Condo Law in California

QUESTION: My HOA has not repaired a parking lot overhead light. This has resulted in a very dark and unsafe condition which has led to car break-ins and potentially unsafe condition for residents and guests. What is the association’s responsibility?

ANSWER: Your board should repair the light as soon as possible. Otherwise, the association could be liable for any injuries to persons or property that might result from their failure to respond–especially since the board is already on notice that the lack of lighting may have been a factor in previous criminal activity.

Village Green. A similar set of circumstances has already been litigated up to the California Supreme Court. In the Village Green Owners Association, a young woman installed exterior security lights after her condo was burglarized. Even though the board was aware of criminal activity in the development, she was ordered to remove the lighting because it had not been approved by the board.

Rape and Robbery. The woman complied and disconnected her lights. That night an unidentified person entered her unit under cover of darkness and molested, raped and robbed her. She sued the board.

Foreseeable Harm. Even though boards are normally not responsible for the criminal acts of others, the Supreme Court held that directors can be held liable for their own negligence. The Court concluded that associations and members have a relationship requiring boards to exercise reasonable care to protect residents from foreseeable harm.

It is not necessary that the prior crimes be identical to the ones actually perpetrated against a resident. To create liability, boards need not foresee the precise injury to a resident, only that the possibility of this type of harm is foreseeable. For more about the Court’s reasoning see Frances T. v. Village Green Owners Assn.

QUESTION: Our reserve account is currently funded at 1000%. Is this legal? Can we refund the money to owners? Thank you.

ANSWER: There may be legitimate instances when reserve funding temporarily exceeds 100%. It is not illegal and a reasonable surplus creates a contingency for unexpected expenses.

However, anything over 130% is generally considered excessive. A 1000% surplus is not appropriate unless it is a temporary condition resulting from an insurance or construction settlement. Even then, the monies should be in an account separate from reserves and used for those items for which the settlement occurred.

Restoring Balance. Assuming the 1000% is due to excessive reserve contributions rather than a one-time settlement, the account should be brought back to normal funding levels. I do not recommend writing checks to owners because it (i) creates disputes between current and prior owners over who should receive the money, (ii) is an inappropriate use of reserves funds Civ.Code 1365.5(c)(1), and (iii) may create tax complications. The best way to restore balance is to gradually deplete the surplus by reducing or temporarily stopping contributions to the reserve account.

BORROWING FROM RESERVES

QUESTION: If an association borrows from its reserves and doesn’t pay the money within a year, what are the consequences?

ANSWER: If a board borrows from reserves, whether by making actual transfers from the account or by not making budgeted contributions, the association must repay the funds within one year from the date of borrowing but may delay repayment “upon making a finding supported by documentation that a temporary delay would be in the best interests” of the association. Civ.Code 1365.5(c)(2) Documentation may be supplied by a reserve study company.

Special Assessment. The statute also requires that boards “shall exercise prudent fiscal management in maintaining the integrity of the reserve account.” Civ.Code 1365.5(c)(2) Boards must levy special assessments to recover the full amount of the expended funds within the required time limits. Special assessments are subject to the limitations imposed by Civ.Code 1366 unless the expenditures were for emergencies as defined by Civ.Code 1366(b).

Consequences. You asked about consequences. If the board fails to repay the monies, there are no penalties. At best, an owner could file suit and ask a judge to order the board to meet its obligations.

DEPLETING RESERVES

QUESTION: Is a board limited to spending a certain percentage of the association’s reserve fund in one fell swoop? Our board recently used $60,000 from its reserves for one project, leaving only a few thousand in the fund.

ANSWER: Boards are not limited in how much they can spend from reserves. Reserves are accumulated for one reason, and that is to be spent. Many associations have large reserve components such as roofing or painting. As a result, the reserve fund will take a significant dip when these projects are completed.

If the reserve fund becomes dangerously low after a major project, it means that insufficient funds were accumulated for other projects. This will result in deferred maintenance and/or special assessments for those projects. If the board has properly built up reserve funds, then when the time is right, the right thing to do is to spend the money.

Thank you to Robert Nordlund of Association Reserves, www.ReserveStudy.com, for his input.