Duty to Levy Assessments. Boards must impose regular and special assessments sufficient to carry out their responsibilities under the governing documents. (Civ. Code § 5600(a); Park Place v. Naber.) Their primary duties are to (i) maintain the common areas, (ii) fund the reserves for maintaining the common areas, (iii) purchase insurance (per statute and the CC&Rs), and (iv) enforce the governing documents.
Board Approved Special Assessments
5% Limitation. By statute, HOA boards of directors are allowed to special assess the membership up to 5% of the current fiscal year's budgeted gross expenses without membership approval, regardless of any limitations that might be found in the governing documents. (Civ. Code § 5605(b).) "Budgeted gross expenses" means all expenses in an association's budget, both operational expenses and reserve contributions. The statute could have said budgeted operating expenses, which would exclude reserves, but it didn't. (Civ. Code § 5605(b).) Therefore, reserve allocations are included in the 5% calculation for board-approved special assessments.
How to Calculate 5%. If an association's annual budget is $100,000, the maximum special assessment the board can impose without membership approval is $5,000. That does not mean $5,000 per unit. The $5,000 assessment is divided among all units according to the allocation schedule contained in the CC&Rs. Once the board approves an assessment, proper notice must be given to the membership before collecting it.
Assessment Frequency. There is no limit on the number of special assessments, only on the total percentage. For example, the board may levy five 1% special assessments in a single year or one special assessment of 5%. Once the board hits an aggregate of 5% of the budgeted gross expenses for that fiscal year, the membership must approve any further special assessments (unless the additional assessments qualify as emergencies). There is no limit on the size or number of special assessments the membership imposes upon themselves.
Member Approved Special Assessments
Secret Ballot. A membership voting on a special assessment must be done by secret ballot using election rules duly adopted by the association. Membership approval is at a special meeting called for that purpose.
Approval Defined. For a special assessment, the approval requirement is set by statute rather than the governing documents. Regardless of anything contrary to an association's governing documents, special assessments are approved by a "majority of a quorum" of the membership. (Civ. Code § 5605(b).) It is important to know that this term means approval "by an affirmative vote of a majority of the votes represented and voting in a duly held election in which a quorum is represented, which affirmative votes also constitute a majority of the required quorum." (Civ. Code § 4070.) Further, a quorum means more than 50% of the owners of an association, regardless of anything to the contrary, in an association's governing documents. (Civ. Code § 5605(d)(3).) For Example: In an association of 100 members, 51 ballots must be returned to constitute a quorum. Of those, at least 26 must vote for the special assessment. If 60 ballots are cast, at least 31 must vote in the affirmative. And so on.
If a ballot contains a mix of valid and invalid votes, the valid votes are counted, and the invalid ones are ignored. RONR (12th ed.) 45:36. Blank ballots are not counted as yes or no votes. For example, when voting on a special assessment, a majority of a quorum must approve the assessment. In an association of 100 members, a quorum is more than 50, i.e., 51. (Civ. Code § 5605(c).) A majority of 51 is 26. If 51 ballots are cast, with ten voting for the assessment and the other 41 not marking their ballot as either yes or no, the vote fails. Ten votes in favor is not a majority. The 41 non-votes do not count as yes votes. For more information, see "Approval Requirements."
Super-Majority Requirements Invalid. Governing documents that require a super-majority for assessment approval are invalid, such as approval by a majority of the membership or approval by a majority of a quorum where the quorum is 2/3 of the membership. The Davis-Stirling Act supersedes such provisions.
Notice Requirement. Once an assessment has been approved, proper notice of the increased assessment must be given to the membership as described in Section 4040, not less than 30 nor more than 60 days before the assessment is due. (Civ. Code § 5615.)
Expenditure Limitations. For example, if the membership approves a special assessment of $100,000 for two items, roof and boiler repairs, the board cannot use the funds to asphalt the parking lot. They must use the funds for the roof and boiler. The limitation also applies to leftover funds. If, after the work, $8,000 is left over, the board cannot use the surplus funds for new artwork in the lobby. The board must either (i) transfer the funds to reserves for future roof and boiler repairs, (ii) obtain membership approval to buy new artwork for the lobby, or (iii) return the money to the membership.
Flexibility in Use of Funds. Even though boards cannot divert special assessment monies from one project to another, they can use the funds for related issues. For example, a special assessment approved for replacing drain lines can be expanded by the board to include remediation of mold discovered in the walls once the replacement program has been started. Although mold was not on the ballot, it is sufficiently related to replacing pipes to fall within the board's discretion when repairs are made.
Where a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants, and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas, courts should defer to the board's authority and presumed expertise. Thus, we adopt today for California courts a rule of judicial deference to community association board decisionmaking that applies, regardless of an association's corporate status, when owners in common interest developments seek to litigate ordinary maintenance decisions entrusted to the discretion of their associations' boards of directors. (Lamden v. La Jolla Shores, (1999) 21 Cal.4th 249.)
No Time Limit. There is no time limit on the expenditure of special assessment funds. Any delays in using the monies for their intended purpose must be reasonable.
Emergency Special Assessments
Normally, boards of directors cannot increase regular assessments more than 20% above the prior year's regular assessments or impose special assessments (within a fiscal year) that exceed 5% of an association's budgeted gross expenses for that fiscal year without membership approval. (Civ. Code § 5605(b).) However, the Legislature provided an exception that allows boards, without membership approval, to impose a special assessment over 5% if there is an "emergency."
Emergency Defined. An emergency situation is defined by the Davis-Stirling Act to mean any of the following circumstances (Civ. Code § 5610):
- Court Order. An extraordinary expense is required by a court order. [Boards have the authority (and the obligation) to special assess their membership to pay judgments against their associations, which boards must impose the assessment regardless of any opposition by the membership. In the case of O'Toole Co., Inc. v. Kingsbury Court, a 46-unit association voted down an assessment to pay a $200,000 judgment against it. The court ordered the board to levy an emergency assessment to pay the judgment regardless of the membership's vote to the contrary.] An owner who prevails in litigation against their association is not exempt from a special assessment levied against the membership to pay the judgment. Although there is no statute or case law that would exempt the owner, the parties could agree to it.
- Threat to Personal Safety. An extraordinary expense is necessary to repair or maintain the common interest development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered.
- Unforseen Repairs. An extraordinary expense necessary to repair or maintain the common interest development or any part of it for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the annual budget report under Section 5300.
Notice to the Members. However, before it can impose or collect an "emergency situation" assessment under #3 above, the board is required to pass a resolution containing written findings as to (a) the necessity of the extraordinary expense involved and (b) why the expense was not or could not have been reasonably foreseen in the budgeting process. The resolution must be distributed to the members with the notice of the "emergency situation" assessment that is required to be provided by Civil Code § 5615.
Court Approved Special Assessments
Boards are required to fund common area maintenance. If the membership votes down a major unfunded maintenance project, boards should consider petitioning the court to approve the special assessment. Corporations Code § 7515(a) provides: "If, for any reason, it is impractical or unduly tricky for any corporation to call or conduct a meeting of its members, delegates, or directors or otherwise obtain their consent in the manner prescribed by its articles or bylaws or this part, then the superior court of the proper county, upon petition of a director, officer, delegate or member, may order that such a meeting be called or that a written ballot or other form of obtaining the vote of members, delegates or directors be authorized, in such a manner as the court finds fair and equitable under the circumstances." If a property is in dire need, this would be a minimal-risk approach following a failed assessment vote to get a court to approve a necessary assessment. The assessment could then be used as collateral for a bank loan. This provides immediate funds for critical maintenance.
Budget Adjustment. See "Midyear Budget Increase."
Reimbursement Assessments
Older sets of CC&Rs are often silent about imposing a special assessment against individual members to reimburse expenses incurred by the association repairing common areas damaged by members, guests, or tenants. An argument can be made that it falls under the general powers of a board to act in the association's best interests and that it's implied in Civil Code § 5855(a). To remove any uncertainty, associations should amend their governing documents to include it.
Lien & Foreclose. The Davis-Stirling Act allows associations to record a lien against an owner's separate interest on unpaid reimbursement assessments, provided the costs incurred were to repair the common areas. A monetary charge imposed by the association to reimburse the association for costs incurred in repairing damage to common areas and facilities caused by a member or the member’s guest or tenant may become a lien against the member’s separate interest... (Civ. Code § 5725(a).)
Hearing. Before a reimbursement special assessment is levied against an owner, the owner should receive written notice of a hearing at which the assessment may be levied to allow the owner to present evidence as to why the assessment should not be levied. (Civ. Code § 5855(a).) The board should ensure that expenses are clearly documented and that the owner provides the documentation.
Collection. If the owner refuses to pay for the damage he/she caused, an association can impose late fees and interest, record a lien against the owner's unit, and foreclose as they would with any other delinquent assessment.
Recommendation: Because it is unclear whether authorizing language for reimbursement special assessments needs to be in an association's governing documents, the more conservative course of action is to amend an association's documents to include it. Doing so avoids the potential for a legal challenge.
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