HOA Law Blog

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. 

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.