Budgeting Appropriately for Increasing Costs with Regular Annual Assessments

By David A. Kline, Esq.

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Civil Code section 5600(a) requires an association to “levy regular and special assessments sufficient to perform its obligations under the governing documents and [the Davis-Stirling Act].” To that end, Civil Code section 5605 gives boards of directors the authority to increase regular assessments by up to 20%, without a membership vote.

As costs naturally increase over time due to inflation, material costs increase due to supply chain shortages and insurance premiums increase in response to the rising risk of drought-fueled wildfires, directors of common interest developments often find it difficult to manage their association’s budget.

Although it is important for board members to carefully scrutinize an association’s costs, consistently and steadfastly refusing to increase regular assessments to account for rising costs can lead to disastrous results for homeowners. Eventually, a hefty special assessment may be needed when long deferred maintenance results in property damage, or worse.

Often, candidates for the board of directors make campaign promises to cut regular assessments claiming they will reign in years of alleged financial mismanagement. And, board members often tout an association’s consistent level of regular assessments as evidence the association is well-managed and financially stable. In fact, these arguments are misplaced. Artificially keeping assessments low can be a major red flag, often indicating significant financial struggles around the corner. This is especially true now with inflation and the difficulties of obtaining goods and services.

Too often, boards of directors ignore the advice of the association’s experts, defer routine maintenance, fail to adequately fund the reserve account in accordance with the approved reserve funding plan, or otherwise kick their problems down the road for future boards and homeowners to address. This simply delays the inevitable and often ends up costing the association and the owners more in the long term and may create the need for a large special assessment to perform needed work in the community. Owners are often shocked when hit suddenly with a large special assessment and may have difficulty paying it when they prepared their own household budget based on an assumption of their association’s financial well-being.

When boards decide to forego a long-term warrantied roof replacement project, opting instead for a short-term patch job, or delay replacing corroded and worn-out pipes despite multiple leaks, for example, associations may find themselves paying not just to replace the broken common area components (often at a greater expense than would be paid if the board had been more proactive), but may also have to pay for the avoidable resulting damage to the separate interests as well. This can be much more expensive for homeowners in the long run, especially if the association’s insurance carrier denies coverage for damage due to the association’s alleged failure to properly maintain the failed component.

This is not to suggest that delaying an important infrastructure project is never appropriate. It may be appropriate for a board to prioritize repairing damaged structural components that threaten the health and safety of the residents above less critical repairs. However, boards of directors, and candidates for the board of directors, should be candid with the members about the rising costs that they anticipate. Homeowners should not be surprised by moderate, incremental increases in regular assessments from one year to the next. Anyone who pays attention to the news is well aware of rising inflation and community associations are subject to this like everyone else.

Sudden unexpected special assessments are never welcome, but they are particularly frustrating when they could have been avoided with honest and transparent budgeting decisions – this includes annual assessment increases to keep up with rising costs.

Boards should expect small incremental increases to most budget line items each year to keep up with inflation and make these annual assessment adjustments as needed in an effort to avoid large increases or special assessments in later years.

Key Tips for Levying Special Assessments

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By Karyn A. Larko, Esq.

There are times when levying a special assessment is necessary or prudent to obtain needed funds. However, if not well planned and properly implemented, a special assessment can turn into a nightmare for the Board, and for you.

Here are some key tips to help avoid such a nightmare.

Ascertain Whether a Member Vote is Required

California Civil Code (“Code”) § 5605 controls when a member vote is needed to levy a special assessment. No matter what an association’s governing documents state, a member vote is not required to levy a special assessment if that special assessment individually, or when combined with any other special assessments levied the same fiscal year will not exceed 5% of the association’s budgeted gross expenses for that fiscal year. Conversely, a member vote is always required if the special assessment individually, or when combined with any other special assessments levied the same fiscal year will exceed 5% of the association’s budgeted gross expenses.

The Civil Code Sets the Member Approval Requirement

If member approval is required, Code § 5605 also dictates the votes needed to approve the special assessment, as well as quorum. The affirmative vote of a majority of a quorum is required to pass a special assessment.  A quorum is more than 50% of the members.

Comply with the Civil Code When Conducting the Vote

A member vote to approve a special assessment must be conducted using the double-envelope secret ballot voting process set forth in Code § 5100 et seq. In short, this means providing all members with a ballot, two balloting envelopes and the association’s election rules at least 30 days before the voting deadline. (The election rules can be omitted if they are posted on the association’s website and the ballot contains the language mandated by Code § 5105.) It also means having one or three qualified inspectors of elections open and count the ballots at a duly noticed meeting whereat the members can observe this process, and providing members with notice of the vote results within 15 days.

Notify the Members

Regardless of whether a member vote is needed, members must be given written notice of a special assessment no less than 30 days and no more than 60 days before that special assessment becomes due in accordance with Code § 5615. If a member vote is required, this notice can be combined with the notice of the outcome of the vote that must be provided to members so long as:  1) this notice is provided via “individual delivery” and 2) the special assessment will become due between 30 and 60 days after this notice is given.

Payment is Important

It goes without saying that when planning a special assessment, it is critical to consider when the funds will be needed. However, there are other factors that should also be considered.

If members will be voting on whether to approve the special assessment, giving members more than one payment option (e.g. the option of paying in one lump sum or in installments over time) may increase the likelihood of members voting in favor of the special assessment.

On the flip side, if members will be given the option of paying over time, it is possible that more members will decide to pay over time than expected. If some or all of the special assessment monies are needed quickly, this situation could result in a serious cashflow problem for the association.

If a special assessment is to be paid over time (e.g. monthly installments), it is important to secure the debt in case any members file bankruptcy or sell. The longer the payment period, the greater the likelihood of collection issues. However, securing the debt means going through the pre-lien and lien process, which can be costly for the members who are subject to this process. Thus, levying a special assessment that will or can be paid over time may only be a perceived benefit to members if the assessment amount will be significantly greater than the pre-lien and lien costs.

It is a good idea to have members who cannot pay a special assessment when due enter into a payment plan whereby they agree to pay the assessment within a longer period of time that is acceptable to the Board. Doing so will help the Board predict the association’s cashflow and prevent any misunderstandings as to what payment allowances the Board is granting.  It may also create good will with members who are struggling financially. However, a payment plan should generally be used in addition to, and not in lieu of a lien, because a payment plan will not secure the debt. A lien will.

In the event a member fails to pay the special assessment and that debt is not secured, the association’s only recourse for collecting the debt is to file a lawsuit against the member. The association cannot collect the debt via foreclosure unless the debtor still owns the separate interest and a lien is filed.

When in Doubt, Encourage the Board to Consult with Legal Counsel

While it may be tempting to save a little money by not consulting with the association’s legal counsel for guidance when levying a special assessment, making a special assessment misstep could cost the association a lot more in time and money. For example, a mistake could result in a missed opportunity for the association, create a serious cashflow problem, necessitate a second member vote and/or place the association in the position of having to return to members any special assessment payments received. It could also leave the association vulnerable to liability for violating the Code and unable to collect from delinquent members.

*This article was originally published in the Summer 2022 Issue of The Law Journal by the California Association of Community Managers (CACM).

 

Solar Energy Systems: Regulating Owners’ Installation on Shared Multi-family Common Area Roofs

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By Emily A. Long, Esq.

By Emily A. Long, Esq.

Since January 1, 2018, California common interest developments have been required to allow members to install solar energy systems[1] on shared multifamily common area roofs of buildings within which their units are located and on roofs of adjacent carports or garages. (See Civ. Code §§ 714.1, 4600 and 4746).  While we do not have an abundance of mid or high-rise common interest developments in the desert, we do see many buildings with shared multifamily common area roofs.

Luckily, the requirement to allow solar energy systems does not mean that associations are prohibited from implementing reasonable requirements to guide solar energy system installation and protect associations from liability. Below, we summarize some of relevant law’s important provisions on this topic, and provide further guidance on how to remain compliant.  Associations should work with counsel to develop guidelines that take into consideration the recommendations provided below.

  1. An association shall not establish a general policy prohibiting the installation or use of a rooftop solar energy system for household purposes on the roof of the building in which the owner resides, or a garage or carport adjacent to the building that has been assigned to the owner for exclusive use. (Cal. Civ. Code §714.1(b)(1).)

Owners cannot place solar panels or equipment on whatever common area they choose, but rather are limited to the buildings or structures in which they own. Also note, if a carport is adjacent to the building but is not assigned, the association is not required to allow an owner to place solar energy equipment on that carport.

  1. When reviewing a request to install a solar energy system on a multifamily common area roof, the association must require an applicant to notify each owner of a unit in the building on which the installation will be located of the application. (Cal. Civ. Code §4746(a)(1).)

For practical purposes, we suggest any association with common area roofs include this requirement in its guidelines to notify all owners in the same building. Associations may require the applicant to provide signatures from the notified owners or certified mail receipts showing the notification was sent as part of its application process. That way, if a neighboring owner challenges the owner’s solar installation, the association has proof that the owner complied with the guidelines.

  1. The association must require the applicant and each successive owner of that unit to maintain a homeowner liability coverage policy and provide the certificate of insurance within 14 days of approval and annually thereafter. (Cal. Civ. Code § 4746(a)(2).)

Unfortunately, the California Legislature did not clarify what an association can or should do if an owner does not comply with this requirement. We believe the Legislature would not force an association to permit a solar energy system to be installed if there is no proof that it is insured, so we think revocation of approval is appropriate in that instance. However, there are unanswered questions with respect to insurance and we recommend you discuss such concerns with association counsel.

  1. When reviewing a request to install a solar energy system on common area, the association may impose a requirement to submit a solar site survey showing the placement of the system. If the association requires this solar survey, it must “include a determination of an equitable allocation of the usable solar roof area among all owners sharing the same roof, garage, or carport.” (Cal. Civ. Code §4746(b)(1(B).)

This provision means the association can impose guidelines regarding aesthetic standards, so long as the guidelines do not “significantly increase the cost of the system or significantly decrease its efficiency or specific performance…” as described in Civil Code §714.  For example, an association can provide that the preferred location of all solar energy systems is one that results in the least visual impact.  However, if the only feasible location for solar panels to be placed is on a roof which directly faces the street and any other location would significantly decrease the system’s efficiency, the association cannot prohibit an owner from placing the solar panels on the roof that faces the street.

Additionally, this provision provides that an association “may” require that an owner provide a solar site survey showing the usable area of the rooftop and the proposed placement of the solar energy system.[2] We recommend every association with common area roofs require the submission of a solar survey in its solar guidelines. Alternatively, an association may perform its own solar site survey.

As for the “equitable allocation,” we interpret this provision to mean an association may require the owner to abide by the equitable allocation as called for in the site survey by using only the owner’s share of the rooftop and leaving the remainder available for other owners of units in the building. The phrasing of Civil Code §4746(b)(1) seems to indicate that the requesting owner may choose where the solar energy system is placed, so long as the owner owns a portion of the building on which it will be placed, and complies with other requirements.

  1. The association may require the owner and each successive owner to be responsible for costs of any damage to the common area, exclusive use common area or unit; costs for the solar energy system; and disclosures to prospective buyers. (Cal. Civ. Code §4746(b)(2).)

We highly recommend each association require an applicant to sign a license, maintenance, and indemnity agreement taking on the above responsibilities, which may then be recorded on title so all prospective buyers are put on constructive notice of the agreement. This agreement should include language which clarifies that the owner may be required to remove the solar energy system, at their cost, to allow for common area maintenance or repair.

  1. The association must still abide by Civil Code §714.

California Civil Code § 714(a) prohibits any declaration and other governing document provision(s) from prohibiting or restricting the installation of solar energy systems outright. As such, any restrictions on the installation of these systems are declared invalid if the restrictions “significantly” increase the cost of the system or “significantly” decrease the efficiency of the system.[3]  Civil Code § 714 also provides penalties for willful noncompliance and attorneys’ fees are recoverable by a prevailing party.[4]

Emily Long, Esq., Epsten, APC.  Epsten, APC is a community association law firm that has been providing solutions to Southern California common interest development legal issues since 1986.  You can reach Emily at [email protected].

“Associations should work with counsel to develop guidelines that take into consideration these recommendations for solar energy system installation on shared multifamily common area roofs.


[1] For purposes of these Guidelines, the term “solar energy system” refers to both solar domestic water heating systems and/or photovoltaic systems, as applicable to an Owner’s request.

[2] The cost to perform this survey shall not be deemed as part of the cost of the system as used in Civil Code §714.

[3]See Civil code § 714(d)(1)(A) and (B) for a further definition of what a “significant increase” or “significant decrease” means under the law.

[4] See Civil Code § 714(f) and (g).

*This article was originally published in CAI Coachella Valley’s HOA Living Magazine in the June 2022 edition and was adapted from the original article, Solar Panels and Solar Energy Systems: The Association’s Ability to Regulate Owners’ Installation on Common Area) as authored by Jillian M. Wright, Esq.

Emily Long, Esq., Epsten, APC.  Epsten, APC is a community association law firm that has been providing solutions to Southern California common interest development legal issues since 1986.  You can reach Emily at [email protected].

Associations should work with counsel to develop guidelines that take into consideration these recommendations for solar energy system installation on shared multifamily common area roofs.

CAUTION! Flooring Penetrations May Result in Structural Changes

Many of our multi-story condominium communities are wood framed with wood flooring. Most high-rise communities are concrete structures with concrete flooring. Whether wood or concrete, flooring is an integral part of the structural integrity of the building.
The unfinished floors (i.e., slabs) provide lateral and vertical support, and are intended to be load bearing. A floor may also provide sound attenuation and may even prevent smoke and fumes from entering units.
Over the years, many associations have unwittingly approved penetrations through the structural flooring without requiring an analysis of how such penetrations will affect the structural integrity of the building as a whole. When these issues are subsequently raised at meetings, I often hear comments from boards such as, “we have always allowed owners to…” cut into the floors to install wiring, add ventilation ducts or install plumbing.
I reached out to Professional Structural Engineer, Carl Josephson, on this topic and he offered the following insight:

“When a wood floor or beam is cut improperly, usually a sag will occur, if not immediately, then over time. The sag may be very noticeable or only slightly noticeable. There may be cracking in wall or ceiling finishes to alert someone that there is a problem. However, when a concrete floor slab is improperly cut or notched, there may be some cracking or floor sag, but many times there will not be any noticeable distress. Concrete can fail quickly and abruptly. The best thing to do is to avoid the problem in the first place by checking with a qualified engineer before cutting or notching any concrete slabs, beams, columns, or other component parts.  If you suspect you could have a problem it may be necessary to carefully examine the area in question, review the original drawings and calculations (if they are available), test the concrete using ground-penetrating radar or other non-destructive techniques, in the worst-case scenario, core the concrete and chip out and expose some of the reinforcing steel.”

The tragedy in Surfside, Florida is a grim reminder of the need for constant vigilance over building modifications which may impact the structure. Rumors abound as to the cause of the Champlain Tower failure. It is likely that there were multiple factors that came together to cause the collapse.
While we will allow the courts to weigh in on liability, one issue that has been a source of speculation is whether penetrations in the concrete floors caused by an owner’s improvements was one of the contributing causes to the disaster. We have seen occasions where owners have requested floor penetrations and the retained structural engineer has responded, “no penetrations should be allowed, or the size of the penetrations should be modified.” On occasion, the risk of accidently cutting into the slab and damaging the post tension cables was a risk the board was unwilling to take.

So, what is the take away?

When an architectural application is received or when floor penetrations are noted, the affected area should be evaluated to determine whether any floor penetrations could affect the structural integrity of the building. Spending a few dollars now with licensed engineers may prevent a serious problem down the road.

Acclamation Decisions Have to be Made Early

By David A. Kline, Esq.

When Civil Code section 5103 became effective on January 1, 2022, many community association managers and board members celebrated the new authority for boards to approve nominees by acclamation when there are not enough candidates to hold a contested election. However, there are limitations on a board’s ability to approve nominees by acclamation and a decision needs to be made very early in the election planning process about whether approval by acclamation might be an option – long before the board will know how many nominees will ultimately emerge.

In order to approve candidates by acclamation, section 5103 requires several procedures to take place. First, notice of the nominating process and the possibility of an election by acclamation must be provided to all members by individual notice at least 90 days before the deadline for nominations. This requires the election process to begin at least 60 days earlier than is otherwise required to conduct an election under Civil Code section 5115(a). And, because 5103 requires individual notice of the nomination procedures, whereas 5115(a) only requires general notice, the additional cost of providing individual notice should be considered. Second, section 5103(b)(2) also requires providing a second, similar reminder notice to the members before the deadline for nominations, again by individual notice, that is not required by Civil Code section 5115 if acclamation is not an option.

The requirement to send notices by individual delivery places an added burden on associations. General notice of documents can be satisfied, under Civil Code section 4045, simply by posting a document in a prominent location or on the association’s website, if those locations are described in the Annual Policy Statement. (Though, it should be noted that individual delivery is required for any member who requests it.) And, while delivery by individual notice may be accomplished by email under Civil Code section 4040, most associations deliver individual notice by first class mail, postage prepaid, particularly if the association does not maintain evidence that every member has consented in writing to receive communications by email, as would be required for email delivery. So, in most cases, delivery by individual notice costs more than general notice.

The board must also consider whether there is sufficient time to provide a 90-day nomination period. For example, suppose the association’s bylaws require the annual meeting to be held in the first week of September. If, by the second week of April, the board has not instructed management or the inspector of elections to provide individual notice of a 90-day nomination period and possibility of election by acclamation, there would not be enough time to comply with the legal requirements of section 5103 to potentially allow the board to approve the nominees by acclamation.

So, as a practical matter, before nominees are sought, it would be prudent for the board to decide whether the additional time and expense of providing two notices by individual delivery is worth the benefit of potentially approving nominees by acclamation and saving the cost of mailing ballots and any other costs that might be incurred in an election.

On that note, a board that is inclined to hire a professional inspector of elections, rather than to rely on one or more homeowner volunteers, might not always save money by deciding to approve nominees by acclamation. Under Civil Code section 5115(b)(1), associations must provide notice to members of “the date and time by which, and the physical address where, ballots are to be returned by mail or handed to the inspector or inspectors of elections” at least 30 days before the ballots are distributed. Civil Code section 5115(c)(2) requires that the physical address where ballots are to be returned either be the inspector of elections’ address or an address specified by the inspector of elections. This means that the inspector of elections must be selected at least 60 days before the election date so that address will be included on the 5115(b)(1) notice. Since the board won’t know if balloting will be necessary until just before a 5115(b)(1) notice would need to be sent, it might not be practical to wait that long before hiring a professional inspector of elections. A possible option might be determining whether any prospective inspector consents to ballots being sent to the management company or some other location instead of directly to the prospective inspector.

Another issue to consider is whether the board may have any difficulty in achieving quorum on short notice at the latest opportunity to select an inspector of elections or may need to postpone the annual meeting. In addition, if the board waits that long before selecting an inspector of elections, it might be difficult to find an inspector of elections who is still available on the date of the association’s annual meeting. On the other hand, if the board signs a contract with a professional inspector of elections earlier in the process and the contract does not allow termination within 60 days of the election, the association may have an obligation to pay the inspector of elections, even if the election will be held by acclamation.

It’s also worth keeping in mind that the election of directors may be only one issue for the members to decide at the annual meeting. Ballots may still be needed for other items to be voted upon at the annual meeting, such as approval of the minutes of the prior annual meeting or an election under IRS Revenue Ruling 70-604.

Board members who are aware of this new ability to conduct elections by acclamation may be very enthusiastic to save money on unnecessary elections and might assume that management and/or the inspectors of elections will comply with all requirements to enable the board to approve nominees by acclamation. Likewise, management might assume that the board would prefer to save money on the cost of mailing notices by individual delivery – costs that may turn out to have been unnecessary if more candidates than open board positions emerge.

It’s important for the board and management to communicate their expectations long before the next annual meeting (ideally at least six months before the next annual meeting) to avoid any misunderstandings. Be prepared to discuss the association’s cost and method of providing individual notices and general notices to the members, the cost of printing and mailing ballots, the availability of various professional inspectors of elections on the date of the annual meeting, the termination provisions in the contracts proposed by those inspectors of elections, the fees charged by management to attend board meetings and annual meetings, and the likelihood of finding more nominees than seats available on the board.

The following table may provide a helpful guide for those discussions:

Procedure Acclamation Election by Ballot Comparison
Notice of Nomination Procedures and possibility of election by acclamation – 90-days before deadline for nominations.

– Individual delivery required

– 30 days before deadline for nominations

– General delivery is acceptable

Acclamation requires a longer nomination period and may require more postage
Nomination and possibility of election by acclamation reminder notice – 7-30 days before deadline for nominations

– Individual delivery

Not required

 

Acclamation requires an additional notice, which may require more postage
Board meeting to approve by acclamation Open board meeting required No board meeting required. An additional board meeting may be required to approve nominees by acclamation.
Inspector of Elections Not needed since no ballots will be counted Must be selected at least 60 days before election. It’s prudent to select an inspector of elections before the deadline for nominations.  But, if the association cannot terminate its contract with a professional inspector of elections, it may have to pay for services that are unnecessary.
Ballot delivery Not necessarily required Must be mailed or delivered to all members Acclamation could save the cost of printing and mailing ballots

 

 

Reservation of Rights Letters: What are They and What Should You Do if Your Association Receives One?

By Jack S. Fischer, Esq. & Lindsay J. Anderson, Esq.

Your Association gets sued by a homeowner. You reach out to your insurance company to let them know about the lawsuit then you sit back and relax because insurance is going to cover everything, right? Do not get too comfortable!

Insurance companies may not cover everything, or anything, that you believe they should. How do you know what the carrier is going to cover during the course of this particular lawsuit? Look no further than the reservation of rights (“ROR”) letter. Your insurance company is required by law to provide you, as its insured, with a reservation of rights letter detailing all possible limitations on coverage that the insurer may rely on in connection with adjusting the claim or suit.

Basic Definitions

Before we can understand what the insurance company is saying in its ROR letter, we need to understand the jargon that’s typically included in the letter. The following definitions provide the basics.

  • Duty to Defend: Used to describe an insurer’s obligation to provide you with a defense to claims made under an insurance policy. As a general rule, an insurer’s duty to defend you arises when there is potential for coverage under a policy.
  • Duty to Indemnify: Used to describe an insurer’s obligation to pay the claim, by funding a settlement or paying a judgment against the insured. Unlike the duty to defend, which is typically determined at the outset of the litigation, the duty to indemnify arises when the facts establish that there is a covered loss under the policy.
  • Tender: Under the terms of your insurance policy, you must give your insurance carrier notice of any claim or suit being made against the Association. Such notice includes a demand for defense (i.e., duty to defend) and indemnity (i.e., duty to indemnify) under the policy.
  • Trigger or Coverage Trigger: Refers to the event that must occur before a liability policy applies to a given loss.

What is a Reservation of Rights Letter?

The ROR letter will be a letter from your insurance company which notifies you of the carrier’s coverage position, including any limitations on coverage that may act as a complete or partial bar to coverage. The ROR letter also affords the insurer an opportunity to undertake a more thorough factual investigation into the claim without waiving its rights to deny or limit coverage at a later date.

ROR letters vary in form depending upon the insurance company but, in general, include a summary of the factual background surrounding the current claim, a detailed analysis of the applicable insuring agreement and applicable exclusions (i.e., intentional acts, breach of contract, no monetary damages being sought) and endorsements which may impact coverage, a reservation of rights, and, in some instances, a denial of coverage for some or all of the claims. Since ROR letters may be long and winding with insurance terms and phrases peppered throughout, they are difficult to understand.

What are the Insurance Company’s Duties (Refer to Definitions Above)?

The duties of an insurance company are set forth in the Insuring Agreement section of the policy. Typically, an insurer has two distinct duties – the “duty to defend” and the “duty to indemnify.” In California, the duty to defend is “triggered” when there is any possibility, no matter how remote, that the claim would be covered under the policy. Where your carrier defends an entire action where only a portion of the claims are covered, the carrier may seek reimbursement from you for any defense fees and costs incurred in defending the non-covered claims.

Under the typical scenario where an insured is faced with a third-party claim for monetary damages, the carrier is obligated to defend the action if, under the facts known, there is a possibility of coverage under the policy. Once a carrier’s defense obligations have been “triggered”, the carrier is obligated to hire counsel, retain experts, investigate the claim, pay defense costs, and defend the case through disposition.

The duty to indemnify is the insurance company’s duty to pay any monetary judgment (i.e., damages) rendered against an insured for a covered loss. A carrier’s indemnity obligations are limited by the terms of the insurance contract and should be detailed in the ROR letter.

Why is an ROR Letter Important?

California’s insurance regulations require an insurance company to provide you with a written response to a request for defense and/or indemnity. That response typically comes in the form of the ROR letter which puts you on notice of any limitations or exclusions to coverage. Knowing what is, and more importantly what is not, covered under the policy is crucial to making strategic decisions regarding the handling of the claim. By way of example, the ROR letter can assist the Association and its defense counsel in evaluating a settlement demand and determining whether or not it is in the Association’s best interests to settle a claim. However, it is worth noting that the decision to settle typically rests entirely with the insurance company.

The ROR letter is also how an insurance company reserves its rights to either deny or limit coverage under the policy and to recover defense fees and costs expended in connection with the defense or settlement of uncovered claims. Under California law, the carrier’s coverage defenses may be waived where the insured relies upon the carrier’s failure to specifically reserve its rights under the policy.

What Should You Do if Your Association Receives an ROR Letter?

Receiving an ROR letter from an insurance company may feel intimidating. However, knowing what to do and what to look for when you receive an ROR letter are crucial in getting a handle on the carrier’s coverage determination.

  1. Your first step when you receive an ROR letter should be to share it with your attorney.
  2. The next step is to carefully review the policy exclusions and endorsements and discuss them with your insurance professional so that you can work within your budget to buy the broadest coverage available.

Suspended Status with Secretary of State

All businesses, including common interest developments must register via the Secretary of State (SOS), file tax returns and pay their taxes, and submit a Statement of Information every two years. Failure to properly comply with these requirements will result in a “suspended status” with the State.

When a corporation is suspended, the corporation can take very few actions other than becoming reinstated. Once suspended, legal counsel is unable to assist the association with any legal needs other than reinstating the corporate status to active. Generally speaking, a suspended association cannot prosecute or defend litigation matters in its own name until reinstated.

It is critical to the Association’s operations that the corporation remain in good standing. Check your association’s status here. If you need assistance in getting reinstated, we can help.

Term Limits are Back in Vogue

By Rhonda R. Adato, Esq.

Everyone has a change of heart sometimes, including, it seems, the California Legislature. By now, most people in the community association field are familiar with Senate Bill 323 (“SB 323”). SB 323 was chaptered into law in October 2019. It significantly amended Civil Code sections 5100, et seq., which govern community association elections. Among other things, SB 323 revised the law to only permit community associations to impose a few, specific qualifications on candidates running for an association’s board of directors. Term limits were not included among them, meaning that associations were effectively prohibited from disqualifying board candidates who had termed out.

That has now changed. The Governor signed Assembly Bill 502 (“AB 502”) into law in October 2021, which took effect on January 1, 2022. This new law added Section 5103 to the Civil Code, which permits elections by acclamation, provided certain requirements have been met. These requirements include:

(d) (1) The association permits all candidates to run if nominated, except for nominees disqualified for running as allowed or required pursuant to subdivisions (b) to (e), inclusive, of Section 5105.
(2) Notwithstanding paragraph (1), an association may disqualify a nominee if the person has served the maximum number of terms or sequential terms allowed by the association.
(3) If an association disqualifies a nominee pursuant to this subdivision, an association in its election rules shall also require a director to comply with the same requirements.

(Emphasis added.)

Section 5103(d)(2) effectively reintroduced the concept of permitting director term limits. Arguably, associations may now impose term limits on director candidates, so long as such term limit is clearly set forth in the association’s Election Rules.

This raises a question as to whether term limits only apply in elections by acclamation. It is curious that the Legislature reintroduced the concept of imposing term limits in the context of elections by acclamation, rather than simply stating that associations may impose this candidate qualification in all elections. Hopefully, the Legislature will clarify this issue with some clean up legislation in the coming years.

Another question is whether term limits in Bylaws are now enforceable again. We believe they likely are, but the association’s Election Rules will need to be amended accordingly.

Please reach out to your community association counsel if you have any questions regarding imposing term limits in your association’s board elections, the enforceability of term limits in Bylaws, or the procedure to amend Election Rules.

Election Process Timeline (Effective January 1, 2020)

Now that SB 323 has passed… What do you need to do and when?

Your election process just got a lot more complicated – and, the truth is, calculating your important dates and deadlines to adhere to the new laws effective January 1st, is like trying to hit a moving target.

To assist our clients (beyond attending our Legal Symposium), we have compiled an Election Process Timeline to help you understand the laws, identify when you need to start planning your next election and to help you set your Association’s own election deadlines.
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Download our Election Process Timeline Here.
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