There is no statute that specifically requires associations to properly fund their reserves. The legislature has repeatedly amended the reserve provisions in the Davis-Stirling Act and has had many opportunities to impose funding requirements but has not done so. Instead, it keeps increasing notice requirements.
Indirect Duty. An argument can be made that there is an implied requirement to fund reserves because boards have a duty to impose regular and special assessments sufficient to perform their obligations under the governing documents. (Civ. Code § 5600(a).) Setting aside sufficient funds to repair and replace major components is arguably one of those duties. In Raven's Cove v. Knuppe, the court held that the failure of the developer-controlled board to fund the reserves was a breach of the board's fiduciary duty.
Special Assessment. Boards must exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by this section. (Civ. Code § 5515(e).) This special assessment is subject to the limitation imposed by Civil Code §5605(b) (unless the expenditures were for emergencies as defined by Civil Code §5610). The board may, at its discretion, extend the date the payment on the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment. (Civ. Code § 5515(e).)
Fee Limitation Argument. A member of the Foothills Townhomes Association sued his association claiming that a special assessment to fund the reserve account violated Civil Code §1366.1 [now Civ. Code § 5600(b)]. He argued that it "exceeded the amount necessary to defray the costs for which it is levied" because there was no requirement that reserves be funded. The court disagreed and ruled that replenishment of the association's reserve account was a valid basis for a special assessment. Plaintiff also argued the special assessment was unnecessary because the reserves could be funded incrementally over time. The court again disagreed:
Whether the fund could have been replenished over time is irrelevant to whether the assessment exceeded costs for which it was levied. As a matter of law, an assessment does not violate Civil Code section 1366.1 merely because the costs could have been recouped incrementally. Nothing in the language of the statute suggests that is so. (Foothills Townhomes v. Christiansen.)
Prudent Funding. Even though there is no mandate by the legislature to fund reserves, the prudent course is to fund reserves in accordance with the association's reserve funding plan.
Bank Loans. If reserves are underfunded and associations are faced with large-scale repairs, boards may have no choice but to levy a special assessment to raise the funds needed to make repairs. To lessen the burden on members, associations often seek bank loans that allow them to make immediate repairs but spread the cost over 3, 5, 7 or 10 years so members can more easily pay for the repairs.
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