HOA Law Blog

That’s right, it’s budget time again.

Community managers and Board members are hard at work preparing their associations’ budgets and other required disclosure documents. As we do each year, Swedelson & Gottlieb is providing you with our 2004 Annual Disclosure Checklist.

The Checklist is in Adobe Acrobat PDF document format and can be downloaded by clicking on the following link. Download 2004ADC.pdf

Please contact our office at 800.372.2207 if you have any difficulties with the download.

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.

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.

The California State Legislature has passed many code sections or statutory laws that govern the formation and operation of condominium and homeowner associations. The Davis-Stirling Common Interest Development Act (Civil Code §§ 1350-1378) was first made law in 1986 and was intended to bring together in one area of the Civil Code the most important statutory laws regulating California community associations. The Act has been amended more than 45 times since enacted. These important code sections are set out below with explanations and articles.

(a) If a dispute exists between the owner of a separate interest and the association, including, but not limited to, an assessment, fine, penalty, late fee, collection cost, or monetary penalty imposed as a disciplinary measure, and the amount in dispute does not exceed the jurisdictional limits stated in Sections 116.220 and 116.221 of the Code of Civil Procedure, the owner of a separate interest may, in addition to pursuing dispute resolution pursuant to Article 5 (commencing with Section 1363.810) of Chapter 4, pay under protest the disputed amount and all other amounts levied, including any fees and reasonable costs of collection, reasonable attorney's fees, late charges, and interest, if any, pursuant to subdivision (e) of Section 1366, and commence an action in small claims court pursuant to Chapter 5.5 (commencing with Section 116.110) of Title 1 of the Code of Civil Procedure.

(b) Nothing in this section shall impede an association's ability to collect delinquent assessments as provided in Sections 1367.1 and 1367.4.

(a) This section applies in an association that does not otherwise provide a fair, reasonable, and expeditious dispute resolution procedure. The procedure provided in this section is fair, reasonable, and expeditious, within the meaning of this article.

(b) Either party to a dispute within the scope of this article may invoke the following procedure:
(1) The party may request the other party to meet and confer in an effort to resolve the dispute. The request shall be in writing.
(2) A member of an association may refuse a request to meet and confer. The association may not refuse a request to meet and confer.
(3) The association's board of directors shall designate a member of the board to meet and confer.
(4) The parties 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 the dispute.
(5) A resolution of the dispute agreed to by the parties shall be memorialized in writing and signed by the parties, including the board designee on behalf of the association.

(c) An agreement reached under this section binds the parties and is judicially enforceable if both of the following conditions are satisfied:
(1) The agreement is not in conflict with law or the governing documents of the common interest development or association.
(2) The agreement is either consistent with the authority granted by the board of directors to its designee or the agreement is ratified by the board of directors.

(d) A member of the association may not be charged a fee to participate in the process.

(a) A prospective managing agent of a common interest development shall provide a written statement to the board of directors of the association of a common interest development as soon as practicable, but in no event more than 90 days, before entering into a management agreement which shall contain all of the following information concerning the managing agent:
(1) The names and business addresses of the owners or general partners of the managing agent. If the managing agent is a corporation, the written statement shall include the names and business addresses of the directors and officers and shareholders holding greater than 10 percent of the shares of the corporation.
(2) Whether or not any relevant licenses such as architectural design, construction, engineering, real estate, or accounting have been issued by this state and are currently held by the persons specified in paragraph (1). If a license is currently held by any of those persons, the statement shall contain the following information:
(A) What license is held.
(B) The dates the license is valid.
(C) The name of the licensee appearing on that license.
(3) Whether or not any relevant professional certifications or designations such as architectural design, construction, engineering, real property management, or accounting are currently held by any of the persons specified in paragraph (1), including, but not limited to, a professional common interest development manager. If any certification or designation is held, the statement shall include the following information:
(A) What the certification or designation is and what entity issued it.
(B) The dates the certification or designation is valid.
(C) The names in which the certification or designation is held.

(b) As used in this section, a "managing agent" is a person or entity who, for compensation or in expectation of compensation, exercises control over the assets of a common interest development. A "managing agent" does not include either of the following:
(1) A full-time employee of the association.
(2) Any regulated financial institution operating within the normal course of its regulated business practice.