The Legislature...finds that covenants and restrictions contained in the declaration are an appropriate method for protecting the common plan of developments and to provide for a mechanism for financial support for the upkeep of common area, including, but not limited to, roofs, roads, heating systems, and recreational facilities. If declarations terminate prematurely, common interest developments may deteriorate, and the housing supply of affordable units could be impacted adversely. (Civ. Code § 1265(a))
Required Approvals for Dissolution
Because the purpose of an association is to maintain and manage common areas, dissolution requires approvals on multiple levels.
- Board Approval. The board of directors must adopt a resolution to dissolve the corporation. If fewer than a quorum, the resolution must be unanimous. (Corp. Code §§ 7911(a)(1) and 8610(c))
- Membership Approval. As provided for in Corporations Code § 8724, any association for a planned development, condominium, stock cooperative, or community apartment project of five or more units that is responsible for managing, maintaining, preserving, or controlling any lot, unit, or other area cannot be dissolved unless 100% of the members consent.
- Governmental Approval. The governing documents of many associations also require approval from local government entities before an association can be dissolved.
- Lender Approval. The governing documents of most associations also require the approval of the first trust deed holders.
Process Considerations
If all necessary approvals could theoretically be obtained, directors need to include the following process considerations:
- An accountant knowledgeable about associations will need to provide advice about the tax consequences of the dissolution.
- It will be necessary to give formal notice of the dissolution to the IRS.
- Corporate assets can be sold without a vote of the membership. (Corp. Code § 8710(g))
- All of the association's debts and liabilities must be paid. (Corp. Code §§ 8713-8714)
- Creditors of the association must receive notice of the dissolution. (Corp. Code § 8618)
- A receiver can be appointed by the court to assist with the dissolution. (Code Civ. Proc. §§ 566-567 and Corp. Code § 8513)
Maintenance Considerations
As a practical matter, it may be impossible to dissolve an association if no entity can be found to take over its maintenance responsibilities. The following issues must be resolved:
- Who will control the common area?
- How will the buildings be maintained, repaired, painted, and re-roofed without assessment funding and contracts issued through the association?
- Will lenders fund loans to purchasers and refinance loans if there is no association?
- Will more litigation ensue if neighbors enforce the CC&Rs rather than the association?
- If an unincorporated association is set up to replace the former corporation, won't the same operational costs and the same problems of apathy and dissension persist?
One association that attempted dissolution received a negative response from the County. Of interest is the letter's paragraph on taxes.
Appointing a Receiver
An alternative to dissolution is the appointment of a receiver by the superior court. (Code Civ. Proc. § 564) The receiver would need to be paid from assessments and may have the power to increase assessments without a vote of the membership. In addition to the receiver's fees and costs, the association would incur the receiver's accounting and legal expenses. These charges could be substantial.
Involuntary Corporate Dissolution
Effective January 1, 2016, corporations are subject to administrative dissolution if they have been suspended by the Franchise Tax Board or the Secretary of State for at least 48 months. This is NOT the same as dissolving the association. If the corporation dissolves, the association continues to exist as an unincorporated entity.
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