Special Meeting of the Members.Members owning five percent (5%) or more of the separate interests may call a special meeting of the members to reverse a rule change. (Civ. Code § 4365(a).)
Written Request Delivered to Association. The special meeting of the members to reverse a rule change may be called by delivering a written request to the association. The written request must be delivered to the association within thirty (30) days after the association gives general notice of the rule change. The association must hold the special meeting not less than thirty-five (35) and no more than ninety (90) days after receipt of a proper request. (Civ. Code § 4365(b).)
Voting & Balloting Requirements. The vote at the special meeting must be conducted in accordance with the secret balloting requirements under Article 4 (commencing with Civil Code Section 5100) of Chapter 6. (Civ. Code § 4365(b).) The rule change may be reversed by the affirmative vote of a majority of a the members at the special meeting where quorum is present, or by a greater percentage if required under the association’s CC&Rs or bylaws. (Civ. Code § 4365(d).)
Notice of Voting Results. As soon as possible after the close of voting, but not more than fifteen (15) days after the close of voting, the board must provide general notice of the results of the member vote. (Civ. Code § 4365(g).)
Impact of Rule Reversal Where a rule is successfully reversed by the members, that rule may not be re-adopted by the board for at least one (1) year. The board may, however, adopt a different rule on the same subject as the rule which was reversed. (Civ. Code § 4365(f).)
Civil Code Section 4360 sets forth a specific procedure that a board must follow when seeking to adopt or amend an association’s operating rules (to perform a “rule change”). That procedure includes the following primary requirements:
Notice of Proposed Rule Change – the board must provide general notice pursuant to Civil Code Section 4045 of a proposed rule change at least twenty eight (28) days before making the rule change. The notice must include (1) the text of the proposed rule change, and (2) a description of the purpose and effect of the proposed rule change. This notice is not required where “the board determines that an immediate rule change is necessary to address an imminent threat to public health or safety or imminent risk of substantial economic loss to the association.” (Civ. Code § 4360(a).)
Decision Made at Board Meeting – the board’s decision on whether to adopt or amend an operating rule must be made at a board meeting “after consideration of any comments made by association members.” (Civ. Code § 4360(b).) The proposed rule adoption or amendment must have been listed as an agenda item for that meeting in order for the board to discuss or vote on it at the meeting. (Civ. Code § 4930(a); See also “Board Meeting Agenda Requirements.”)
Notice After Making Rule Change – after the board makes a decision to adopt or amend an operating rule, the board must, “as soon as possible…but not more than 15 days after making the rule change,” deliver general notice pursuant to Civil Code Section 4045 of the rule change. (Civ. Code § 4360(b).)
Board Actions Which do not Constitute “Operating Rules” Civil Code Section 4355(b) exempts the following board actions from the procedural requirements applicable to adopting, amending or repealing operating rules.
A rule change that is required by law, if the board has no discretion as to the substantive effect of the rule change; or
Issuance of a document that merely repeats existing law or the governing documents.
Emergency Rule Change If the board determines “that an immediate rule change is required to address an imminent threat to public health or safety, or an imminent risk of substantial economic loss to the association, it may make an emergency rule change, and no notice is required as specified in [Civ. Code § 4360(a)].” (Civ. Code § 4360(d).) The emergency rule change is effective for one hundred and twenty (120) days, unless the rule change provides for a shorter effective period. (Civ. Code § 4360(d).)
Membership Veto of Rule Change An association’s membership has limited rights to veto recently adopted or amended operating rules. (See “Veto of Rule Change by Members.”)
An association’s “operating rules” (aka “Rules & Regulations”) are regulations adopted by the board that apply “generally to the management and operation of the common interest development or the conduct of the business and affairs of the association.” (Civ. Code § 4340(a).)
Distinct From Declaration Unlike the association’s declaration (“CC&Rs”), operating rules are not contained in a recorded document and generally do not require membership approval for their adoption, amendment or repeal by the board. (See “Adopting & Amending Operating Rules.”)
Operating Rule Subject Areas Civil Code Section 4355 identifies specific subject areas where a rule or regulation adopted by the board would constitute an operating rule. Those subject areas include:
Member discipline, including any schedule of monetary penalties (fines) for violations of the governing documents and any procedure for the imposition of monetary penalties.
Any standards for delinquent assessment payment plans.
Any procedures adopted by the association for resolution of disputes (i.e., an IDR policy).
Board Actions which do not Constitute “Operating Rules” Civil Code Section 4355(b) exempts the following board actions from the procedural requirements applicable to adopting, amending, or repealing “operating rules.” As such, the following actions/items do not constitute “operating rules” as contemplated by Civil Code Section 4340(a):
A rule change that is required by law, if the board has no discretion as to the substantive effect of the rule change; or
Issuance of a document that merely repeats existing law or the governing documents.
When Valid and Enforceable Civil Code Section 4350 contains five (5) requirements that must all be satisfied before an operating rule becomes “valid and enforceable.” Those requirements include:
The rule is in writing;
The rule is within the authority of the board conferred by law or by the CC&Rs, articles of incorporation or association, or bylaws of the association;
The rule is not in conflict with governing law and CC&Rs, articles of incorporation or association, or bylaws of the association; (See also Ekstrom v. Marquesa at Monarch Beach HOA (2008) 168 Cal.App.4th 1111.)
The rule is adopted, amended, or repealed in good faith and in substantial compliance with the Civil Code’s procedural requirements governing the adoption, amendment, and repeal of operating rules; and
Civil Code Section 5300 requires an association to prepare and distribute to its members an annual budget report. The annual budget report serves as a consolidated disclosure statement which must include all of the following information, as well as any additional requirements imposed by the association’s governing documents: (Civ. Code § 5300(b)(1)-(9).)
Operating Budget – a pro forma operating budget, showing the estimated revenue and expenses on an accrual basis.
Reserve Funding Plan Summary – a summary of the reserve funding plan adopted by the board, as specified in Civil Code Section 5550(b)(5). The summary must include notice to the members that the full reserve plan is available upon request, and that the association must provide the full reserve plan to any member upon request.
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 thirty (30) years or less, including a justification for the deferral or decision to not undertake the repairs or replacement.
Anticipated Special Assessments – a statement as to whether the board, consistent with the reserve funding plan adopted pursuant to Civil Code Section 5560, 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 reserve funds for such repair, replacement or restoration. If so, the statement must also set out the estimated amount, commencement date, and duration of the anticipated special assessment.
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.
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.
Outstanding Loans– a statement as to whether the association has any outstanding loans with an original term of more than one year, including the payee, interest rate, amount outstanding, annual payment, and when the loan is scheduled to be retired.
Insurance Summary – a summary of the association’s property, general liability, earthquake, flood, and fidelity insurance policies. For each policy, the summary must include the name of the insurer, the type of insurance, the policy limit, and the amount of the deductible, if any. If this information is specified in an insurance policy’s declaration page, the association may satisfy its obligations to disclose that information by including copies of the declaration page with the annual budget report. Additionally, the insurance summary must contain, in at least 10-point boldface type, the statement provided under Civil Code Section 5300(b)(9). (See also “Insurance Disclosures.”)
FHA Status – if the association is a condominium community, a statement as to whether the association is a Federal Housing Administration (FHA)-approved condominium project. The disclosure must contain, in at least 10-point font on a separate piece of paper, the statement provided under Civil Code Section 5300(b)(10).
VA Status – if the association is a condominium community, a statement as to whether the association is a federal Department of Veterans Affairs (VA)-approved condominium project. The disclosure must contain, in at least 10-point font on a separate piece of paper, the statement provided under Civil Code Section 5300(b)(10).
Additionally, the assessment and reserve funding disclosure summary form, prepared pursuant to Civil Code Section 5570, must accompany each annual budget report or summary of the annual budget report that is distributed to a member. (Civ. Code § 5300(e); See also “Reserve Disclosures.”)
When Distributed
The annual budget report must be distributed to the members within thirty (30) to ninety (90) days before the end of the association’s fiscal year, regardless of any contrary provision contained in an association’s governing documents. (Civ. Code § 5300(a).)
How Distributed The annual budget report must be distributed to all members by individual delivery. (Civ. Code §§ 5300(c), 5320(a).) An association is permitted to distribute the annual budget report in one of the following forms: (Civ. Code § 5320(a)(1)-(2).)
The full annual budget report; or
A summary of the annual budget report. The summary must include a general description of the content of the annual budget report, as well as instructions on how the member may request a complete copy of the annual budget report at no cost to the member. The content description and instructions must be printed in at least 10-point boldface type on the first page of the summary.
Notwithstanding the above, if a member has requested to receive association reports in full, the association must deliver the full annual budget report to that member, rather than the summary referenced above. (Civ. Code § 5320(b).)
An association’s Articles of Incorporation are filed with the California Secretary of State. In general, an association’s Articles of Incorporation:
(1) identify the corporation as an association formed to manage a Common Interest Development (CID) under California law,
(2) state the name and address of the association’s managing agent, and
(3) state the business/corporate office of the association. (Civ. Code § 4280.)
Association’s True Legal Name An association’s true legal name is set forth in its Articles of Incorporation.
Corporate Status Most associations are incorporated as Nonprofit Mutual Benefit Corporations under the California Corporations Code. (See Corp. Code §§ 7130-7135.) Though corporate status is not required, associations incorporate to avail themselves of certain legal protections afforded to corporations under California law.
Amending Articles of Incorporation An association’s Articles of Incorporation may be amended pursuant to the provisions contained therein as well as Sections 7810-7820 of the California Corporations Code.
Regular Assessments
Regular assessments (aka “dues”) are the assessments which must be paid by the owner of each separate interest to the association every year, often on a monthly basis. The level of regular assessments is determined by the funds required to meet the association’s annual operating expenses. Regular assessments may be increased over time for a variety of reasons (i.e., improving the health of the association’s reserve account, defraying increases in the association’s expenses, etc.). An association’s board of directors may, without membership approval, increase the level of regular assessments each year by up to twenty percent (20%) over the prior year’s level, subject to certain requirements. (Civ. Code § 5605; See also “Limitations on Assessment Increases.”)
Special Assessments Special assessments may be levied by the board to cover unanticipated budget shortfalls or to raise funds needed for unforeseen repairs. The board may, without membership approval, levy a special assessment up to five percent (5%) of the current year’s budgeted gross expenses, subject to certain requirements. (Civ. Code § 5605; See also “Limitations on Assessment Increases.”)
Capital Improvement Assessments Many sets of association governing documents use the term “capital improvement assessments” to refer to special assessments which are levied to fund the construction of a capital improvement. The limitations on the board’s ability to levy a capital improvement assessment with or without a vote of the membership will be dictated by the terms of the association’s governing documents as well as the general limitations on levying special assessments found under Civil Code Section 5605.
Reimbursement (“Compliance”) Assessments Under certain circumstances, an association may levy an individual special assessment against a particular member in order to reimburse the association for costs incurred in repairing damage to the common area caused by the member, his family or tenant. (See “Reimbursement & Compliance Assessments.”)
When ADR is Required; Prerequisite to “Enforcement Action”
Neither an association nor any of its members may file an “enforcement action” (i.e., a lawsuit) in superior court unless the parties to the dispute have “endeavored” to submit their dispute to “alternative dispute resolution” (ADR) in accordance with Civil Code Section 5930. (Civ. Code § 5930(a).)
ADR Defined
“Alternative dispute resolution” (ADR) is defined as “mediation, arbitration, conciliation, or other nonjudicial procedure that involves a neutral third party in the decision making process.” (Civ. Code § 5925(a).)
“Enforcement Action” Defined
An “enforcement action” means a civil action or proceeding, other than a cross-complaint, for any of the following purposes:
Enforcement of the Nonprofit Mutual Benefit Corporation Law (Part 3 (commencing with Section 7110) of Division 2 of Title 1 of the Corporations Code); (Civ. Code § 5925(b)(2).)
Exceptions to ADR Requirement Offering ADR is not required in connection with the following enforcement actions:
If the party is filing a claim in small claims court for money damages; (Civ. Code § 5930(c).)
Where preliminary or temporary injunctive relief is necessary; or (Civ. Code § 5950(a)(3).)
A dispute involving delinquent assessments unless the member requests ADR with the association in connection with the assessment dispute. (Civ. Code §§ 5930(d), 5658(a).)
Participation in ADR When “internal dispute resolution” (IDR) is invoked by a member, the association is obligated to participate in IDR. (Civ. Code § 5910(c); See also “Internal Dispute Resolution (IDR).”) However, there is no such requirement in the Civil Code when a member offers his/her association ADR, though such a requirement may be contained in the provisions of an association’s governing documents (i.e., in its CC&Rs).
Refusal to Participate & Attorney’s Fees – “In an enforcement action in which attorney’s fees and costs may be awarded, the court, in determining the amount of the award, may consider whether a party’s refusal to participate in [ADR] before the commencement of the action was reasonable.” (Civ. Code § 5960.)
Certificate of Compliance At the time an enforcement action is commenced (i.e., a lawsuit is filed), the party commencing the enforcement action is required to file with the initial pleading a certificate stating that one (1) or more of the following conditions are satisfied:
If the party fails to file the required certificate, it provides grounds for a demurrer or a motion to strike “unless the court finds that dismissal of the action for failure to comply with the [Civil Code’s ADR requirements] would result in substantial prejudice to one of the other parties.” (Civ. Code § 5950(b).)
Initiating ADR: “Request for Resolution” To initiate ADR, a party is required to serve on the other parties to the dispute a “Request for Resolution” pursuant to Civil Code Section 5935. In sum, the Request for Resolution includes a description of the dispute, a formal request for ADR, a notice of the required response timeline, and a copy of the Civil Code’s ADR provisions (if the party on whom the request is served is a member of the association). (Civ. Code § 5935(a); See also “Initiating ADR: Request for Resolution.”)
ADR Timelines
30 Days to Accept Request for Resolution – A party on whom a Request for Resolution is served has thirty (30) days following service to accept or reject the request. (Civ. Code § 5935(c).) If the party does not accept the request within that period (or simply fails to respond), the request is deemed rejected by that party. (Civ. Code § 5935(c).)
90 Days to Complete ADR – If the party on whom a Request for Resolution is served accepts the request, the parties are required to complete ADR within ninety (90) days after the date the acceptance was received, unless the period is extended by written stipulation signed by both parties. (Civ. Code § 5940(a).)
Effect on Statute of Limitations If a Request for Resolution is served before the applicable statute of limitations has run for commencing an enforcement action, the statute of limitations is tolled:
During the the thirty (30) day period for a response a Request for Resolution, (Civ. Code § 5945(a).) and
If the Request for Resolution is accepted, during the the ninety (90) day period to complete ADR, including any extension of time for completing the ADR that is stipulated to by the parties. (Civ. Code § 5945(b).)
ADR Costs Borne by the Parties The costs of ADR (i.e., the fees to use a neutral third party mediator or arbitrator) must be borne by the parties to ADR. (Civ. Code § 5940(c).) This requirement for a member to incur costs associated with the ADR proceeding is one of the major distinctions between ADR and internal dispute resolution (IDR); in an IDR proceeding, the member may not be charged a fee to participate in IDR. (Civ. Code § 5910(g); See also “Internal Dispute Resolution (IDR).”)
Recovery of Attorney’s Fees The parties to ADR must generally bear their own attorney’s fees. However, there may be circumstances where attorney’s fees may be recoverable by a party that prevails in a subsequent lawsuit:
ADR Attorney’s Fees are Recoverable in Subsequent Litigation Reasonable attorney’s fees that are incurred by a party in ADR are recoverable by that party if it prevails in any subsequent litigation. (Grossman v. Park Fort Washington Association (2012) 212 Cal. App. 4th 1128.)
Attorney’s Fees to Enforce a Settlement Agreement Reached in ADR are Recoverable
If a settlement agreement is reached in ADR, and a subsequent lawsuit becomes necessary to enforce compliance with that settlement agreement, the prevailing party in the lawsuit is entitled to recover its reasonable attorney’s fees and costs. (Rancho Mirage Country Club HOA v. Hazelbaker (2016) 2 Cal. App. 5th 252.)
Summary of ADR Procedures in Annual Policy Statement
An association must include a summary of the Civil Code’s provisions pertaining to ADR within the association’s annual policy statement. (Civ. Code § 5965.) The summary must include the following language in accordance with Civil Code Section 5965(a):
“Failure of a member of the association to comply with the alternative dispute resolution requirements of Section 5930 of the Civil Code may result in the loss of the member’s right to sue the association or another member of the association regarding enforcement of the governing documents or the applicable law.”
Without the approval of 100 percent of the members, any contrary provision in this part or the articles or bylaws notwithstanding, so long as there is any lot, parcel, area, apartment, or unit for which an owners’ association, created in connection with any of the forms of development referred to in Section 11004.5 of the Business and Professions Code, is obligated to provide management, maintenance, preservation, or control, the following shall apply:
(a) The owners’ association or any person acting on its behalf shall not do either of the following:
(1) Transfer all or substantially all of its assets.
(2) File a certificate of dissolution.
(b) No court shall enter an order declaring the owners’ association duly wound up and dissolved.
(a) A membership list is a corporate asset. Without consent of the board a membership list or any part thereof may not be obtained or used by any person for any purpose not reasonably related to a member’s interest as a member. Without limiting the generality of the foregoing, without the consent of the board a membership list or any part thereof may not be:
(1) Used to solicit money or property unless such money or property will be used solely to solicit the vote of the members in an election to be held by their corporation.
(2) Used for any purpose which the user does not reasonably and in good faith believe will benefit the corporation.
(3) Used for any commercial purpose or purpose in competition with the corporation.
(4) Sold to or purchased by any person.
(b) Any person who violates the provisions of subdivision (a) shall be liable for any damage such violation causes the corporation and shall account for and pay to the corporation any profit derived as a result of said violation. In addition, a court in its discretion may award exemplary damages for a fraudulent or malicious violation of subdivision (a).
(c) Nothing in this article shall be construed to limit the right of a corporation to obtain injunctive relief necessary to restrain misuse of a membership list or any part thereof.
(d) In any action or proceeding under this section, a court may award the corporation reasonable costs and expenses, including reasonable attorneys’ fees, in connection with such action or proceeding.
(e) As used in this section, the term “membership list” means the record of the members’ names and addresses.
In any action or proceeding under this article, and except as required by Section 8331, if the court finds the failure of the corporation to comply with a proper demand thereunder was without justification, the court may award the member reasonable costs and expenses, including reasonable attorneys’ fees, in connection with such action or proceeding.
