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).)
Approvals Required. Dissolving an association is extremely difficult since its purpose is to maintain and oversee common areas. Dissolution, therefore, requires approvals on multiple levels.
- Board Approval. The board of directors must adopt a resolution to dissolve the corporation. If less than a quorum, the resolution must be unanimous. It would be necessary to elect or appoint directors to the board so that this resolution can be adopted. (Corp. Code §§ 7911(a)(1) and 8610(c).)
- Membership Approval. As provided for in Corporations Code § 8724, any owners 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 the approval of local governmental entities before an association can be dissolved.
- Lender Approval. The governing documents of most associations also require the approval of first trust deed holders.
Practical 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 will need to be sold, and can be sold without a vote of the membership. (Corp. Code § 8710(g).)
- All of the debts and liabilities of the association will need to 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 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 their 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 costs of operation and problems of apathy and dissension exist?
One association that attempted dissolution received a negative response from the County. Of interest is the letter's paragraph on taxes.
Alternative to Dissolution. 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 fees and costs of the receiver, the association would incur the expense of accounting and legal fees incurred by the receiver. These charges could be substantial.
Involuntary Dissolution of Corporation. 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 corporate dissolution occurs, the association continues to exist as an unincorporated entity.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.