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 (1994) 29 Cal.App.4th 427) 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 on Boards. By statute, HOA boards of directors may levy a special assessment on the membership up to 5% of the current fiscal year's budgeted gross expenses without membership approval, regardless of any limitations 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 it is collected.
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 5% special assessment. Once the board reaches 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 itself.
Member Approved Special Assessments
Secret Ballot. A membership vote on a special assessment must be conducted by secret ballot under 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 to the contrary in 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 in favor of 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 it. 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 10 voting for the assessment and the other 41 leaving their ballots blank, the vote fails. Ten votes in favor are 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 funds from one project to another, they can use them for related issues. For example, a special assessment approved to replace drain lines can be expanded by the board to include remediation of mold discovered in the walls once the replacement program has begun. Although mold was not on the ballot, it is sufficiently related to the replacement of 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 decision-making 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 by more than 20% over 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 of 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 no statute or case law would exempt the owner, the parties could agree to it.
- Hazardous Conditions and Threats 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 or another hazardous condition or circumstance on the property is discovered.
- Unforeseen Major Expenses. An example of extraordinary expenses is one necessary to repair or maintain the common areas that could not have been reasonably foreseen by the board in preparing and distributing the annual budget report under Section 5300. Because the statute states "maintain the common interest development" (Civ. Code § 5610(c)) rather than the "common areas," it includes operations. This provision can be used to authorize an emergency special assessment to cover a sudden, extraordinary, unbudgeted increase in insurance premiums, which has occurred in many associations in high-fire-risk areas. An extraordinary expense of this nature cannot be put to a vote of the membership. If the membership were to vote it down, the board would still be obligated to purchase the insurance per the CC&R requirements. If the board allowed the insurance to lapse due to the membership vote and a significant loss occurred, resulting in an even larger special assessment, it is likely the board would be sued for failing to renew the insurance. Accordingly, an assessment must be imposed and the insurance premium paid. Another example is litigation not covered by insurance. If the association is sued, the board is obligated to defend it. The unbudgeted attorneys' fees must be paid, which may require an emergency special assessment in the current fiscal year. The following budget would then raise regular assessments to cover higher insurance premiums and legal fees.
Before imposing or collecting an emergency assessment pursuant to this section, boards are 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 notice of the "emergency situation" assessment as required by Civil Code § 5615.
- Utility Repairs. If there is an unexpected disruption in utilities for which the association is responsible, the board shall commence the process to make the necessary repairs to restore gas, heat, water, or electrical services within 14 days of the interruption. If there are insufficient reserve funds to cover repair or replacement costs, boards may obtain a loan and impose an emergency assessment to repay the loan. However, before obtaining that financing, the board must pass a resolution containing written findings regarding the nature of the association’s expenses and the fact that the association’s reserves do not cover the necessary costs. The resolution shall be distributed to the members with the notice of the emergency assessment and with notices otherwise required by law or governing documents pursuant to the board’s action, if any. (Civ. Code § 4775)
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 difficult 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, seeking court approval of a necessary assessment. The assessment could then be used as collateral for a bank loan. This provides immediate funds for critical maintenance.
Reimbursement Assessment for Property Damage
Civil Code § 5855(a) allows boards to impose a charge to reimburse the association for costs incurred by the association in the repair of damage to common areas caused by a member, the member's guests, or tenants. The charge may become a lien against the member’s separate interest, enforceable by the sale of the interest under Sections 2924, 2924b, and 2924c, provided the authority to impose a lien is set forth in the governing documents.
Lien & Foreclose. The Davis-Stirling Act allows associations to record a lien against an owner's separate interest for unpaid reimbursement assessments, provided the costs incurred were for repairs to 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 special assessment for reimbursement is levied against an owner, the owner should receive written notice of a hearing at which the assessment may be levied, allowing the owner to present evidence that 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.
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