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Civil Code Section 1940.4. Display of Political Signs; Tenant Protections.

(a) Except as provided in subdivision (c), a landlord shall not prohibit a tenant from posting or displaying political signs relating to any of the following:

(1) An election or legislative vote, including an election of a candidate to public office.

(2) The initiative, referendum, or recall process.

(3) Issues that are before a public commission, public board, or elected local body for a vote.

(b) Political signs may be posted or displayed in the window or on the door of the premises leased by the tenant in a multifamily dwelling, or from the yard, window, door, balcony, or outside wall of the premises leased by a tenant of a single-family dwelling.

(1) The political sign is more than six square feet in size.

(2) The posting or displaying would violate a local, state, or federal law.

(3) The posting or displaying would violate a lawful provision in a common interest development governing a document that satisfies the criteria of Section 1353.6.

(d) A tenant shall post and remove political signs in compliance with the time limits set by the ordinance for the jurisdiction where the premises are located. A tenant shall be solely responsible for any violation of a local ordinance. If no local ordinance exists or if the local ordinance does not include a time limit for posting and removing political signs on private property, the landlord may establish a reasonable time period for the posting and removal of political signs. A reasonable time period for this purpose shall begin at least 90 days prior to the date of the election or vote to which the sign relates and end at least 15 days following the date of the election or vote.

(e) Notwithstanding any other provision of law, any changes in the terms of a tenancy that are made to implement the provisions of this section and are noticed pursuant to Section 827 shall not be deemed to cause a diminution in housing services, and may be enforced in accordance with Section 1161 of the Code of Civil Procedure.

Commercial Use & Home Businesses

An association has the general authority to restrict or prohibit the operation of commercial and business activities inside its members’ separate interests (in or upon their respective units or lots). Such restrictions and prohibitions are almost always contained in an association’s governing documents (i.e., in its CC&Rs) from the time the association was originally developed. Those provisions often define “commercial” in a broad sense to include any business, commercial, manufacturing, mercantile, storing, vending or other such non-residential purpose.

The intent behind such provisions are to reduce the burdens placed upon association common areas (i.e., customers/employees parking in the HOA’s streets or parking spaces), and to prevent commercial activities from becoming a nuisance to neighboring homeowners and the HOA in general. Municipal ordinances and laws that permit the operation of home-based business do not necessarily supersede conflicting provisions in an association’s governing documents unless they explicitly state that they do.

Interpretation of CC&R Restrictions & Judicial Deference
CC&R provisions that prohibit and restrict commercial uses and home businesses are often drafted broadly. Courts may grant judicial deference to a decision made by an association’s board of directors as to whether alleged business activity violates those restrictions:

“The trial court properly deferred to the Board’s discretionary decision that the Ketelhuts’ operation of the vineyard did not violate the prohibition against business or commercial activity because it did not affect the community’s residential character.” (Eith v. Ketelhut (2018) 31 Cal.App.5th 1, 17.)

Residential Care Facilities, Sober Living Homes & Day Care Homes
An association is limited in its ability to restrict and prohibit homeowners from operating residential care facilities (i.e., sober living homes) and day care centers out of their homes. (See “Residential Care Facilities,” “Family Day Care Homes” and “Alcohol or Drug Abuse Recovery or Treatment Facilities.“)

Commercial Signage
Civil Code Section 4710 affords homeowners with rights to display “noncommercial” signage on their separate interests. Even where an association does not have a restriction on commercial use, it may still have the authority to prohibit the display of commercial signage on a homeowner’s lot or unit. (See “Flags, Banners & Signs.”)

Pet Restrictions

No Flat Prohibitions
In 1994, the California Supreme Court upheld the validity of a CC&R restriction that broadly prohibited homeowners from having pets in their units. (See Nahrstedt v. Lakeside Village (1994) 8 Cal.4th 361.) Several years after that decision, the California Legislature enacted Civil Code Section 1360.5 (now Civil Code Section 4715) to afford homeowners within associations the limited right to keep and maintain at least one (1) pet. However, as written, Section 4715 does not affect the validity of a pet prohibition contained in an association’s governing documents that has not been “entered into, amended, or otherwise modified” on or after January 1, 2001. (Civ. Code § 4715(e).) This created an ambiguity as to whether Section 4715 applies only to situations where the specific governing document containing the pet prohibition (i.e., the CC&Rs) was amended after 2001, or whether Section 4715 would apply if any governing document of the association was amended or modified after 2001 (i.e., the bylaws, operating rules, etc.).

This ambiguity became especially significant upon the adoption of Civil Code Section 1363.03 (now Civil Code Section 5105) in 2006 that required all associations to adopt election rules. Because election rules are “operating rules” within the meaning of Civil Code Section 4355, they constitute a component of the association’s governing documents for the purposes of Section 4715. (Civ. Code § 4715(d).) Thus, there was a concern that Section 1363.03 (now Section 5105) requiring associations to adopt election rules served to effectively nullify any existing pet prohibitions.

To address this concern, in 2007, Senator Kuehl requested that the California Office of Legislative Counsel (COLC) review this ambiguity and provide some guidance. On July 19, 2007, COLC rendered an opinion that the adoption of election rules pursuant to Section 1363.03 would indeed void pet prohibitions contained in other provisions of an association’s governing documents. The COLC opinion states in pertinent part that:

“…it is our opinion that, under Section 1363.05 of the Civil Code, the adoption of a rule by a common interest development to comply with the election requirements of Section 1363.03 of the Civil Code renders unenforceable a provision of the governing documents of that development that prohibits the keeping of at least one pet.”

While the COLC opinion does not have the weight of law or legal precedent, it does illustrate how courts may interpret Section 4715 moving forward. The HOA industry took notice of the COLC opinion, and the general consensus among HOA attorneys is that flat prohibitions on pets are no longer enforceable.

Reasonable Restrictions Permitted
The rights afforded to homeowners under Section 4715 are “subject to reasonable rules and regulations of the association.” (Civ. Code § 4715(a).) Rules and regulations utilized by associations in this respect typically include restrictions on the type of breed, size (weight), and number of pets that a homeowner may have. Additionally, associations often enact operating rules that regulate pets entering into the association’s common areas (i.e., rules requiring pets to be leashed when in common area streets, parks, hallways, etc.).

Companion & Service Animals
An association’s authority to regulate and restrict pets is also subject to Federal and State laws prohibiting discrimination against persons with disabilities. Those laws may require an association in particular circumstances to exempt a disabled owner’s pet from having to comply with the association’s otherwise reasonable pet restrictions.

Operating Account

All funds received by an association are deposited into the association’s operating account. A portion of those funds are then transferred into the association’s reserve account according to the association’s reserve funding plan.

Review Requirements
Included within the board’s financial review requirements is the review of information pertaining to the association’s operating account (i.e., review bank account statements, review current reconciliation of the operating account, etc.). (Civ. Code § 5500; See also “Financial Review Requirements.”)

Manager Deposits & Control of Account
Civil Code Section 5380 contains several requirements governing how funds received by a managing agent on behalf of an association must be deposited into certain bank accounts. (See “Deposit of Association Funds by Manager.”)

Financial Transfers Requiring Written Board Authorization
Transfers from the association’s operating account over certain thresholds require written board authorization. (See “Financial Transfers Requiring Written Board Authorization.”)

Financial Review Requirements

An association’s board of directors has the affirmative duty to:

Review a current reconciliation of the association’s operating accounts on a monthly basis; (Civ. Code § 5500(a).)
Review a current reconciliation of the association’s reserve accounts on a monthly basis; (Civ. Code § 5500(b).)
Review, on a monthly basis, the current year’s actual operating revenues and expenses compared to the current year’s budget; (Civ. Code § 5500(c).)
Review, on a monthly basis, the latest bank account statements for both the association’s operating and reserve accounts; (Civ. Code § 5500(d).)
Review an income and expense statement for both the association’s operating and reserve accounts on a monthly basis; (Civ. Code § 5500(e).)
Review, on a monthly basis, the check register, monthly general ledger, and delinquent assessment receivable reports; (Civ. Code § 5500(f).) and
Review the association’s most recent reserve study on an annual basis in order to consider and implement any necessary adjustments to the board’s analysis of the HOA’s reserve account requirements. (Civ. Code § 5550(a).)

Notwithstanding the above, the board has the duty to adhere to any more stringent financial review requirements that may be contained in the association’s governing documents. (Civ. Code § 5500.)

Financial Review by Board Independent of Board Meeting
The financial review requirements of Section 5500 discussed above may be met when every individual member of the board, or a subcommittee of the board consisting of the treasurer and at least one other board member, reviews the documents and statements described in Section 5500 independent of a board meeting, so long as the review is ratified at the next board meeting and that ratification is reflected in the minutes of that meeting. (Civ. Code § 5501.)

Bank Loans to HOAs

Authority to Obtain Loan
A HOA’s authority to obtain a loan (borrow money) is generally contained within the provisions of its governing documents—typically its CC&Rs or bylaws. Where such provisions are absent, the authority to obtain a loan is found in Corporations Code Section 7140(i). Section 7140(i) allows corporations to borrow money, subject to any limitations contained in the corporation’s articles or bylaws.

Membership Approval Requirements
Many sets of HOA governing documents contain provisions that require membership approval in connection with obtaining a bank loan for the HOA. Those approval requirements could extend to any of the following issues:

The approval of the special assessment needed to repay the loan over time (see “Limitations on Assessment Increases“);
The approval of the purpose for which the loan is being obtained (i.e., to construct a capital improvement); and/or
The approval required to authorize the board to enter into the loan agreement with the bank.

Qualification Issues
In order for a HOA to be approved for a bank loan, banks often require the HOA to provide the following items of information:

Financial statements and other information regarding the HOA’s overall financial health (i.e., number of delinquencies)
Verification that the HOA carries all of the insurance policies required under its CC&Rs
Verification that the HOA is in “good standing” with the California Secretary of State (i.e., filing income tax returns and paying taxes)
An written opinion from the HOA’s attorney verifying that the HOA has the authority to obtain the desired loan.

Reserve Account (Generally)

An association’s “reserve account” means both of the following:

“Moneys that the board has identified for use to defray the future repair or replacement of, or additions to, those major components that the association is obligated to maintain.” (Civ. Code § 4177(a).)

“The funds received, and not yet expended or disposed of, from either a compensatory damage award or settlement to an association from any person for injuries to property, real or personal, arising from any construction or design defects.” (Civ. Code § 4177(b).)

The reserve account is thus separate and distinct from the association’s operating account that contains funds used to carry out the association’s day-to-day operations.

Withdrawal, Spending & Disclosure Requirements
Boards are required to “exercise prudent fiscal management in maintaining the integrity of the reserve account.” (Civ. Code § 5515(e).) Failing to do so could not only jeopardize the financial viability of the association and the property values of its members, but could also constitute a breach of the board’s fiduciary duties. (Raven’s Cove Townhomes, Inc. v. Knuppe Dev. Co. (1981) 114 Cal.App.3d 783, 800-801.)

Associations are therefore subject to numerous statutory requirements that serve to:

Limit the purposes for which funds may be expended from the reserve account;
Regulate the procedure through which a board may authorize the temporary transfer (borrowing) of funds from the reserve account without the membership’s approval; and
Require every association to perform a reserve study, and to then use that information to prepare a reserve funding plan and make various reserve disclosures to the association’s membership.

Financial Transfers Requiring Written Board Authorization
Transfers from the association’s reserve account over certain thresholds require written board authorization. (See “Financial Transfers Requiring Written Board Authorization.”)

Borrowing Reserve Funds (Reserve Transfers)

A HOA board is generally prohibited from spending reserve funds “for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established.” (Civ. Code § 5510(b); See also “Reserve Account Expenditures.”) Notwithstanding that limitation, the board may, without membership approval, authorize the temporary transfer of funds from the reserve account to the association’s operating account in order to “meet short-term cash flow requirements or other expenses.” (Civ. Code § 5515(a).) The procedure through which the board may validly authorize such a transfer is subject to the following requirements:

Notice of Intent to Borrow
The board must first provide notice of its intent to consider the transfer (borrowing) of reserve funds in a notice of board meeting. (Civ. Code § 5515(a).) The notice must include the reasons the transfer is needed, some of the options for repayment, and whether a special assessment may be considered in order to repay the borrowed funds. (Civ. Code § 5515(b).)

Written Finding Explaining Reasons for Transfer & Describing Repayment Method
If the board authorizes the transfer, the board must issue a written finding explaining the reasons the transfer is needed, and describing when and how the transferred funds will be repaid to the reserve account. (Civ. Code § 5515(c).) This written finding must be recorded in the minutes of the board meeting. (Civ. Code § 5515(c).)

Restoration of Funds within One (1) Year
The transferred funds must be restored to the reserve account within one (1) year of the date of the initial transfer. (Civ. Code § 5515(d).)

Exception: Option to Temporarily Delay the Restoration
Notwithstanding the above, the board may, after giving the same notice required for considering the transfer, temporarily delay the restoration. (Civ. Code § 5515(d).) Such a decision must be based upon “a finding supported by documentation that a temporary delay would be in the best interests of the common interest development.” (Civ. Code §5515(d).)

Reserve Funds for Litigation
When the decision is made to use reserve funds or to borrow reserve funds in order to pay for litigation “involving the repair, restoration, replacement or maintenance” of major components for which the association is responsible (i.e., construction defect litigation), the association is required to provide general notice of that decision, and of the availability of an accounting for those litigation expenses. (Civ. Code § 5520(a).) Additionally, the association is required to make an accounting of expenses related to the litigation on at least a quarterly basis, unless the governing documents impose more stringent standards. (Civ. Code § 5520(b).) The accounting must be “made available for inspection” by the association’s members at the association’s office. (Civ. Code § 5520(b).)

Special Assessment Concerns
The board 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 [transferred] funds” within the time limitation discussed above. (Civ. Code § 5515(e).) Any such special assessment is subject to the limitations contained in Civil Code Section 5605 (i.e., the special assessment may not exceed five percent (5%) of the association’s annual budget without membership approval). (Civ. Code § 5515(e); See also “Limitations on Assessment Increases.”) The board has the discretion to extend the date the payment on any such special assessment is due, and any extension does not prevent the board from enforcing the collection of an unpaid special assessment. (Civ. Code § 5515(e).)

Reserve Account Expenditures

The health of a HOA’s reserve account is vital to protecting the financial viability of the association and the property values of its members. HOAs are therefore required to perform reserve studies, make various reserve disclosures, and are subject to limitations on the purposes for which funds may be expended from the reserve account.

Spending Restrictions
A board may not spend reserve funds “for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established.” (Civ. Code § 5510(b).)

Exception: Temporary Transfer (Borrowing) of Reserve Funds
Notwithstanding the above, a board may authorize the temporary transfer of funds from the reserve account to the association’s operating account in order to “meet short-term cash flow requirements or other expenses” without a vote of the membership. (Civ. Code § 5515(a).) The procedure through which the board may validly authorize such a transfer is subject to several requirements (i.e., provide notice of the intent to consider the transfer, issue a written finding as to why the transfer is needed and how the borrowed funds will be restored within one (1) year, etc.). (See “Borrowing Reserve Funds (Reserve Transfers).”)

Signature Requirement
The withdrawal of funds from the reserve account requires the signatures of at least two (2) persons. Those persons must either both be directors, or one officer who is not a director and one director. (Civ. Code § 5510(a).)

Reserve Disclosures

The California Bureau of Real Estate (CalBRE) issued a warning in 2012 in response to a growing number of HOAs with inadequate reserve funds and the resulting problems encountered by those HOAs and their members (i.e., reduced maintenance capabilities, special assessment problems, declining property values, difficulties in securing loans, etc.). These concerns motivated the California Legislature to, in addition to the pre-existing obligation for HOAs to perform reserve studies, increase the number of disclosures HOAs must make on an annual basis regarding their reserve accounts.

Disclosures
The required reserve disclosures are provided to the association’s membership as part of the association’s annual budget report that is prepared pursuant to Civil Code Section 5300, and include all of the following:

Reserve Summary – the association’s reserve summary prepared pursuant to Civil Code Section 5565. (Civ. Code § 5300(b)(2).) The reserve summary is used to disclose the level of deficiencies in the association’s reserves expressed on a per unit basis. (See “Reserve Summary.”)
Reserve Funding Plan – a summary of the reserve funding plan adopted by the board pursuant to Civil Code Section 5550(b)(5). (Civ. Code § 5300(b)(3).) The reserve funding plan indicates the way in which the association will fund the required annual contribution to the reserve account, and includes a schedule of the date and amount of any increases in regular or special assessments that will be needed to sufficiently fund the reserve funding plan. (See “Reserve Funding Plan.”) The summary of the reserve funding plan must also include a notice to members that the full reserve funding plan is available upon request. (Civ. Code § 5300(b)(3).)
Deferred Maintenance Items – a statement as to whether the board has determined “to defer or not undertake repairs or replacement of any major component with a remaining life of 30 years or less, including a justification for the deferral or decision not to undertake the repairs or replacement.” (Civ. Code § 5300(b)(4).)
Anticipated Special Assessments – a statement as to whether the board, consistent with the reserve funding plan, “has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor. If so, the statement shall also set out the estimated amount, commencement date, and duration of the assessment.” (Civ. Code § 5300(b)(5).)
Reserve Funding Mechanisms – a statement as to the mechanism(s) by which the board will fund reserves to repair or replace major components, including assessments, borrowing, use of other assets, deferral of selected replacements or repairs, or alternative mechanisms. (Civ. Code § 5300(b)(6).)
Procedures for Calculation and Establishment of Reserves – a general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacements, or additions to those major components that the association is obligated to maintain. The statement must include, at the least, reserve calculations using the formula described in Civil Code Section 5570(b)(4), and may not assume a rate of return on cash reserves in excess of two percent (2%) above the discount rate published by the Federal Reserve Bank of San Francisco at the time the calculation was made. (Civ. Code § 5300(b)(7).)
Assessment and Reserve Funding Disclosure Summary form – the annual budget report (whether delivered in full or in summary form) must also be accompanied by the Assessment and Reserve Funding Disclosure Summary form that is prepared pursuant to Civil Code Section 5570. (Civ. Code § 5300(e).)

Disclosure Timeframe
The above disclosures that are included within the annual budget report must be distributed to the association’s members within thirty (30) to ninety (90) days before the end of the association’s fiscal year, regardless of any provisions to the contrary contained in the association’s governing documents. (Civ. Code § 5300(a).)

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