Duties of Homeowners’ Associations in Managing a Condominium or Other Common Interest Development
Condominiums, community apartment projects, stock cooperatives, and planned developments are the various types of common interest developments. They are governed by a homeowners’ association which can be a non-profit mutual benefit corporation or a non-profit unincorporated association.
The homeowners’ association’s powers are defined in the governing documents of the common interest development. However, the primary duties are to maintain the common areas and to enforce the rules and regulations.
This legal memorandum will discuss some of the duties and responsibilities of homeowners’ associations.
Q 1. What are the powers and duties of a homeowners’ association?
A A homeowners’ association manages the common interest development. The association, whether incorporated or unincorporated, may exercise many of the powers granted to a nonprofit mutual benefit corporation. The powers and duties are typically enumerated in the governing documents (e.g., bylaws, articles of incorporation or association, CC&Rs). (Civ. Code § 1363.)
The duties of the association are normally handled by the members of the board of directors. Some of these duties include: duty to maintain the common areas, financial planning duties, architectural control, duty to protect and insure the association assets, duty to enforce the CC&Rs, duty to collect assessments, and duty to conduct meetings. (Civ. Code § 1365.5.)
Q 2. What is the principal source of income for a homeowners’ association?
A The principal source of income for a homeowners’ association is assessments levied on its members who own interests in the development. Ordinarily, the CC&Rs provide procedures for calculating and collecting regular assessments. (Civ. Code § 1366.)
Q 3. How are these regular assessments allocated among the association members?
A The governing documents of a homeowner’s association must establish a system for allocating the assessments. For example, in a condominium project, a large unit may be more expensive for the association to maintain than a small unit. Therefore, if provided in the governing documents, the owner of a larger unit may find him/herself paying a higher assessment than the owner of a smaller unit.
Q 4. May regular assessments be increased each year?
A Yes. Even if the governing documents indicate otherwise, however, the homeowners’ association may not increase the annual regular assessment by more than 20 percent over the regular assessment for the preceding fiscal year without the approval of owners constituting a quorum (more than 50 percent of the owners of the association). (Civ. Code § 1366(b).)
However, the limits stated above do not apply to defined "emergency situations." (See Question 5.)
Q 5. What "emergency situations" would allow an association to increase assessments without complying with the restrictions specified in Question 15?
A "Emergency situations" are defined to be any one of the following:
- An extraordinary expense required by court order;
- An extraordinary expense necessary to repair or maintain the development or areas which the association is responsible for where a threat of personal safety on the property is discovered;
- An extraordinary expense necessary to repair or maintain the areas under responsibility of the association which could not have been "reasonably foreseen" by the board when preparing and distributing the pro forma operating budget. (Civ. Code § 1366(b).)
Q 6. May a homeowners’ association levy assessments for special expenses?
A Yes. An association may periodically levy special assessments to make improvements to the structure of a building (e.g., a clubhouse roof), to pay for extraordinary expenses, or to make up for a shortage in the association’s reserves. The homeowners’ association may not impose special assessments amounting to more than 5 percent of the association’s budgeted gross expenses for that year without the approval of a majority of the owners. (Civ. Code § 1366.)
Q 7. Must a homeowners’association hold membership meetings?
A Yes. According to regulations of the Department of Real Estate (DRE), the CC&Rs or the bylaws must provide for such meetings, at least annually. These membership meetings must be held within the development itself or as close to it as possible. However, once the developer has sold his/her last unit and the DRE no longer is regulating the development, regular meetings must be held with the frequency and at the times and dates that are in accordance with the bylaws. In any event, a meeting must be held in any year in which directors are to be elected at a regular membership meeting. The meeting location may be at a place "within or without the state" as stated in the bylaws. If none is stated, then the meeting must be held at the corporation’s principal office. (10 Cal Code Regs § 2792.17(a), Corp. Code § 7510.)
Any member of an association may petition the local superior court for an order to hold a meeting if the association fails to call one within 60 days of the meeting date provided for in the governing documents. The petitioner must give the corporation adequate notice and a reasonable opportunity to be heard, however. (Corp. Code § 7510(c).)
Q 8. Must owners be given access to all association meetings?
A No. Nearly all board of directors' meetings must be open to all unit owners. In the open meetings, all owners have the right to speak but are subject to any reasonable time limit imposed by the association.
The board of directors may restrict attendance only when it meets in an "executive session"--that is a session called to consider litigation, matters that relate to the formation of contracts with third parties, member discipline, personnel matters, or to meet with a member, at the member's request, regarding the member's payment of assessments. However, all matters discussed in the closed meeting must be recorded in the minutes of the subsequent open meeting and made available to the unit owners. (Civ. Code § 1363.05.)
Q 9. Must owners have voting rights in the homeowners’ associations?
A Yes. The governing documents (such as articles of incorporation or bylaws) must provide for member voting rights. (Corp. Code § 7610.)
Q 10. What rights does a homeowners’ association member or governing body member (i.e., officer or director of the association) have to inspect the books, records, and physical properties of the association?
A A governing body member has a right to inspect, at any reasonable time, all the books, records, and physical properties of the association. Such a member (director/officer) is not required to present a written demand for inspection. (Corp. Code § 8334, 10 Cal Code Regs § 2792.23(c).) In a 1995 case, the court held that a director did not have an absolute right of inspection and the rights of inspection must be balanced against members’ "legitimate expectations of privacy." (Chantiles v. Lake Forest II Master Homeowners Ass’n (1995) 37 Cal. App. 4th 914 (the director wanted to determine who voted against him))
On the other hand, an association member who is not on the governing body (i.e., not on the board of directors) has the right to review the association documents only if the inspection is "related" to his/her interest as a member. In addition, written notice must be given to the association before this type of inspection may occur. (Civ. Code § 1363(f), Corp. Code § 8333.)
Q 11. May a homeowners’ association discipline a member who violates a provision of a governing document?
A Yes. In order to do so, however, the governing documents must include specific provisions authorizing the governing body to impose a fine, suspend common area use rights, or otherwise discipline a member for failing to abide by its provisions. Further, before actually imposing a particular penalty, such as a fine, the board of directors must adopt a schedule of fines or penalties and must distribute it personally or by first class mail to each member. (Civ. Code § 1363(g).)
Q 12. May a homeowners’ association impose or collect an unreasonable fee or assessment?
A No. An association cannot impose or collect a fee or assessment that exceeds "the amount necessary to defray the costs" of levying. (Civ. Code § 1366.1.)
Q 13. May a homeowners’ association impose late charges?
A Yes. A homeowners’ association may impose late charges not exceeding 10 percent of the delinquent regular or special assessment, or $10, whichever is greater, if the assessment remains unpaid 15 days after it is due. If the CC&Rs specify a longer period of time or a lower fine for delinquent payments, the CC&Rs will apply. Associations may also recover "reasonable" collection costs, including attorney’s fees.
In addition, if an assessment remains unpaid 30 days or more after the due date, the association can collect interest on "all sums," including the delinquent assessment, reasonable costs of collection and late charges, at an annual percentage rate not exceeding 12 percent. The interest rate charged is exempt from state usury limitations. (Civ. Code § 1366(e).)
Q 14. Under what circumstances may a homeowners’association impose a lien on a member’s interest?
A An association has the authority to impose a lien on the property of a member who fails to pay regular or special assessments. However, the assessment, costs of collection, late charges, and interest do not become a lien on the owner’s separate interest until the association records a notice of delinquent assessment. Penalty assessments for violation of association rules cannot become a lien. (Civ. Code § 1367.1.)
Before recording a lien, the association must provide a 30-day notice to the member by certfied mail. This notice must contain various statements. The list of items can be found in Civil Code Section 1367.1.
Q 15. What are the collection choices available to a homeowners’ association if a unit owner refuses to pay assessment dues in response to a notice of delinquent assessment?
A An association may elect any of the following alternatives:
- A civil action (such as a small claims or municipal court action) to collect the delinquent assessment;
- A nonjudicial trustee sale; or
- A judicial foreclosure proceeding.
- Alternative Dispute Resolution (if homeowner has paid amount in dispute under protest and has requested ADR this method must be used prior to any civil action--limited to 2 times in a single year and 3 times in a five year period) (Civ. Code §§ 1367.1, 1366.3.)
Q 16. Must a homeowners’ association board of directors oversee the financial affairs of the association?
A Yes. And unless the governing documents impose more stringent standards, such overseeing by the board of directors must include a review, on at least a quarterly basis, of the following:
- A current reconciliation of the association’s operating accounts;
- A current reconciliation of reserve accounts; The current year’s actual reserve revenues and expenses compared with the current year’s budget;
- The latest account statements prepared by the financial institutions in which the association has its operating and reserve accounts; and
- An income and expense statement for the association’s operating and reserve accounts.
The requirement of quarterly reviews of financial material does not apply in some circumstances where an association does not have a "common area." (Civ. Code § 1365.5.)
Q 17. Is the homeowners’ association responsible for repairing, replacing, or maintaining the common areas?
A Yes. Unless provided otherwise in the CC&Rs, the homeowners’ association is responsible for repairing, replacing or maintaining the common areas, other than the exclusive use common areas (Civ. Code § 1364). The California Supreme Court has held in Lamden v. La Jolla Shores Clubdominium Homeowners Ass’n,(1999), 21 Cal. 4th 249, that when a homeowner disagrees with the association’s decisions on how to handle maintenance decisions, the courts will defer to the authority and presumed expertise of a homeowner’s association in making those decisions.
Q 18. Must the homeowners’ association prepare and distribute financial statements
A Yes. Unless the CC&Rs impose more stringent standards, the association must prepare and distribute to its members a "formal operating budget" not less than 45 days nor more than 60 days before the beginning of the fiscal year. The budget must contain all of the following information:
A. The estimated revenue and expenses on an accrual basis;
B. A summary of the association’s reserves based on a recent review or study done under including in bold type all of the following:
1) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component;
2) At the end of the fiscal year:
a) The current estimate of the amount of cash reserves necessary to repair, replace, restore or maintain the major components; and
b) The current amount of accumulated cash reserves necessary to repair, replace, restore or maintain the major components;
3) The percentage that the current amount of accumulated cash reserves to repair the major components is of the current estimate of what such cash reserves should be.
C. A statement as to whether the board of directors has determined or anticipates that the levy of special assessments will be required to repair or maintain any major component or to provide adequate reserves therefor;
D. A general statement addressing procedures used for the calculation and establishment of those reserves to defray future repair, replacement, or additions to those major components that the association must maintain (Civ. Code § 1365(a).);
E. A review of the financial statement done in accordance with "generally accepted accounting principles" by a licensee of the California State Board of Accountancy and distributed within 120 days after the close of any fiscal year in which the gross income to the association exceeds $75,000. (Civ. Code § 1365(b).)
Summary of the pro forma operating budget
Instead of the "formal operating budget," an association may instead distribute a summary of the pro forma operating budget accompanied by a written notice in at least 10-point bold type that the complete statement is available at the business office of the association or other location and copies can be made, if requested, at the association’s expense. If a member requests a copy of the budget by mail the association must send it by first-class mail within 5 days after receipt. (Civ. Code § 1365(c).)
Policies and practices enforcing liens
Furthermore, the association must annually provide during the 60-day period before the beginning of the fiscal year a statement describing its policies and practices in enforcing lien rights or other remedies for default in the payment of its assessments against its members. (Civ. Code § 1365(d).)
Summary of association insurance policies
Finally, the association must provide a summary of the association’s property, general liability, and earthquake and flood insurance policies, which must be distributed within 60 days prior to the beginning of the association’s fiscal year. (Civ. Code § 1365(e).)
Q 19. What powers do architectural review boards possess
A The governing documents of most common interest subdivisions require an architectural committee or review board to be formed. Its goal is to maintain the appearance and value of the project by establishing architectural standards and reviewing all proposed changes in relation to those standards.
Q 20. Are there any limits on an architectural review board’s authority?
A Architectural review boards in general have a great deal of freedom to make decisions concerning the architectural design or aesthetics of homeowners’ units. However, the board may not exceed the authority provided in the governing documents. (Clark v. Rancho Santa Fe Ass’n, (1989) 216 Cal. App. 3d 606.)
Q 21. Should a homeowners’ association carry an insurance policy for its directors and officers?
A Yes. Association directors and officers who fail to obtain adequate insurance may be exposed to personal liability.
Q 22. What other types of insurance coverage should an association have?
A An association should carry a master policy covering all the common areas. Specific risks to be insured against should be discussed with the association’s attorney and/or insurance broker. Coverage to consider includes: fire, theft, general hazard, flood, earthquake, public liability (injuries to persons or damage to property on the premises), and vehicle.
Association directors and officers have a fiduciary duty to insure and protect association assets. Failure of their duty to procure insurance is not typically covered by Errors and Omissions ("E&O") or Directors and Officers ("D&O") insurance.
In order for a director or officer to have the statutory protection against tort liability, the association must carry general liability insurance (covering the association and the individual directors and officers) in the following amounts (at a minimum): $500,000 coverage if there are 100 or fewer separate units in the development or $1,000,000 coverage if there are more than 100 separate units in the development. (Civ. Code § 1365.7.)
In addition, in order for the homeowners to have statutory protection against tort liabilities (accidents in the common areas), the association must carry general liability insurance in the following amounts (at a minimum): $2,000,000 if development has 100 or fewer units and $3,000,000 if development has more than 100 units. (Civ. Code § 1365.9.)
Q 23. Should individual unit/lot owners obtain their own insurance?
A Yes. Each unit/lot owner should obtain insurance covering risks that are not covered by the association’s policies. Each unit/lot owner should consider an emergency shelter rider to cover additional living expenses in the event of damage to his/her unit. In addition, the individual unit/lot owner should have coverage for his/her own "tortious" injuries to other persons or property, including the unit owner’s negligence and that of members of his/her family, household, and pets. Owners should also consider fire and extended coverage for the interior and contents of their units.
Q 24. Should a homeowners’ association and its members obtain the services of an insurance expert?
A Yes. Because of the specialized nature of condominium insurance, the association should utilize the services of an experienced insurance broker.
Readers who require specific advice should consult an attorney.
The information contained herein is believed accurate as of December 12, 2003. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.