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 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).)
General Requirements Pursuant to Civil Code Section 5565, the reserve summary (1) must be based on the association’s most recent reserve study, (2) must be based only on assets held in cash or cash equivalents, and (3) must be printed in boldface type, and include all of the following:
Current Estimates of Major Components – the current estimated replacement cost, estimated remaining life, and estimated useful life of each major component. (Civ. Code § 5565(a).)
Cash Amounts – as of the end of the fiscal year for which the reserve study is prepared, the reserve summary must include: (1) the current estimate of the amount of cash reserves necessary to repair, replace, restore or maintain major components, (2) the current amount of accumulated cash reserves actually set aside for those purposes, and (3) if applicable, the amount of funds received by the association in connection with a construction defect action. (Civ. Code § 5565(b).)
Percentage Funding – the percentage that the amount of cash reserves actually set aside for the repair, replacement, restoration or maintenance of major components equals the estimated amount of cash reserves necessary for those purposes. (Civ. Code § 5565(c).)
Reserve Deficiency – the current deficiency in reserve funding expressed on a per unit basis. This figure is calculated by subtracting the amount of cash reserves actually set aside for the repair, replacement, restoration or maintenance of major components from the estimated amount of cash reserves necessary for those purposes, and then dividing that result by the number of separate interests within the association. This calculation method may vary somewhat if the association has variable, as opposed to uniform, assessments. (Civ. Code § 5565(d).)
Inadmissible as Evidence of Improper Financial Management
The reserve summary is generally not admissible as evidence to show improper financial management on the part of the association. (Civ. Code §5300(d).)
A member’s right to inspect and copy various association records is not absolute and may be limited in certain circumstances. (See “Records Not Subject to Inspection.”). However, Corporations Code Section 8334 gives each board member (each director of the association) the “absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director.” Thus, unlike regular members of an association, directors generally (1) are not subject to the requirements of Civil Code Section 5205 (i.e., do not have to pay for the costs in producing records), and (2) have broader record inspection rights than regular members (i.e., can inspect executive session minutes).
Limitations Notwithstanding the term “absolute” under Corporations Code Section 8334, a director’s record inspection rights may still be limited in order to avoid conflicts of interest, to protect privacy concerns, and/or to protect the association from tortious acts and breaches of fiduciary duties by the director.
Avoid Conflicts of Interest: “…a corporate director does not have the right to access corporate documents covered by the attorney-client privilege that were generated in defense of a suit for damages that the director filed against the corporation.” (Tritek Telecom, Inc. v. Superior Court(2009) 169 Cal.App.4th 1385, 1387.)
A director’s absolute right to inspect and copy corporate records “is subject to exceptions and may be denied where a disgruntled director announces his or her intention to violate his or her fiduciary duties to the corporation…” (Tritek at 1390.)
Protect Privacy: A director’s record inspection rights may be limited by the association’s duty to protect the privacy rights of its members in their voting decisions. (Chantiles v. Lake Forest II Master HOA(1995) 37 Cal.App.4th 914, 927 (“…the Association had a duty to guard the privacy of rights of its members in their voting decisions…the Association’s refusal to allow [the director] the unfettered access to the ballots which he demands was not unjustified.”).)
Protect from Tortious Acts: “Where the corporation determines that an unfettered inspection [by the director] will result in a tort against the corporation, it may decline the request for inspection.” (Havlicek v. Coast-to-Coast Analytical Services, Inc.(1995) 39 Cal.App.4th 1844, 1856.)
*Evidence must Establish Clear Intent to Commit Tort – The mere possibility that information could be used adversely to the corporation is not by itself sufficient to defeat a director’s inspection rights. The evidence must establish the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation, such that allowing inspection would produce an “absurd result”. (Fowler v. Golden Pacific Bancorp(2022) 80 Cal.App.4th 205, 211.)
Former Directors A former director loses his/her broad record inspection rights once the former director loses his/her status as a sitting (current) director of the association (i.e., no longer serves on the board.) This is true notwithstanding the fact that the desired record pertains to a decision or action of the former director or of the board while the former director was serving:
“…current director status is required to pursue current inspection rights. This line of cases will not allow enforcement of any absolute director’s right of inspection to a former corporate director, when the reason for the inspection right (holding office and performing fiduciary duties as a director) no longer exists.” (Wolf v. CDS Devco(2010) 185 Cal.App.4th 903, 919.)
A member’s right to inspect and copy various association records is not absolute and may be limited by the year the requested record was prepared as well as the contents of the requested record.
Records Which may be Withheld or Redacted The following includes records which are not subject to inspection and/or which may be withheld or redacted pursuant to Civil Code Section 5215:
Information which, if released, is reasonably likely to lead to (1) identity theft (i.e., bank account numbers of members or vendors, social security or tax id numbers, credit card numbers, etc.), (2) fraud in connection with the association, or (3) compromising the privacy of an individual member of the association. (Civ. Code § 5215(a)(1),(2),(4); Civ. Code § 5215(a)(5)(c); See also Chantiles v. Lake Forest II Master HOA (1995) 37 Cal.App.4th 914.)
Association employee information (i.e., name, social security number, or other personal information), except for employee compensation information to be set forth by job classification or title. (Civ. Code § 5215(b).)
Information which is privileged under law (i.e., documents subject to attorney-client privilege, documents relating to litigation in which the association is or may become involved, confidential settlement agreements, etc.). (Civ. Code § 5215(a)(3); See also Smith v. Laguna Sur Villas Community Assn. (2000) 79 Cal.App.4th 639.)
Records of goods or services provided a la carte to individual members for which the association received monetary consideration other than assessments. (Civ. Code § 5215(a)(5)(A).)
Records of disciplinary actions, collection activities, or payment plans of members other than the member requesting the records. (Civ. Code § 5215(a)(5)(B).)
Interior architectural plans, including security features, for individual homes. (Civ. Code § 5215(a)(5)(F).)
Written Explanation for Withholding or Redacting Records An association that denies or redacts records must, if so requested by the requesting member, “provide a written explanation specifying the legal basis for withholding or redacting the requested records.” (Civ. Code § 5215(d).)
Costs of Redacting Records Where any record requested by a member will need to be redacted before being produced, the association may charge the member “an amount not in excess of ten dollars ($10) per hour, and not to exceed two hundred dollars ($200) total per written request, for the time actually and reasonably involved in redacting an enhanced association record.” (Civ. Code § 5205(g).) The association is required to inform the member of the estimated redacting costs, and the member is required to agree to pay those costs, before redacting the records and providing them to the member. (Civ. Code § 5205(g); See also “Member Record Inspection Rights” and “Fees & Costs for Records.”)
Limitation of Liability “No association, officer, director, employee, agent or volunteer of an association shall be liable for damages to a member of the association or any third party as the result of identity theft or other breach of privacy because of the failure to withhold or redact that member’s information under this subdivision unless the failure to withhold or redact the information was intentional, willful, or negligent.” (Civ. Code § 5215(c).)
Minutes of Board and Member Meetings Minutes of board meetings and member meetings must be made available to members within thirty (30) calendar days following the meeting and distributed upon request by a member. (Civ. Code § 4950.)
Minutes Prepared During Current Fiscal Year – must be provided to the member within ten (10) days following the association’s receipt of the member’s request. (Civ. Code § 5210(b)(1).)
Minutes Prepared During Prior Years – must be provided to the member within thirty (30) calendar days following the association’s receipt of the member’s request. (Civ. Code § 5210(b)(2).)
Minutes of Committee Meetings with Decisionmaking Authority Minutes of committees with “decisionmaking authority” for meetings commencing on or after January 1, 2007 must be made available within fifteen (15) calendar days following approval. (Civ. Code § 5210(b)(5); See also “Committee Meeting Minutes.”)
Fiscal Records & Governing Documents Any statement or record available pursuant to Civil Code Section 5300 (insurance, budget, financial statements, etc.) or pursuant to Civil Code Section 4525 (governing documents, construction defects, assessment changes, etc.) must be made available within the specified time frame:
Records for Current Fiscal Year – must be provided within ten (10) business days following the association’s receipt of the member’s request. (Civ. Code § 5210(b)(1).)
Records for Prior Fiscal Years – must be provided within thirty (30) calendar days following the association’s receipt of the member’s request. (Civ. Code § 5210(b)(2).)
A member of an association has certain rights to inspect and copy various association records. Those rights cannot be limited by contract or by the association’s articles or bylaws. (Corp. Code § 8313.) However, not all records are subject to inspection and copying by a member. Those limitations, along with the requirements and procedures applicable to requesting and inspecting association records, are principally governed by Civil Code Sections 5205, 5210 and 5215.
Records Subject to Inspection
Association records are broken down into two (2) categories: (1) “association records” (Civ. Code § 5200(a)), and (2) “enhanced association records” (Civ. Code § 5200(b)). “Association records” include such items as annual budget reports and financial statements, income tax filings, board meeting minutes (except for executive session minutes), and executed contracts. “Enhanced association records” include such items as invoices, canceled checks, purchase orders, credit card statements, and reimbursement requests submitted to the association. (See “Records Subject to Inspection.”)
Records Not Subject to Inspection
Many association documents contain sensitive, confidential or privileged information. While such documents may fall within the purview of an “association record” or an “enhanced association record,” they may be withheld or redacted. (Civ. Code § 5215; See also “Records Not Subject to Inspection.”)
Proper Purpose Requirement
A member’s request to inspect association records must be for a proper purpose:
“…association records, and any information from them, may not be sold, used for a commercial purpose, or used for any other purpose not reasonably related to a member’s interest as a member.” (Civ. Code § 5230; See also Tract No. 7260 Association, Inc. v. Parker (2017).)
This proper purpose requirement is also referenced in Corporations Code Sections 8330 and 8333. A member’s misuse of records may subject the member to legal action by the association for injunctive relief and damages. (Civ. Code § 5230(b); See also “Misuse of Association Records.”)
Right to Designate Agent
A member may designate another person to inspect and copy the specified records on the member’s behalf. (Civ. Code § 5205(b); Corp. Code § 8311.) Such a designation must be made in writing. (Civ. Code § 5205(b).)
Costs of Copying, Mailing & Redacting Records
An association may charge the member for the direct and actual cost of copying and mailing the requested records. (Civ. Code §§ 5205(f), 4950(a); See also “Fees & Costs for Records.”) An association may also charge the member “an amount not in excess of ten dollars ($10) per hour, and not to exceed two hundred dollars ($200) total per written request, for the time actually and reasonably involved in redacting an enhanced association record.” (Civ. Code § 5205(g).) An association is required to inform the member of the amount of copying and mailing costs, including estimated redacting costs, and the member is required to agree to pay those costs, before providing the member with the requested records. (Civ. Code § 5205(f)-(g).)
Electronic Production of Records
A member has the option of receiving the requested records “by electronic transmission or machine-readable storage media as long as those records can be transmitted in a redacted format that does not allow the records to be altered.” (Civ. Code § 5205(h).) Where records are delivered by such means, “[t]he cost of duplication shall be limited to the direct cost of producing the copy of a record in that electronic format.” (Civ. Code § 5205(h).)
Location for Inspecting & Copying Records
Records must be made available at the association’s onsite business office or, if there is none, at a location agreed upon by the member and the association. (Civ. Code § 5205(c)-(d).) If there is no onsite business office and no alternate location can be agreed upon, or if the member submits a written request directly to the association for copies of the records, the association may mail them to the member by individual delivery within the applicable deadlines for producing the requested records. (Civ. Code § 5205(e).)
Enforcement of Inspection Rights
If an association wrongfully denies a member’s valid request for records, the member may bring a lawsuit (including a small claims suit where possible) against the association to enforce the member’s inspection rights. (Civ. Code § 5235(a),(c).) If the association is found to have unreasonably withheld access to association records, the member is entitled to reasonable costs and expenses, including reasonable attorney’s fees, and the association may be further subject to a civil penalty of up to five hundred dollars ($500) for the denial of each separate written request. (Civ. Code § 5235(a).) If the association prevails, and if the court finds the member’s action to have been “frivolous, unreasonable, or without foundation,” the association may recover its costs from the member. (Civ. Code § 5235(c).)
Most of the books, records and items of information maintained and generated by an association during the course of its operations are subject to inspection and copying by a member. (Civ. Code § 5205;See also “Member Record Inspection Rights.”) The records of an association that are subject to inspection and copying are broken down into two (2) main categories: “association records” and “enhanced association records.” (Civ. Code § 5200.)
“Association Records” Civil Code Section 5200(a) defines “association records” to include all of the following:
Interim financial statements, periodic or as compiled, containing any of the following: (a) balance sheet; (b) income and expense statement; (c) budget comparison; (d) a “general ledger” of transactions over a period of time. (Civ. Code § 5200(a)(3); See also “Financial Statement.”)
Returned ballots, signed voter envelopes, the voter list of names, parcel numbers, and voters to whom ballots were to be sent, proxies, and the candidate registration list. Signed voter envelopes may be inspected but may not be copied. (Civ. Code § 5200(c).)
“Enhanced Association Records” Civil Code Section 5200(b) defines “enhanced association records” to include “invoices, receipts and canceled checks for payments made by the association, purchase orders approved by the association, bank account statements for bank accounts in which assessments are deposited or withdrawn, credit card statements for credit cards issued in the name of the association, statements for services rendered, and reimbursement requests submitted to the association.” Anything which constitutes an “enhanced association record” is also an “association record.” (Civ. Code § 5200(a)(13).)
Exception: Inspector’s reports compiled pursuant to Section 5551 (pertaining to exterior elevated elements) must be made available for inspection at least two (2) inspection cycles. (Civ. Code § 5210(a)(3).)
Request for Inspection & Production Requirements
Subject to certain limitations, members and directors of an association have varying rights to inspect association records. (See “Member Record Inspection Rights;” See also “Director Record Inspection Rights.”)
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).)
The association shall, as soon as reasonably practicable, provide individual notice pursuant to Section 4040 to all members if any of the policies described in the annual budget report pursuant to Section 5300 have lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible, as to any of those policies. If the association receives any notice of nonrenewal of a policy described in the annual budget report pursuant to Section 5300, the association shall immediately notify its members if replacement coverage will not be in effect by the date the existing coverage will lapse.
(Added by Stats. 2012, Ch. 180, Sec. 2. Effective January 1, 2013. Operative January 1, 2014, by Sec. 3 of Ch. 180.)
The summary of the association’s reserves required by paragraph (2) of subdivision (b) of Section 5300 shall be based on the most recent review or study conducted pursuant to Section 5550, shall be based only on assets held in cash or cash equivalents, shall be printed in boldface type, and shall include all of the following:
(a) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component.
(b) As of the end of the fiscal year for which the study is prepared:
(1) The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components.
(2) The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components.
(3) If applicable, the amount of funds received from either a compensatory damage award or settlement to an association from any person for injuries to property, real or personal, arising out of any construction or design defects, and the expenditure or disposition of funds, including the amounts expended for the direct and indirect costs of repair of construction or design defects. These amounts shall be reported at the end of the fiscal year for which the study is prepared as separate line items under cash reserves pursuant to paragraph (2). Instead of complying with the requirements set forth in this paragraph, an association that is obligated to issue a review of its financial statement pursuant to Section 5305 may include in the review a statement containing all of the information required by this paragraph.
(c) The percentage that the amount determined for purposes of paragraph (2) of subdivision (b) equals the amount determined for purposes of paragraph (1) of subdivision (b).
(d) The current deficiency in reserve funding expressed on a per unit basis. The figure shall be calculated by subtracting the amount determined for purposes of paragraph (2) of subdivision (b) from the amount determined for purposes of paragraph (1) of subdivision (b) and then dividing the result by the number of separate interests within the association, except that if assessments vary by the size or type of ownership interest, then the association shall calculate the current deficiency in a manner that reflects the variation.
