complete their secret ballots and seal them at the meeting. We recommend the board, manager or Inspector(s) bring extra blank secret ballots and envelopes to the meeting in case someone lost their voting materials, etc. and needs a replacement.

14. What if quorum is not achieved?

Remember that even secret ballots received by mail count as members present at the meeting for quorum purposes, so be sure to count them towards quorum. Also, the Inspector(s) should not open any envelopes until quorum is satisfied (if quorum is not satisfied, move to adjourn the meeting and check to see if your governing documents have a provision for reduced quorum at an adjourned meeting).



We encourage all associations to comply with the new law. If you would like more information, there are additional articles on this blog and our website, or you may e-mail our office and we will be glad to forward you additional documents.

Governor Signs into Law Changes to Civil Code Section 1363.03 Dealing with Election Procedure

Please do not shoot the messenger as we are only reporting the news. On September 18, 2006, the Governor signed S.B. 1560 (the “Amendment”), which modifies recently enacted Civil Code Section 1363.03. This “cleanup bill” clarifies some troublesome issues, which will hopefully allow associations to get through the election process more efficiently.

• §1363.03(e)(1)

One of the provisions in 1363.03 required homeowners, when voting by secret ballot, to write his or her name in their own hand on the exterior envelope sent to the inspector(s) of election and state their unit, lot or tract number. The Amendment allows an owner to sign the exterior envelope and indicate the owner’s name or address or separate interest identifier that entitles that owner to vote. Therefore, the homeowner will no longer have to print their name, unit, lot and tract number in their own hand but may instead utilize a label. However, the member is still required to sign his or her name.

• §1363.03(f)

The changes to Civil Code Section 1363.03 now confirm what we already knew to be the case, that once the inspector receives the ballot, it is not revocable. This change can be found at 1363.03(f). An additional change to 1363.03(f) allows the inspector or the inspector’s third party designee to verify members’ information and signature on the outer envelope of the secret ballot prior to the meeting at which the ballots are tabulated. We had been very concerned that only the inspector(s) of election could perform this job and only perform it at the meeting. Now, the inspector(s) can designate third parties to help perform some of the work and allows for the signature on the outer envelope to be verified (this will help with reaching quorum) prior to the meeting.

• §1363.03(m)

1363.03(m) has been added to confirm that the secret ballot procedure is not required for votes cast by delegates or other elected representatives, but only for votes cast directly by members of the association.

• §1363.03(d)(1)(A)

Another important change defines a proxy (this is a new definition for the code) as “a written authorization signed by a member or the authorized representative of the member that gives another member or members the power to vote on behalf of that member.” (Emphasis added.) In the past, a proxy could be given to any third party whether they were the member, the member’s attorney or a family member unrelated to the association. Now, a proxy can only be given to a member.

• §1363.03(d)(1)(B)

The word “signed” is now defined as “the placing of the member’s name on the proxy, whether by manual signature, typewriting, telegraphic transmission or otherwise by the member or authorized representative of the member.” This is important because it clarifies whether faxed signatures count; they do.

• §1363.03(d)(2)

The cleanup legislation clarifies that proxies may not be construed or used in lieu of a ballot. The modifications to the Civil Code provide that if proxies are permitted or required by an association’s bylaws, and if the proxy meets the statutory requirements, they shall be used. However, associations are not required to prepare or distribute proxies pursuant to Section 1363.03. A member may revoke his or her proxy prior to the receipt of the secret ballot by the inspector(s) of election pursuant to Section 1363.03(d)(3).

• §1363.03(b)

An important concern has been the quorum requirement. The Amendment provides that if quorum is required for elections in the governing documents or other provisions of law, each secret ballot received by the inspector(s) shall be treated as a member present at a meeting for purposes of establishing a quorum (1363.03(b)). We believe that since the ballot is contained within the first and second envelope referenced above, when the envelope is received, it can be used for establishing quorum. Since quorum is determined by ballots, if an envelope is received without a ballot enclosed, then the empty envelope would not count toward quorum.

Additionally, this same subparagraph adds to the already designated four issues for which secret ballots must be utilized to include the removal (recall) of directors.

Unfortunately, these changes did not go as far as we would have liked. However, the changes are significant and clarify many unanswered questions that followed the enactment of Civil Code Section 1363.03.

Sample Annual Meeting Forms

Wondering where you can find sample annual meeting and secret ballot forms? Look no further. Click on the links below to find some handy reference.

These forms are provided as reference only and do not constitute legal advice. Swedelson and Gottlieb makes no representations as to whether these forms are suitable for any purpose. Consult an attorney before using any of these forms.

Download Secret Ballot Form

Download Secret Ballot Instructions

Download Candidacy Notice

Download Notice of Annual Meeting

2005 - 2006 ANNUAL DISCLOSURE CHECKLIST FOR COMMUNITY ASSOCIATIONS

2005 - 2006 ANNUAL DISCLOSURE CHECKLIST FOR COMMUNITY ASSOCIATIONS

NOT LESS THAN 30 DAYS NOR MORE THAN 90 DAYS PRIOR TO THE BEGINING OF THE FISCAL YEAR:

 Pro Forma Operating Budget Civil Code § 1365(a)
The association must distribute its operating “pro forma” budget within the “60-day window” to retain its ability to unilaterally increase assessments. If this requirement is not met, the members must approve any increase to the regular assessments.

The budget must contain the following:
• an estimate of revenue and expenses on an accrual basis;
• a summary of the reserves printed in bold type;
• with respect to construction or design defect cases, the summary must also include a separate line
item for:
(1) funds received from compensatory damage awards or settlements; and
(2) expenditure or disposition of funds, including amounts for direct/indirect costs of repair of
defects (If the association is required to have a CPA conduct a review of its financial
statements, the above information may instead be contained in such review);
• a statement as to whether the board anticipates the levy of one or more special assessments; and
• a basic description of the procedures used to calculate the reserves.

 Summary of Pro Forma Operating Budget Civil Code § 1365(c)
(Alternative to Above) The association may distribute a summary of the operating budget in lieu of the pro forma budget.

The summary budget must give members notice that:
• the complete budget is available for review at the association’s business office or other
suitable location within the development; and
• copies of the complete budget will be provided upon request at no charge to a member within
five (5) days of the request.

These notices must be printed in at least 10-point bold type on the front page of the summary.

 Assessment and Reserve Funding Disclosure Summary
The association must distribute an Assessment and Reserve Funding Disclosure Summary in the form prescribed by Civil Code Section 1365.2.5. This disclosure requires more than just a description of the amount of reserves and/or the association’s budget contributions. Disclosure of, among other things, the components being reserved for, their anticipated remaining life and how much money is currently in reserves allocated to that component must be disclosed.

 Assessment Increases Civil Code § 1366(d)
Notice of an assessment increase or special assessment must be provided by first-class mail to members not less than thirty (30) nor more than sixty (60) days before the increase or assessment is due. Note: Even if the budget shows the increased assessments, prepare and distribute a general notice.

 Assessment Collection Policy Civil Code § 1365(d)
Members must receive a description of the policies and practices which the association will apply to enforce payment of assessments. The failure to adopt and distribute this assessment collection policy may affect an association’s ability to collect delinquent assessments.

This notice usually describes:
• how, when and under what conditions the association will record and foreclose upon assessment liens;
• the nature and amount of late charges, interest and collection costs; and
• owners’ rights to demand Internal Dispute Resolution (“IDR”) and Alternative Dispute Resolution (“ADR”) at different times during the collection process.

 Secondary Addresses Provided by Owners
The association shall notify owners of their right to submit secondary addresses to the association for purposes of collection notices. Upon receipt of a written request by an owner identifying a secondary address for purposes of collection notices, the association shall send additional copies of any notices required by Section 1367.1 of the California Civil Code to the secondary address provided. The owner’s request shall be in writing and shall be mailed to the association in a manner that shall indicate that the association has received it. The owner may identify or change a secondary address at any time, provided that, if a secondary address is identified or changed during the collection process, the association shall only be required to send notices to the requested secondary address from the point that the association receives the request.

WITH THE BUDGET SUMMARY, OR IN ANY GENERALY MAILING DURING THE YEAR:

 Notice of Right to Minutes of Board Meeting Civil Code § 1363.05(d)
On an annual basis, the association must notify members of their right to receive copies of the minutes from board of directors’ meetings (which does not include executive session meeting minutes).
The notice should state:
1. that members have the right to receive approved minutes, an unapproved draft, or a summary of the minutes within thirty (30) days of a board meeting upon member’s request and upon reimbursement of association’s costs to distribute minutes; and
2. how and from whom those minutes may be obtained.

 Arbitration/Mediation of CC&Rs Disputes Civil Code § 1369.510 et seq.
Annually, the association must distribute a summary of Civil Code Section 1369.510 et seq. to its members.

Section 1369.510 et seq. provides, in part:
• An owner or the association must first offer arbitration, mediation or conciliation prior to litigating an action to enforce the governing documents, in seeking injunctive or declaratory relief, or injunctive or declaratory relief plus damages of up to $5,000 (other than assessments);
• thirty (30) days in which the responding party may accept or reject ADR

Civil Code §1369.590 requires that associations annually provide members with a summary of the ADR that specifically states:
“Failure of a member of the association to comply with the alternative dispute resolution requirements of Section 1369.520 of the Civil Code may result in the loss of your right to sue the association or another member of the association regarding enforcement of the governing documents or the applicable law.”

The summary must be provided “either at the time the pro forma budget required by Civil Code Section 1365 is distributed or in the manner prescribed in Section 5016 of the Corporations Code.”

 Insurance Coverages Civil Code § 1365(e)
The association must distribute to the members a summary of its property, general liability, earthquake, flood and fidelity insurance policies. The summary should also state:
• the name of the insurer and the type of insurance; and
• the policy limits and deductibles, if any.

To the extent the above information is contained on the policy’s declaration page, that page can be distributed in lieu of the summary.

The summary or declaration page must include the statement provided in Civil Code Section 1365(e)(4). This statement must be in at least 10-point boldface type.

Notice of a lapse, cancellation or non-renewal of any policy or of any change in policy shall be provided to the members by first-class mail as soon as reasonably practicable.

Within Sixty (60) days prior to beginning of fiscal year:

 Notice of Assessments, Foreclosures and Payment Plans Civil Code §1365.1
The association must distribute the notice specified in Civil Code Section 1365.1 pertaining to assessments, the association’s rights of foreclosure, payments of assessments and meetings and payment plans concerning a delinquent assessment.

WITHIN 120 DAYS AFTER THE CLOSE OF EACH FISCAL YEAR

 Review of Financial Statement Civil Code § 1365(b)
For any fiscal year in which the association’s gross income exceeds $75,000, a review of its financial statement must be prepared by a licensed California accountant and distributed to members within 120 days after the close of each fiscal year.

 Notice of Right to Receive Annual Report Corporations Code § 8321
For any fiscal year in which the association’s gross revenues are at least $10,000, it must prepare an annual report within 120 days after the end of the association’s fiscal year and notify members on an annual basis of their right to receive this report. The association must provide the report at its own expense to any member submitting a written request for a copy of the report.

The annual report must contain:
• a year-end financial statement;
• a notice stating where records of the association members’ names and addresses are stored; and
• disclosure of transactions with interested parties and of indemnification agreements.

The association must attach either the accountant’s report, if an independent accountant has reviewed or audited the financial statement, or a certificate by an officer indicating that the statement was prepared without review or audit.

MISCELLANEOUS DISCLOSURES

 Schedule of Monetary Penalties Civil Code § 1363(g)
Associations which impose fines on members for violating governing documents or association rules must distribute a schedule of the monetary penalties via first class mail or hand-delivery when the schedule is adopted or revised (recommended annually).

 Escrow/Sale of Unit Civil Code § 1368(a) and (b)
Within ten (10) days of written request from an owner, an association must provide the owner (or owner’s agent/escrow) with a copy of various documents and information so that the owner may satisfy certain disclosure obligations to a prospective buyer. Among the documents and information to be provided by the selling owner is a statement of unpaid fines and other monetary penalties, as well as a copy or summary of any notices of alleged violations of the governing documents that remain unresolved at the time of making the disclosure to the prospective buyer.

 Disclosure of Construction Defect Issues Before Suit Civil Code § 1368.5, § 1375(k)(1)(E)
Thirty (30) days before an association files a lawsuit for construction defects, it must provide notice to all owners of the defect issues, schedule a members meeting to discuss the claims and the available options, including any settlement offer from the builder, as referenced in California Civil Code Section 1375(k)(1)(E).

 Disclosure of Construction Defect Settlement Civil Code § 1375.1
Upon settling a construction defect claim with the builder, the association must so inform the members as soon as reasonably practicable, of the following:
(1) disclose what will be repaired;
(2) estimate when the defects will be repaired; and
(3) disclose any defects that may not be repaired.

 Reserve Fund Transfer Civil Code § 1365.5(d)
When an association uses or transfers any funds from its reserve account to fund litigation, it must notify the members of the transfer and of the availability of an accounting in the next available mailing to the membership.

 Litigation Expenses Civil Code § 1365.5(d)
Unless the association’s governing documents impose more stringent standards, the association shall prepare an accounting of the litigation expenses on at least a quarterly basis. The accounting shall be made available for inspection by members at the association’s office.

Newsletter—Annual Disclosure Issues

LAWFORHOAS.COM

SWEDELSON & GOTTLIEB LEGAL UPDATE
2005-2006 ANNUAL DISCLOSURE ISSUES
__________________________________________________________
BUDGET AND DISCLOSURE DEADLINE: DECEMBER 1, 2005

It’s November and community managers and board members are hard at work preparing their association’s budgets and other required disclosure documents.

There are important legislative changes effective in 2006, some of which will affect what disclosures are required.

As Swedelson & Gottlieb does each year, we are providing you with our updated Annual Budget and Disclosure Checklist (the “Budget”).

The provisions of the California Civil Code governing community developments require that community associations provide members with an ever-growing list of disclosure information. Much of the information required by the Civil Code must be distributed to homeowners within a 60-day window “not less than 30 days nor more than 90 days” prior to the beginning of the association’s fiscal year. (Yes, that’s the law as of 2005.)

For those community associations operating under a fiscal year that coincides with the calendar year, the Budget and other disclosures must be distributed not later than December 1, 2005.

For those community associations whose fiscal year commences on a date other than January 1, 2006, the information in this newsletter should be utilized at the applicable time by calculating the appropriate calendar deadlines prior to the commencement of the new fiscal year.

The California Civil Code also mandates the distribution of a “pro forma operating budget” which must include, among other things, information regarding the association’s expenses, income, and reserves. The Civil Code also requires that associations annually provide members with other information about the association and their membership rights. We address these requirements in our checklist which follows.

For more information, including updates on applicable statutes, you can print a copy of our newsletter explaining the changes in the law by accessing our internet blog at www.hoalawblog.com or e-mail us at Info@sghoalaw.com to request a copy be sent to you via e-mail.

The remainder of this newsletter addresses suggestions for dealing with specific issues relating to the association’s budget and disclosure obligations.

BUDGETING FOR BAD DEBT

Although we have enjoyed several years of phenomenal growth and appreciation in real estate, experts indicate that we are likely to see a softening of the real estate market beginning in 2006. While the experts also believe that at least 50% of homeowners have significant equity in their properties, a large percentage of new homeowners who have bought or refinanced within the last year, or so, have taken advantage of the creative
loans that are in the market. Many of these homeowners have either obtained 100% financing or interest-only financing and have very little equity in their properties. When their variable interest rates start to climb, it is likely that some of these homeowners will not be able to afford the payments for the financing of their condominium or house.

A recent Los Angeles Times news article pointed out the potential for many homeowners to lose their homes through foreclosure. The article quoted a woman who had recently purchased her condominium with 100% financing with a variable interest rate. The woman stated that she could barely make the payments and did not know what she would do if her interest rate increased.

Many of us who have been in real estate-related industries for many years remember when interest rates were higher, property values fell, and many homeowners found themselves in a situation where their mortgages were more than the market value of their homes. There are likely to be some homeowners who will not pay their assessments or who lose their properties to their senior lenders in foreclosure. In that instance, the associations may not be able to collect the delinquency from them. It would be prudent for associations to work a bad debt allowance into their budgets beginning with fiscal year 2006.

BUDGETING FOR COST OF DOCUMENT INSPECTION BY OWNERS

Effective July 1, 2006, new Civil Code Section 1365.2 greatly expands the types of documents homeowners are entitled to inspect. Homeowners will not be limited merely to inspecting financial reports, but will be able to see bank statements, cancelled checks, contracts and other financial documents. An association has an obligation to redact, which means to edit a document to omit confidential and/or privileged information, such as information relating to the names of employees, social security numbers, account numbers, etc. Unfortunately, the Legislature only allows an association to charge a homeowner $10.00 per hour, for a maximum of $200.00, for preparing and providing the requested documents. It is expected that some associations will require an attorney’s assistance in the proper preparation of confidential and/or privileged documents that may be requested by a homeowner.

Although associations are only allowed to charge homeowners $10.00 per hour, up to $200.00, for its to prepare requested documents, which costs include attorney services, management companies may charge the associations their extra hourly fees for their services, if required. Additional fees charged by management for these services are probably justified, and associations are encouraged to add additional monies into their budgets for these additional management services. The amount that should be budgeted depends upon the size of the association and the history of the association’s homeowners’ requests for documents.

ANTICIPATING SPECIAL ASSESSMENTS

The California Civil Code also details what is required to be stated or presented in an association’s budget and financial reports. In addition to the budget and other required financial disclosures, the Code requires that associations, through their boards of directors, prepare a statement as to whether “the association has determined or anticipates that the levy of one or more special assessments will be required to repair, replace or restore any major component or to provide adequate reserves therefore.” The Civil Code now imposes greater disclosure obligations regarding reserves and the precise amount of increased assessments for the association’s fiscal year.

Associations need to take a good, hard look at their proposed budgets and anticipated expenses for the new fiscal year and determine whether any special assessments will be required.

This has been an issue with several associations where the board knew, or should have known, of the need for a special assessment to fund the cost of a common area repair, or replacement project, for which there were no monies in reserve, but failed to advise the members.

Many associations are purposely choosing to under-fund reserves and rely on special assessments for common area repair or replacement projects under the theory that the homeowners who will benefit immediately from the repair should pay for it. While such a practice may be in technical compliance with Civil Code requirements because an association is not required to establish reserves, the 2005 changes to the Civil Code require that the board of directors carefully review what projects it believes will need to be undertaken and determine whether the association has sufficient funds or will require a special assessment and make the appropriate disclosure.

Some associations are disguising assessment increases by calling them “special assessments.” Rather than increase the regular assessment, some associations are levying special assessments of a set amount, per month, to fund repair programs or reserves when, in reality, this money should be part of the regular assessments. Such a practice could be challenged by homeowners. In order to be in compliance with Civil Code mandates, it is appropriate to present this information in the budget.

LEAKS, MOLD, AND DEFECTS

When the budget is being finalized, some associations are also uncovering issues, such as water leaks, mold and construction defects, of which the board has knowledge. Even if the board is not anticipating making any major repairs to deal with the problems (although these days, they probably should), disclosure of these issues should be made. Technically, it could be said that the issues fall between the cracks in the California Civil Code and a line item for the repairs should either be included as a reserve item or the board should disclose, at some point, that they anticipate a special assessment to repair or fix the problems. To avoid conflict, the board should make full disclosure of what major repair issues it is dealing with, especially if the board anticipates that the cost of repair will affect the association’s budget. Full financial disclosure should be made so that the board is representing the association’s true financial condition.

The failure to disclose the cost of repair for defects, water damage or mold repair projects continues to be a problem for associations that anticipate such work. Although not every expenditure can be calculated or anticipated in advance, if a board is going to borrow from reserves (that is, use reserve money for work not designated as a reserve item), then it must disclose that it is borrowing from the reserves, along with the board’s plan for repayment of the borrowed reserve money.

MOLD AND INSURANCE DEDUCTIBLES

Community associations should develop and distribute a “deductible policy” setting forth the association’s policy for dealing with insurance claim deductibles. The policy should state, for example, that, if the claim originates as a result of an element that is the homeowner’s responsibility, such as a broken flex line or leaking sink fixtures, then the homeowner is responsible for the deductible. If the cause of the damage is related to an element over which the association has maintenance and repair responsibilities, the association would be responsible for the deductible. Such a policy can be included with the insurance disclosures and reflect the amount of the deductible(s).

If the association adopts a deductible policy that includes a significant deductible, it should be disclosed to the members along with a reminder to homeowners to obtain their own insurance policies to cover any gaps in the association’s coverage.

Associations should adopt a mold policy in addition to their maintenance and repair policies. Often associations wind up in disputes with homeowners over who is responsible for what maintenance and repairs.

One component of the policy is that homeowners should be apprised that, if they do not report water damage claims within twenty-four (24) hours, the association cannot be held responsible for any resulting mold because the association was not given a timely

opportunity to remediate the water damage before mold developed.

DISCLOSURE OF ALLEGED VIOLATIONS
OF GOVERNING DOCUMENTS

There is another important disclosure that some association boards are failing to make: escrow notification of alleged violations of association governing documents. Although not part of the annual disclosure obligations, not only can this disclosure assist the association in CC&R and Rules and Regulation enforcement, but the association’s failure to make such a disclosure may adversely effect an association’s enforcement rights.

Along with all other documents delivered to escrow on behalf of an owner, the California Civil Code requires associations to provide a copy or summary of any notice previously sent to an owner that sets forth any alleged violations of the governing documents which remain unresolved at the time of the request. This means that associations are obligated to disclose to prospective owners any CC&Rs or Rules and Regulation violations alleged to have occurred on a homeowner’s property. Disclosure may compel the seller to correct the violation, as the prospective buyer will not want to inherit the problem.

NEW DISCLOSURES FOR 2006

ASSESSMENTS AND FORECLOSURES NOTICE OF SECONDARY ADDRESS AND PAYMENTS

Effective in January 2006, the Civil Code will be revised and the process of collecting assessments will substantially change. In addition to restricting when and how an association can lien and foreclose, the new law requires new disclosures. See the checklist that follows.

For a copy of an article detailing the changes, please contact us at Info@sghoalaw.com.

NOTICE

As of January 1, 2006, each association is required to provide annually an updated notice to the homeowners that outlines some of the rights and responsibilities of common interest development property owners and the associations. It is suggested the notice be provided with the association’s other mandatory disclosures.

SECONDARY ADDRESS

New for 2006, the Civil Code requires that associations notify homeowners of their right to submit a secondary address to the association for the purpose of collection. Such notification must be sent to the homeowners and associations should likely not wait until 2006, but rather, provide this notice at the same time that the other 2005-2006 disclosures, budget, etc., are distributed.

Although the Civil Code only requires that associations notify homeowners of their right to provide secondary addresses for the purpose of collection notices, Civil Code Section 1365.1(c) also gives homeowners the right to give a secondary address for general notices and obligates the associations to send all correspondence and legal notices to the secondary address. Civil Code Section 1367.1 requires that secondary address notices for collection purposes be mailed in a manner that confirms receipt whereas, Civil Code Section 1365.1 provides that secondary address notices may be sent by facsimile or mail, with no requirement of confirmation of receipt. It is not clear whether this discrepancy is the result of poor drafting on the part of the California Legislature or whether the Legislature intended to make a distinction between notifications for purposes of collection and other notices, although we believe it is the former.

For a copy of this newsletter in PDF format to copy and distribute to clients and associates, please contact us at Info@sghoalaw.com.

AB 2736 Architectural Review

New Procedures Apply To The Adoption Of "Operating Rules"

The Davis-Stirling Common Interest Development Act was amended effective January 2003 by adding Civil Code Sections 1357.100 through 1357.150 which require that certain rules and regulations of an association defined in the Civil Code as "operating rules" satisfy specified criteria before that operating rule becomes effective. For certain categories of rule changes listed in the Civil Code, the board of directors of an association must give its members at least 30 days’ notice of a proposed rule change prior to adopting the rule change. The notice must include the text of the rule change and a description of the purpose and effect of the rule chan; however, rules adopted for emergency purposes are exempt from the notice requirements. Once the 30 day notice period expires, the Board may adopt the proposed rule change. The Board must notify the members soon as possible after the rule has been and no more than 15 days after making the rule change. Once enacted, operating rules subject to the requirements of Civil Code § 1357.100 may be reversed by a majority of a quorum of the members if at least 5% or more of the voting power of the association petitions the board for a special meeting for the purpose of reversing an operating rule (distinguished from a common area maintenance or repair policy, for example) within 30 days after the members are notified of the enactment of the rule change. This 30 days period was adopted to allow the homeowners to challenge the rule change, but there is no requirement that the owners be told that they have the right to challenge the proposed rule.

Currently, under Section 1357.120, a rule that governs one or more of the following subjects is subject to the above procedure:

1. Use of the common area or of an exclusive use common area.
2. Use of a separate interest, including any aesthetic or architectural standards that govern alteration of a separate interest.
3. Member discipline, including any schedule of monetary penalties for violation of the governing documents and any procedure for the imposition of penalties.
4. Any standards for delinquent assessment payment plans.
5. Any procedures adopted by the association for resolution of assessment disputes.

Beginning January 1, 2005, AB 2376 adds an additional category of rules subject to the above described rule adoption procedure.  Specifically, any procedures for reviewing and approving or disapproving a proposed physical change to a member’s separate interest or to the common area will now be subject to the rule-adoption procedures set forth in Sections 1357.130 and 1357.140 of the Civil Code.

In addition, if an association’s governing documents require that an owner obtain the approval of the association before making a physical change to the owner’s separate interest or to the common area, the association must now satisfy the following requirements in reviewing and approving or disapproving a proposed change.  The requirements are set forth in newly added Civil Code Section 1378.  The minimum requirements that an association must satisfy are as follows:

1. The association shall provide a fair, reasonable, and expeditious procedure for making its decision.  The procedure shall be included in the association’s governing documents, such as the association’s rules and regulations or CC&Rs.  (Remember, pursuant to the amendment to Civil Code Section 1357.120, if this procedure is adopted as an operating rule, the procedure will be subject to Civil Code Section 1357.130 and 1357.140).  The procedure shall provide for prompt deadlines and shall state the maximum time for response to an application or an owner’s request for reconsideration by the board of directors.
2. A decision on a proposed change shall be made in good faith and may not be unreasonable, arbitrary, or capricious.
3. A decision on a proposed change shall be consistent with any governing provision of law, including, but not limited to, the Fair Employment and Housing Act, commencing with Section 12900, of Division 3 of Title 2 of the California Government Code.
4. The decision on a proposed change shall be in writing.  If an application for a proposed change is disapproved, the written decision must include both an explanation of why the proposed change is disapproved and a description of the procedure for reconsideration of the decision by the board.
5. If a proposed change is disapproved, the applicant is entitled to reconsideration by the board of the association that made the decision, at an open board meeting.  Section 1378 provides that  reconsideration of a decision is not required if the decision is made by the board of directors or a body that has the same membership as the board, at a meeting that satisfies the requirements of Civil Code Section 1363.05 (the Common Interest Development Open Meeting Act).  Section 1378 also provides that reconsideration by the board shall not require dispute resolution within the meaning of the new Civil Code Section 1363.820, described below.

New Civil Code Section 1378 is not intended to authorize a physical change that is prohibited by an association’s governing documents or governing law.

Section 1378 also requires that an association provide its members with notice of any requirements for association approval of physical changes to property on an annual basis.  The notice must describe the types of changes that would require the association’s approval and shall include a copy of the procedure used by the association to review and approve or disapprove a proposed change.

AB 2376 also amends Civil Code Section 1373 pertaining to common interest developments that are limited to industrial or commercial uses by zoning or by a declaration of covenants, conditions and restrictions.  Section 1373 exempts these types of common interest developments from compliance with certain provisions of the Davis-Stirling Common Interest Development Act such as the requirement to distribute to the members on an annual basis a pro forma operating budget.  The amendment to Civil Code Section 1373 will exempt common interest developments limited to industrial or commercial uses from compliance with Section 1378, described above. 

Do You Have An Internal Dispute Resolution Process

Effective January 1, 2005, Assembly Bill 1836 changes the current requirements and process for Alternative Dispute Resolution,  by amending the existing provisions of the Davis-Stirling Common Interest Development Act (“Act) and adding additional provisions to the Act.  This Bill was introduced to enact recommendations made by the California Law Review Commission (CLRC). This new legislation requires that associations adopt some form of Internal Dispute Resolution process, as discussed below, and it also expands the scope of the disputes to which the Alternative Dispute Resolution processes must or can be applied within community associations.

Existing law requires that certain disputes be submitted to Alternative Dispute Resolution prior to a lawsuit being filed, either by a homeowner or by the association.  This Bill establishes a two-tier process to address disputes prior to enforcement through the court system.  As of 2005, associations are required to implement an informal process by which homeowners and boards "meet and confer" to discuss their disputes.  The CLRC came to the conclusion that some association boards were not talking with homeowners regarding their disputes, and felt that by encouraging personal communication that many disputes would be resolved without court intervention.

If the dispute is not resolved through the informal “meet and confer” process, either the owner/member or the association must still submit the dispute to some form of formal Alternative Dispute Resolution (ADR) prior to filing a lawsuit in the Superior Court.

Assembly Bill 1836 amends Section 1354 of the Davis-Stirling Act to clarify that all governing documents, which include rules and regulations, Articles, Bylaws, as well as CC&Rs, may be enforced by any owner of a separate interest or by the association, or both.  This change reinforces the concept  recognized by the California Court of appeals in Beehan v Lido Isle Community Association that not all association disputes have to be enforced or resolved by the association.

As was the case prior to enactment of Assembly Bill 1836, neither associations nor homeowners are obligated to use the mandatory “meet and confer” and the ADR process for disputes involving a claim for monetary damages in excess of $5,000.00, Small Claims actions, or, except as provided in the Davis-Stirling Act, to assessment disputes.

This Bill also defines ADR as including mediation, arbitration, conciliation, or any other non-judicial procedure involving a neutral party in the decision-making process.

This new legislation also changes the requirements on how a Request for Resolution may be served.  Previously, there was some ambiguity in the law regarding whether a Request for Resolution had to be personally served.  The Court of Appeals addressed this ambiguity in the Cabrini Villas HOA case.  Realizing that it was becoming difficult for associations to comply with the ADR service requirements, the new law states that the Request for Resolution may be made by personal delivery, first class mail, express mail, fax, or any other means that would reasonably be assumed to notify the receiving party.

AB 1836 also repeals the provisions of Court of Civil Procedure 383, and adds Section 1368.3 to the Civil Code in its place.  Section 1368.3 provides that an association is entitled to institute, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings in its own name as the real party interest without joining the individual owners in certain disputes.

AB 1836 also amends Civil Code Section 1357.120 to reflect that associations are required to adopt an internal procedure for dispute resolution and that any procedures to be adopted by the Board are subject to the notice and rule change requirements of Civil Code Sections 1357.130 and 1357.140.  This Bill also adds two new requirements to Sections 1357.130 and 1357.140 (which are the sections adopted last year which require notice to members before the Board makes a rule change and allow members of an Association to reverse a rule change, respectively.  Essentially, the amendments to Sections 1357.130 and 1357.140 require that the Internal Dispute Resolution process adopted by an association must comply with the requirements of Section 1357.100 et seq, which means that before it becomes the law of an association, it must first be distributed to the members, to allow them an opportunity to oppose the new procedure.

Associations Must Adopt a Procedure for Internal Dispute Resolution

AB 1836 requires that associations either establish their own procedures for Internal Dispute Resolution or use the procedure set forth in new Civil Code Section 1363.840.  The procedures set forth in Section 1363.840 are as follows:

1. Either the association or a homeowner may request that the other meet and confer in an effort to resolve a dispute involving their rights, duties or liabilities under the Davis-Stirling Common Interest Development Act, the Nonprofit Mutual Benefit Corporation law, or the governing documents of the common interest development.  The request must be in writing.
2. Either the homeowner receiving such a request from the association may refuse to meet and confer.  However, if the association receives such a request from a homeowner, the association must accept the homeowner’s request to meet and confer.
3. The association’s board of directors must designate a member of the board to meet and confer with the homeowner.
4. The designated member of the board of directors and the homeowner shall meet promptly at a mutually convenient time and place; explain their positions to each other and confer in good faith in an effort to resolve this dispute.
5. Any resolution of the dispute agreed to by the designated member of the board of directors and the homeowner must be memorialized in writing and signed by the designated member of the board of directors and the homeowner.

The association has the option of using the above procedure or may adopt its own process.  If the board of directors chooses to adopt its own process, the process is subject to the following:

1. The meet and confer process must be “fair and reasonable.”
2. The process must provide the right for either the association or a homeowner to invoke the process in writing.
3. The procedure must provide prompt deadlines.
4. The procedure must allow for the homeowner and the association to explain their positions and provide the right of appeal by the homeowner to the board of the association.

This new requirement of “a meet and confer” process is intended to foster communication, and that communication will not be binding on either the association or the disgruntled or rule-violating homeowner.  Assuming the agreement made through the meet and confer process is in writing, that resolution may be judicially enforceable, as long as the resolution is not in conflict with the law or the governing documents of the community association, and the agreement is either consistent with the authority granted by the Board of Directors to its designated representative or is ratified by the Board of Directors.

In developing an Internal Dispute Resolution process, Civil Code Section 1363.820(b) requires associations to “make maximum, reasonable use of available local Dispute Resolution programs involving a neutral third party, including low-cost mediation programs, such as those listed on the internet web sites of the Department of Consumer Affairs, and the United States Department of Housing and Urban Development.”

Conceivably, the meet and confer process implemented by a Board of Directors could include use of a mediation service.  However, this new law specifically states that no fee can be charged to the member for participating in the Board’s informal meet and confer process.  Should the dispute not be resolved and be subject to the formal ADR process, the cost of the ADR will be shared equally by the association and the homeowner.

AB 1836 requires that associations annually provide the members with a summary that specifically states:

Failure of a member of the association to comply with the alternative dispute resolution requirements of Section 1369.520 of the Civil Code may result in the loss of your right to sue the association or another member of the association regarding enforcement of the governing documents or the applicable law.

The summary must be provided “either at the time the pro forma budget required by Civil Code Section 1365 is distributed, or in the manner prescribed in Section 5016 of the Corporations Code.  The summary shall include a description of the association’s Internal Dispute Resolution process as required by Section 1363.850.”

Any new procedures adopted by the Board of Directors related to the Resolution of Disputes must comply with Civil Code Section 1357.130 and 1357.140, the procedure for enacting new rules (which, among other things, requires that the new rule or procedure be distributed to the members prior to becoming enforceable and allows members to vote to reverse a rule change).