COMMERCIAL & INDUSTRIAL CIDS

Previously, commercial and industrial common interest developments fell under the Davis-Stirling Act, except for a list of excluded statutes found in former Civil Code §1373. Effective January 1, 2014, commercial and industrial CIDs ceased to be part of the Davis-Stirling Act and were moved under a new Act, the Commercial and Industrial Common Interest Development Act ("Commercial CID Act"). But now, commercial CIDs have their own body of law which, in many instances, parallels Davis-Stirling, but in other cases, varies substantially.

Application of the Act. The rewritten Davis-Stirling Act (also effective January 1, 2014) no longer applies to CIDs which are entirely commercial or industrial. (Civ. Code §4202.) They are now covered by the Commercial CID Act. (Civ. Code §6531 and §6582.) Mixed use CIDs, those with residential and commercial components, continue to be governed by the Davis-Stirling Act.

Delivering Documents to the Association. The new Davis-Stirling scrapped former Civil Code §1350.7  regarding delivery of documents to the association and its members, and the provision was likewise discontinued in the Commercial CID Act. In its place, both acts adopted near identical provisions for delivering documents to the association. (Civ. Code §4035 and §6512.)

Commercial and industrial associations need not prepare the new annual policy statement required of residential associations in Civil Code §5310. Instead they may, but are not required to, give notice to their members of a person designated to receive notices. If not specified, documents may be delivered to the president or secretary of the association. If an association wants a  manager or management company to receive documents, they need to notify their members.

Documents may be delivered to the association only by the following methods: (i) First-class mail, postage prepaid; (ii) Registered or certified mail; (iii) Express mail; (iv) Overnight delivery by an express service carrier; (v) Electronically (email, facsimile, or otherwise), if assented to by the association; and (vi) Personal delivery, if assented to by the association, with a written receipt. All associations (commercial, industrial and/or residential) may decline to accept personal delivery of documents. But, in most cases, that would require a change to the governing documents, most of which expressly allow it.

Individual Delivery and Notice to Members. Both the new Davis-Stirling Act and Commercial CID Act adopted similar provisions for “individual delivery” and “individual notice” to members in Civil Code §4040 and §6514, respectively. Both acts provide for individual delivery of documents or individual notices by the following methods: (i) First-class mail, postage prepaid; (ii) Registered or certified mail; (iii) Express mail; (iv) Overnight delivery by an express service carrier; and (v) Electronically (email, facsimile, or otherwise), if consented to by the member in writing.

Both acts provide as follows (i) No provisions for “individual delivery” of documents or “individual notices” by personal delivery, regardless of what your governing documents might state (However, personal delivery of certain documents and notices is expressly allowed for certain notices elsewhere in the Commercial CID Act.); (ii) Non-electronic delivery shall be addressed to the last known address of the recipient as shown in the association’s record; (iii) The recipient may revoke, in writing, consent to receive electronic notice; and (iv) An unrecorded provision of the governing documents (i.e. bylaws or operating rules) providing for a method of delivery does not constitute agreement by a member to accept that method of delivery.

For the purposes of the Commercial CID Act, “individual delivery” and “individual notice” reference only a few specific types of documents or notice: (i) Delivery of (1) a copy of all amendments to the governing documents to remove only certain developer language and (2) the related notice of the meeting to consider same (Civ. Code §6608(c)); (ii) Delivery of a proposed amendment to the CC&Rs to the membership (Civ. Code §6620(a)(1)); (iii) Delivery of notices to the owner regarding the temporary, summary removal of occupants for termite treatment (Civ. Code §6720(c)); and (iv) Distribution of a schedule of monetary penalties (Civ. Code §6850(a)).

Secondary Address. The Commercial CID Act discontinued the requirements of former Civil Code §1365.1(c) and §1367.1(k) regarding secondary addresses for members.

General Delivery and Notice. While the new Davis-Stirling continued provisions for “general delivery” and “general notice” which allow giving notice by such means as a newsletter, posting and television broadcasting, the Commercial CID Act does not.

Time of Delivery. Both the new Davis-Stirling and the Commercial CID Act adopted identical new provisions defining when a document is deemed delivered (Civ. Code §4050 and §6518): (i) delivery by mail is deemed to be completed on deposit into the United States mail; and (ii) electronic delivery is complete at the time of transmission. Regrettably, neither act addresses when delivery by overnight delivery by an express service carrier is completed. The best answer for that is upon actual delivery to the address of the recipient.

Electronic Delivery. Both the new Davis-Stirling and the Commercial CID Act also adopted new provisions comparable to certain portions of Corporations Code §20 and §21 regarding conditions of electronic delivery. Civil Code §4055 and §6520 identically provide that information received by electronic delivery which must be in writing, must be capable of retention (by printing or storing) by the recipient at the time of receipt.

Notice of Airport in the Vicinity. Former Civil Code §1353(a) regarding notification of nearby airports in the CC&Rs was not continued in the Commercial CID Act.

Fire Retardant Roofing. The requirements of former Civil Code §1353.7 that the provisions of the CC&Rs provide for use of certain fire retardant roofing materials under certain circumstances was not continued in the Commercial CID Act. But all legal requirements regarding fire retardant roofing materials in very high fire severity zones continue to take precedent over any governing documents. 

Right to Attorney’s Fees. The Commercial CID Act discontinued the general statutory right of the prevailing party to recover attorney’s fees and costs in actions for the enforcement of governing documents provided in former Civil Code §1354(c). Part of the idea behind the Commercial CID Act is to cater to the generally more sophisticated membership of an association consisting of business people. The legislature decided to afford prevailing commercial and industrial CIDs or their members the statutory right to recover reasonable attorney’s fees (and sometimes costs) only in a select few instances: (i) Enforcement of an action against the association for injunctive relief to require the removal of a restrictive covenant in violation of Government Code §12955 (prohibiting discriminatory language on the basis of race, religion, gender, etc.) (Civ. Code, §6606(d)); (ii) Enforcement of an action to allow a member to display the American flag (Civ. Code §6702(c)); (iii) Enforcement of an action regarding installation or use of video or television antennas or satellite dishes, etc. of 36 inches or less (Civ. Code §6708(d)); (iv) Enforcement of an action regarding the installation or use of an electric charging station (Civ. Code §6713(k)); and (v) Costs of collection and reasonable attorneys fees arising from collection of assessments (Civ. Code §6808 and §6812).

Petition to Amend CC&Rs. The Commercial CID Act still does not allow the association the right to petition the court to allow a majority vote to be sufficient when a supermajority is required by the CC&Rs. The petition right, found in former Civil Code §1356 and continued in Civil Code §4275, remains available only to residential CIDs.

Rule Adoption and Changes. Commercial and industrial CIDs were previously excluded from the entire process for the adoption and changing operating rules previously provided for in Civil Code §1357.100 through §1357.150, inclusive, and now continued for residential CIDs in Civil Code §4340 through §4370, inclusive. However, the Commercial CID Act includes two provisions previously applicable only to residential CIDs including (1) the definition of “operating rule” and (2) the requirements for an operating rule to be valid and enforceable. (Civ. Code §6630 and §6632.)

Rental Prohibitions. Controversial former Civil Code §1360.2 provided that any rental prohibitions (such as prohibiting all rentals or limiting the number of separate interest that may be rented) would apply only prospectively to those who purchased after the prohibition went into effect. That section was previously inapplicable to commercial and industrial CIDs. While the section was continued in the new Davis-Stirling Act at Civil Code §4740, it was not adopted by the Commercial CID Act. Rental prohibitions in commercial and industrial CIDs may be applied to all owners at the time of adoption. 

Limitations on Pet Restrictions. One of the great unexplained anomalies of the old Davis-Stirling was that Civil Code §1373 (which set out all the statutes that did not apply to the commercial and industrial CIDs) did not include the pet restriction limitations set forth in former Civil Code 1360.5. While some people do take their pets to work, the primary reason behind the limitation was to overturn the California Supreme Court decision in Nahrstedt which allowed complete pet bans and instead allowed people to keep at least one pet at home. This peculiar situation was changed by Civil Code §6706 of the Commercial CID Act which provides that the new Davis-Stirling pet provision, Civil Code §4715, applies to owners of separate interests who kept a pet in the development prior to January 1, 2014.

Budgets and Financial Disclosures. Commercial and industrial CIDs previously had no obligation to prepare a budget or make financial or real estate disclosures required by former Civil Code §1365. That is still true. But now all of the related financial disclosure requirements of Civil Code §1365.1 (Notice of Assessments and Foreclosures) and Civil Code §1365.2.5 (Assessment and Reserve Funding Disclosure Summary) are also excluded from the Commercial CID Act. Of course, general accounting principles and fiduciary obligations would suggest that commercial and industrial CIDs should prepare budgets like any other business.

Reserves. Commercial and industrial CIDs were previously excluded from the reserve study requirements and reserve account and transfer limitations of former Civil Code §1365.5. While those requirements continue in the new Davis-Stirling for residential CIDs, commercial and industrial CIDs are still excluded under the Commercial CID Act. However, as with budgets, the lack of a statutory mandate does not extinguish an Association’s fiduciary obligations to maintain the property and be fiscally sound. Many prudent commercial CIDs continue to maintain separate reserve accounts, require two signatures to withdraw reserve funds, and conduct reserve studies to monitor the health of their property and their financial ability to discharge their maintenance obligations.

Parliamentary Procedures. The Commercial CID Act discontinued the requirement of conducting meetings under a parliamentary procedure as previously required by former Civil Code §1363(d).

Access to Records. The statutes allowing membership access to records and providing recordkeeping requirements (Civ. Code §1363(e) and §1365.2) no longer apply to commercial and industrial CIDs. Record access is once again limited to Corporations Code §8330, et seq. and the association’s governing documents. Likewise, the ill-conceived “Disclosure Documents Index” required by former Civil Code §1363.005 was abandoned by both the new Davis-Stirling Act and the Commercial CID Act.

Fines and Discipline. The statutory fine and discipline procedure of former Civil Code §1363(g) has been jettisoned. This does not suggest that commercial CIDs may disregard due process entirely. It only means that any reasonable procedure giving notice and an opportunity to be heard may be adopted in your governing documents and implemented. Do not forget that there are still guidelines in the Corporations Code for such things as suspension of membership rights. Prudent associations would do well to continue with the Corporation Code standards and the continuing standards of the new Davis-Stirling Act.

Election Rules. The election procedures statute (Civ. Code §1363.03) and its companion on campaign funding (Civ. Code §1363.04) were not continued in the Commercial CID Act. Note that the Corporations Code has some similar provisions that still may be applicable to certain commercial and industrial CIDs and, of course, the association’s governing documents will still apply. But, election rules and the double-envelope secret ballot procedure are no longer mandated by statute for commercial CIDs.

Open Meeting Act. Another casualty of the Commercial CID Act is the Open Meeting Act. The provision of Civil Code §1363.05 are not part of the Commercial CID Act. However, an open meeting is still required for the consideration and deliberation by the board to adopt and amendment to remove certain developer language from the governing documents. Members are entitled to make comments at such meeting. Otherwise, commercial and industrial CIDs, among other things:

• Are subject to Corporations Code §7211 and their governing documents for board meetings.
• Need not give notice of regular or special board meetings to its membership.
• Need not distribute board meeting agendas to its membership.
• Need not allow its members to attend board meetings.
• May consider any matters in executive session (assuming it allowed an open meeting to start).
• May again take actions by written consent as allowed by Corporations Code §7211(b).

Transfer of Common Area to a Member. The requirement of former Civil Code §1363.07 requiring member consent to transfer common area to a member for his or her exclusive use no longer applies to commercial or industrial CIDs.

Managing Agent Disclosures and Duties. The disclosure requirements and duties of managing agents provided for in former Civil Code §1363.1 and §1363.2 were discontinued in the Commercial CID Act. 

Insurance Requirements. The requirements and protections of former Civil Code §1365.7 as to directors and officers insurance no longer apply to commercial and industrial CIDs. Regardless, directors and officers insurance coverage is highly recommended for any CID board.

Assessments. Prior to the Commercial CID Act, the only difference between residential and commercial CIDs regarding assessments was that commercial CIDs were not bound by former Civil Code §1366(b) which (1) limited the amount of annual increases to regular assessments, (2) limited the amount an association could impose for a special assessment and (3) restricted the circumstances under which an emergency assessment could be imposed. The Commercial CID Act continues as before in that regard, but eliminates the requirements of Civil Code §1366(d),(e)&(f) as well. Subject to a commercial or industrial association’s governing documents:

  

• It no longer must give notice of an assessment increase between 30 and 60 days before it becomes due. Now, a shorter or longer period would be acceptable.
• The 15 day minimum before assessments are in default no longer applies. Assessments may be in default after a shorter period.
• The 10% or $10 limit on late fees no longer applies. Larger late fees may be imposed.
• The delay of 30 days before interest accrues on delinquent assessments no longer applies. Interest may now commence immediately upon delinquency.
• The Constitutional exemption allowing them to charge 12% interest on delinquent accounts no longer applies. Commercial and industrial CIDs are now limited to collecting no more than 10% interest on unpaid assessments.

Excessive Fees. Former Civil Code §1366.1, which prohibits residential associations imposing or collecting an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied, continues to be inapplicable to commercial and industrial associations under the Commercial CID Act.

Recording Management Information. The recording rights of former Civil Code §1366.2 were discontinued under the Commercial CID Act.

Basing Assessments on Taxable Value. The prohibitions of former Civil Code §1366.4 to basing assessments on taxable values are not part of the Commercial CID Act.

Lien Procedures. Prior to the Commercial CID Act, lien procedures between the residential and commercial CIDs were identical. But now, the Commercial CID Act changes it to the following:

  

• The Commercial CID Act lien provisions apply only to liens created on or after January 1, 2014. Liens created before then follow the law that existed at the time of their creation. (Civ. Code §6828.) The consequence  is that commercial and industrial CIDs now have four different bodies of law for liens depending on when they were created:
  
  
  • Before January 1, 1986 (such statutory and case law that might have existed then).
  • January 1, 1986 through December 31, 2002 (former Civ. Code §1367).
  • January 1, 2003 through December 31, 2013 (former Civ. Code 1367.1).
  • January 1, 2014 until the next change) (Commercial CID Act).
    
    
• Pre-lien letters no long need to include the former requirements of Civil Code §1367.1(a)(4)-(6) stating that a member has the right to:
  • request a meeting with the board to discuss payments plans,
  • request IDR,
  • request ADR,
    
    
• Commercial and industrial CIDs are no longer required to apply payments to assessments first as previously required by former Civil Code §1367.1(b).
  
  
• Commercial and industrial CIDs need no longer participate in IDR, ADR or discuss payment plans as previously required by former Civil Code §1367.1(c).
  
  
• The foreclosure restrictions of former Civil Code §1367.4 (requiring an assessment to be delinquent for 12 months or in an amount of $1,800 or more) no longer apply to commercial or industrial CIDs.
  
  
• If it is determined that a commercial or industrial CID has recorded a lien for a delinquent assessment in error, it is no longer required to reverse all late charges, fees, interest, attorney’s fees, costs of collection, costs imposed as previously provided for in former Civil Code §1367.5. It need only record a lien release or notice of rescission and provide the owner of the separate interest with a declaration that the lien filing or recording was in error and a copy of the lien release or notice of rescission. (Civ. Code §6818.) But, an association that fails to comply with proper lien procedures shall, prior to recording a lien, recommence the required notice process. Any costs associated with recommencing the notice process shall be borne by the association and not by the owner of a separate interest. (Civ. Code §6819.) So, the association need not reverse prior charges, but cannot charge the member again for the same pre-lien costs.
  
  
• Members may no long pay assessments to commercial or industrial CIDs under protest as previously allowed under Civil Code §1367.6.

Real Estate Disclosures. Previously, the provisions of former Civil Code §1368 requiring owners to make certain disclosures to prospective purchasers and requiring associations to provide owners with such information did not apply to commercial or industrial CIDs. That is still the case under the Commercial CID Act. In addition, the related form disclosing charges for such disclosures, as required by former Civil Code §1368.2, was discontinued in the Commercial CID Act.

IDR and ADR. The IDR and ADR requirements of former Civil Code §1363.810 to §1363.850 and Civil Code §1369.510 to §1369.590, respectively, have been discontinued in their entirety in the Commercial CID Act.

Architectural Rules. The architectural approval requirements of former Civil Code §1378 were previously excluded from commercial and industrial CIDs and they are still excluded from the Commercial CID Act.

Closing Comments. When the Legislature moved commercial and industrial CIDs out from under the Davis-Stirling Act, they essentially deregulated them. Even though the Commercial CID Act is silent on many matters, commercial and industrial CIDs are still bound by their governing documents even where those documents conform to the old Davis-Stirling Act. For example, if a commercial CID’s governing documents require open board meetings and secret ballots for director elections, the association must follow those provisions. Indeed, an association may want to continue those provisions. But, the only way to take full advantage of a less regulated commercial or industrial CID is to remove extraneous requirements from their governing documents to the extent allowed by the new Commercial CID Act.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.