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Law Governing Condominiums Is Rewritten

By J. Anthony Marino, Esq., and Carol L. Newman, Esq.

The California law which for many years has governed the management and operation of common interest developments (“CIDs”), including condominiums, known as the Davis-Stirling Common Interest Development Act (“the Act”), Civil Code §s1350 et seq., is being repealed in its entirety effective January 1, 2014. It will be replaced by a new statutory scheme, AB 805 (“the new Act”), which will probably continue to be referred to as “Davis-Stirling.” All of the existing code numbers will be changed to commence with Civil Code §4000.

A CID is a housing or commercial development characterized by:

(1) separate ownership of dwelling space or a right of exclusive occupancy, together with an undivided interest in a common area, (2) covenants, conditions, and restrictions (commonly known as “CC&R’s”) that limit use of both the common area and the separate ownership interests, and (3) management of the common area and enforcement of the CC&R’s by an owner’s association. CIDs include condominiums, community apartment projects, stock cooperatives, and planned unit developments. (See current Civil Code §1351.)

The new law is mostly a rewritten, recodified, and reorganized version of the Act as it currently exists. However, some provisions have been substantively revised. The Legislative Counsel’s Digest regarding the passage of AB 805 summarizes the changes as follows:

“Existing law, the Davis-Stirling Common Interest Development Act defines and regulates common interest developments.

“This bill, on and after January 1, 2014, would comprehensively reorganize and recodify the Davis-Stirling Common Interest Development Act. The bill would also revise and recast provisions regarding notices and their delivery, standardize terminology, establish guidelines on the relative authority of governing documents, and establish a single procedure for amendment of a common interest declaration. The bill would guarantee the right of an owner of a separate interest to make changes in that separate interest, as specified, in a common interest development other than a condominium project, in which that right currently exists. The bill would establish an express list of conflicts of interest that may disqualify members of a board of directors of an association that manages a common interest development from voting on certain matters.

“The bill would also, among other things, revise provisions related to elections and voting, establish standards for the retention of records, and broaden the requirement that liens recorded by the association in error be released.”

The purpose of this article is not to provide a comprehensive summary of the law governing condominiums, but to summarize the changes in the law that will occur as a result of the passage of the new Act.

Reorganization and Restatement of the Law

The new Act attempts to “comprehensively reorganize” the Act. One of the criticisms of the old Act was that it seemed to be, at least in part, a somewhat disjointed series of statutes which were not well organized unless one knew where to look for a particular statute covering a particular topic. The new law is designed to be easier to navigate, more logical in its groupings of provisions, more concise, and simply more user-friendly and easier to understand.

Additionally, the terminology used in the old Act was not consistent or comprehensive, because in many cases two or more different terms were used to describe the same thing, and definition sections did not necessarily apply to all uses of the defined terms in the Act or include definitions of terms located elsewhere in the Act. The new law standardizes some terminology to attempt to eliminate ambiguity and inconsistency.

These changes were deemed necessary because most CIDs are small and may not be able to afford a general counsel or overall professional management. In fact, more than half of all CIDs in California consist of 25 or fewer separate interests. Levy & Erlanger, 2010 California Community Association Statistics (2010). The new law was designed, at least conceptually, to be understandable by non-lawyer board members of smaller CIDs. Whether or not that this goal has been accomplished remains to be seen.

The new law adds a new Part 5 to Division 4 of the Civil Code, beginning with Section 4000, and restates the law in eleven chapters designed to group provisions by subject matter in a coherent and logical order:

• 1. General Provisions
• 2. Application of Act
• 3. Governing Documents
• 4. Ownership and Transfer of Interests
• 5. Property Use and Maintenance
• 6. Association Governance
• 7. Finances
• 8. Assessments and Assessment Collection
• 9. Insurance and Liability
• 10. Dispute Resolution and Enforcement
• 11. Construction Defect Litigation

The new law is structurally more logical. It begins with provisions governing the application of the new law itself. Then it addresses the creation of CIDs and the nature of what a CID is (a form of property ownership). It concludes with provisions governing the operation of the CID association as among the property owners themselves and between the CID and third parties.

The new law will be given a one-year deferred operation date, to allow affected persons to adjust to the new law, and will provide that any substantive changes will not retroactively invalidate actions and documents which were completed before the effective date of the new Law which were proper under the current law. New Civil Code §4010 (hereafter all sections of the new statute are referred to as “New §”.) The new law provides a simplified procedure for updating references in the governing documents to the new Act by board resolution. New §4235.

For the most part, the changes were intended to be non-substantive and non-controversial, but proposed substantive changes which were not adopted in this enactment were noted by the California Law Revision Commission for future study. (See footnote 1 above.) The substantive improvements are discussed below.

Supremacy of the Act: A frequently encountered issue not resolved in the current Act is whether the governing documents, to the extent they are inconsistent with the Act, supersede the Act, or vice versa. The new Act makes it clear, for the first time, that in the event of inconsistency, the Act prevails over the governing documents. New § 4205(a).

Relative Priority of the Governing Documents: Similarly, the revised Act for the first time expressly declares the relative priority/ authority of the most common governing documents in the event of inconsistencies among them. New § 4205(b)-(d) provides that that the CC&R’s supersede the articles of incorporation; the articles and CC&R’s control the bylaws; and all of the above control the operating rules.

Members Must Receive Text of Proposed Amendment: The new Act adds a new requirement that an association must provide members with the text of any proposed amendment of the governing documents when holding a member election to approve the proposed amendment. New § 5115(e). The Act previously did not require written notice of the text of a proposed amendment.

Contents of CC&R’s: Existing law specifies what information must be included in a CID’s recorded declaration, i.e., the CC&R’s, and allows the “original signator of the declaration” to include any other information that the “original signator” deems appropriate. Civil Code § 1353. The new Act replaces the phrase “original signator” with the defined term “declarant,” which permits a successor-in-interest to the original signator to add provisions to the CC&R’s, using proper procedures for amending the CC&R’s. New §s 4130 and 4250(b).

Amendment of the CC&R’s: Existing law is not consistent with regard to the procedures for amending the CC&R’s, depending on the purpose of the amendment. Civil Code §s 1355(a), 1357. The new Act establishes a single exclusive procedure for amendment of the CC&R’s. New § 4270. That procedure also expressly recognizes that some CC&R’s may require that a person other than a member (owner) approve an amendment, and makes clear that a governing document lower in priority than the CC&R’s cannot govern the procedure for amendment of the CC&R’s.

Court-Authorized Amendment of CC&R’s: Under the existing law, the Superior Court may approve an amendment to the CC&R’s, even if the required member approval was not obtained. Civil Code § 1356. Before making such a decision, the Court must find, among other things, that an election which complied with the governing documents was held to approve the amendment. The revised Act also requires the Court to find that the election was conducted in accordance with the election provisions of the Act and any other applicable law. New § 4275(c)(2).

Amendment or Revocation of Condominium Plan: Existing law specifies that a condominium plan may be amended or revoked by recording an instrument executed by all of the persons whose signatures were required to establish the plan. Civil Code § 1351(c). It is unclear whether an amendment or revocation of the condominium plan must be signed by the original signators, or whether their successors in interest may sign. The new Act clarifies that the amendment or revocation must be signed by those persons who are current holders of the specified interests. New § 4295.

Reversals of Operating Rule Changes: Current law allows members of an association to vote on whether to reverse a recent change to an operating rule pursuant to election procedures set forth in the Corporations Code. Civil Code § 1357.140. The new Act instead cites to equivalent provisions of the new Act. New § 4365.

Right of Access to Separate Interest: The new Act clarifies that both owners and occupants (e.g., renters) are entitled to physical access to the owner’s separate interest. New
§ 4510.

Property Use: The new Act provides property owners with a more complete summary of their property use rights. New § 4730.

Modification of Separate Interest: The new Act broadens the owner’s right to make changes to his/her separate interest in any type of CID, not just a condominium project. New
§ 4760.

Grant of Exclusive Use of Common Area: The existing provisions are broadened to include, among other things, accommodating a disability. New § 4600.

Notice of Board Meetings: All associations will be required to provide advance notice of a Board meeting, including an agenda, regardless of whether the time and place of the meetings is fixed in the governing documents. New § 4920. Further, the requirement that notices of a Board meeting be “posted” in a prominent place in the common area will be deleted, in favor of “general delivery” of Board meeting notices, pursuant to New §s 4045, 4920.

Definition of “Board Meetings”: A “Board meeting” is no longer defined as a gathering of the majority of directors, but instead as the number of directors sufficient to constitute a quorum. New § 4090.

Disqualification of Interested Directors: Existing law provides that a director is subject to the rules governing self-interested contracting in for-profit corporations. Civil Code
§ 1365.6. The new law replaces the reference to for-profit corporations with a reference to the equivalent provisions of non-profit corporation law, and expressly prohibits a self-interested director from voting on specified types of matters. New §s 5350(a), (b).

Elections: Several changes have been made.
• Procedure. Under current law, the elections procedure applies only to certain types of elections. The new law allows an association to use the statutory procedure for any type of member election, so long as a decision to use the statutory procedure in other types of elections is authorized in an operating rule. New § 5100(b).
• Notice of results. The new law also requires that “general notice” of election results be provided to all members, replacing the existing more ambiguous requirement that the results be “publicized.” New §s 4045, 5120(b); compare Civil Code § 1363.03(g).
• Destruction of ballots. The current law appears to allow the destruction of ballots nine months after an election, which is three months before the end of the period in which an election can be challenged. Civil Code §s 1363.03(h), 1363.09. The new Act requires that the ballots be retained for the full twelve-month period in which elections can be challenged. New § 5125.
• Campaign communications. Existing law restricts the use of association funds for campaign communications (anything that features the name or photograph of a candidate) in connection with a pending board election. Civil Code § 1363.04. The new Act adds an exception for communications required by law. New § 5135(b)(2).

Records and Notices:
• Association Records. Under existing law, members may inspect and copy “association records,” as defined in Civil Code §1365.2. The new Law broadens the scope of “association records” to include the governing documents, and to include those records already defined as “enhanced association records.” New §s 5200(a)(11), 5200(a)(13).
• Annual Reports and Notices. The new law reorganizes the information which an association must distribute to its members on an annual basis into three annual reports, based on subject matter: (1) an annual budget report including the budget and related financial disclosures, (2) an annual financial statement review, if required, and (3) an annual policy statement, including all other annual informational disclosures that an association must make. New §s 5300, 5305, 5310; see Civil Code §s 1365(a), (c), (d), (e), 1365.1, 1365.2.5, 1363.850, 1369.490, 1378. The new Act preserves the option for an association to send members a summary and notice of the availability at no cost of the full budget, as opposed to the budget itself, and extends that option to the annual policy statement. New §s 5310(b), 5320. All annual reporting requirements will now be located in one place in the Code, and greater flexibility as to how they are distributed will be permitted.

Commercial and industrial CIDs: The new law continues the existing exemptions for commercial and industrial CIDs from certain provisions of the Act (see Civil Code §1373). (See footnote 1 above.)

• Regular and Special Assessments. Under existing law, an association may not increase regular assessments unless it has either distributed a pro forma budget in compliance with Civil Code Section 1365(a) or obtained the approval of the members in a member election. In addition, the association must obtain the approval of the members before increasing regular assessments by more than 20% or imposing a special assessment that is more than 5% of the association’s budgeted gross expenses for the fiscal year. The proposed law continues these provisions (new §§5600-5740) with a minor change to remove the superseded reference to the Corporations Code election procedure.
• Assessment Payment Priority. Existing law provides that a member’s payment for assessments should be applied first to the assessments owed, before being applied to any collection costs, interest, or penalties. The Commission concluded (40 Report 262) that, under the existing provision, it is not entirely clear whether the payment priority rule is conditioned on the association having provided the member with a written notice of delinquency. New §5655 makes clear that the payment priority rule applies in all cases, regardless of whether or when the member has received a notice of delinquency.
• Lien Release. Under existing law, if it is discovered through ADR that the asso- ciation had recorded an assessment lien in error, the association is required to release the lien and reverse all costs, fees, and interest associated with the error. New §5685 would continue the rule, but expand its application so that it applies whenever the association has recorded an assessment lien in error, without regard for how the error is discovered.

• Schedule of Monetary Penalties. If an association policy authorizes the imposition of a monetary penalty for a violation of the governing documents, §1369(g) requires that the association adopt a schedule of monetary penalties and deliver it to the members. If the penalty schedule is later amended, the amended penalty schedule must be delivered to the members. New §5310(a)(8) requires that the schedule be included in the policy statement that is delivered to the members annually. New §5850 also makes clear that penalties may apply to guest or tenant activities, that the penalty imposed for a violation of the governing documents is limited to the penalty in effect at the time of the violation, and that new or revised penalty schedules may be delivered by a supplement.
• Notice and Opportunity to be Heard. Before disciplining a member for a violation of the governing documents, the association must provide the member with notice of the alleged violation and an opportunity to be heard by the board. See §1363(h). New §5855 broadens that notice and hearing requirement to also apply when an association attempts to impose a monetary charge as a means of reimbursing the
association for costs incurred by the association in the repair of damage to com- mon area and facilities caused by a member or the member’s guest or tenant.

Alternative Dispute Resolution: Sections 1369.510 and following require that ADR be offered before a civil action is filed by or against an association to enforce a provision of the governing documents, the Davis- Stirling Common Interest Development Act, or a provision of the Corporations Code. The non-filing party is not required to accept the offer. However, in an action in which fees and costs may be awarded, the court may consider whether the refusal of ADR was reasonable, when determining the amount of the award. Under existing law, that rule only applies in an action to enforce the association’s governing documents. New §5960 would broaden the rule, to apply in any action in which fees and costs may be awarded.

In summary, numerous changes to the existing law, some major and some minor, have been made. All CID’s and their property managers, attorneys, and accountants need to be made aware of the new law so that they continue to operate within its requirements.