Community associations are said to be a bit like governments. “Citizens” (owners) elect “officials” (directors) to make both small and large decisions affecting their lives and assets. These decisions relate to property values, membership safety, long-term financial planning, property restrictions and maintenance of common areas and amenities. The decisions must be based on a structure of written principles (Governing Documents) serving the function of legislatively mandated law.
Sometimes, the members disagree with the decisions made by directors and call special meetings to remove the board, to challenge its authority or to reverse its decisions. Community association attorneys are often called upon to analyze these challenges and determine a question that goes to the very heart of how a community operates: who has the authority to make decisions for a community association—the board or the members; a better question is: which decisions are made by the board, which by the members, which by either and which by none because the legislature has mandated how a community must operate.
Corporations Code §7210, applicable to non profit mutual benefit corporations (which includes most California homeowner associations) says in part that “the activities and affairs of a corporation shall be conducted and all corporate powers shall be exercised by or under the direction of the board” unless the bylaws or articles otherwise provide. This statutory “default” is frequently found in association bylaws. These legal principles mean that, unless the members are given the specific right to vote on an issue, all decisions of a community association can be made by, and solely by, the board. At least, those are the principles that traditionally governed the “corporate” side of association operations. Sometimes, rules governing real estate require specific membership approval. And, more and more, the legislature itself has decided to emasculate the power of both to decide how an association should function as discussed in more detail below.
Most bylaws and CC&Rs identify which decisions are to be made by the board and those which are to be made by the members. The Corporations Code and the Davis-Stirling Common Interest Development Act also allocate certain voting rights as between the board and the members as do the regulations of the Department of Real Estate which dictate requirements for the original set of an association's Governing Documents.
Generally, without a membership vote, the board has the authority to enter into management contracts and other contracts of less than one year relating to goods or services for the common area; acquiring certain types of insurance, incurring debt and spending association money to certain levels, approving, preparing and distributing financial information (budgets, etc.), conducting board meetings and electing and removing officers and committee members; selecting contractors and service providers, and imposing regular assessment increases of specified amounts and imposition of “emergency” and “unforeseen maintenance assessments” with no limits except that the amounts meet the emergency.
On the other hand, actions typically requiring a membership vote include electing and removing directors, approving large assessment increases and “capital” expenditures, obtaining secured loans, and amending Governing Documents.
Overlaying all this is legislation that removes decision making power from the board and the members. Examples include laws included in the original Davis-Stirling Common Interest Development Act (vesting in the board the power to spend money in certain situations without a member vote; permitting Judges to approve CC&R amendments upon majority assent even where the CC&Rs require a higher percentage), to laws adopted after 1986 which prevent an association from using aesthetic criteria to deny maintenance of signs, solar systems, satellite dishes and certain types of care facilities; to recent laws permitting the veto, by a simple majority, of rules adopted in accordance with authority derived from Governing Documents affirmed by the Department of Real Estate or the members and those mandating the production of certain records at the expense of the association and not the requesting member. Recent changes to Davis-Stirling continue the trend of limiting the discretion of boards to decide issues of importance to a community.
Associations sometimes encounter controversies that trigger strong emotions among directors, the members, or both. These controversies sometimes turn political—the board will try to force the members to accept a particular decision (say, choosing a new stucco color) or perhaps a petition signed by at least five percent of the members demands a special meeting to reverse the decision or to compel the board to do something else. These competing views of how an association operates often turn on how the board and the members believe decisions should be made and implemented in their community.
These disputes arise in many contexts; they relate to the commencement, continuation or settlement of construction litigation; a change in roofing material or paint color; pursuing CC&R violations; selecting, retaining or terminating management companies; the disclosure or distribution of “sensitive” association records; and choosing to make large scale renovations to the common areas, at what price and by which contractors. Each of these situations requires a careful legal analysis and, for the board and the members, a realistic assessment of what actions really must, can or should be taken or approved by the board, the members, or both.
There are times when a board may perceive its fiduciary duty requires an action with which the members may vehemently disagree. In those cases, it takes a fair amount of political courage for directors to stand firm and resist the temptation to “put the matter up for a vote.” Indeed, I believe there are times when a board breaches its fiduciary duty by asking the members to vote on an issue that clearly falls within the sole authority and obligation of the board.
When natural disasters strike (earthquakes, floods, landslides, etc.) members sometimes turn their attention to the acquisition of earthquake insurance. Interest in such insurance can ebb and flow and in “down cycles”, earthquake insurance seems unnecessary or like a luxury.
Acquisition (or cancellation) of earthquake insurance is a good example of the dilemma imposed by market and legal conditions, a board's fiduciary duty and governing document provisions. Some require the board to obtain earthquake insurance; others allow a board to obtain “any other insurance deemed prudent”; some say that obtaining or cancelling insurance requires membership approval. Other governing documents fail to address earthquake insurance at all.
Many bylaw provisions are precise in their requirement that a board must obtain earthquake insurance. This can pose very real practical and political problems for the board. It may be unable to obtain bids (also sometimes required by the bylaws), the coverages available may be of little value because the limits are too low and the deductibles too high, or, simply, the cost may be prohibitive. On the other hand, if buildings are damaged when the “Big One” strikes, do any of us doubt that lawsuits will be filed against directors who failed to obtain earthquake insurance when the governing documents required it?
Typically, a bylaw provision will allow the board to obtain “such other insurance as it deems prudent” or will not address the issue at all. Does this take the board “off the hook”? No. In fact, such a provision may be the worst type to have. This verbiage is not a “free pass” to avoid completely dealing with earthquake coverage. As discussed below, boards facing this type of provision are as much at risk as directors who ignore a bylaw provision requiring the acquisition of this type of coverage.
The duty imposed on each director to use good faith and to make decisions that he or she believes are in the best interest of the community requires (for those where earthquake coverage is a question at all) directors to research earthquake coverage and determine whether, and at what price, it is available. The level of analysis may be higher or lower, depending on each development's unique facts—location, known structural deficiencies, and so forth.
If the governing documents require a board to obtain earthquake coverage but none can be obtained, a record of that fact should be maintained and communicated to the membership. The board should then seek an amendment to the governing documents to eliminate the provision requiring the board to obtain the coverage. California law permits the board to petition the Superior Court to clarify the Association's responsibilities relative to coverage where the members refuse to approve or finance its cost.
If the governing documents allow the board to obtain earthquake insurance “as deemed prudent,” the board should determine whether it is, in fact, reasonable to obtain and pay for the coverage. If the premium can be paid without an increase in assessments (or without an increase beyond 20 percent of the existing budget), no membership vote is required. The board should, however, advise the membership of its decision and the reasons therefore.
Can the board ask the members to approve an assessment to pay for earthquake coverage when the documents give the board discretionary authority to purchase the insurance or not? This is probably the most sensitive issue of all because it invites the board to avoid its obligation to make its own judgment by foisting the issue on the membership. Even worse, the outcome of the vote can turn on whether it is predicated on a funding basis (basically requiring approval of a simple majority) or some other basis requiring a higher percentage of approval (perhaps a majority of the association's total voting power).
In reality, there is no simple answer to the question of whether the board has breached its fiduciary duty by putting the matter to a membership vote. A “clean” way of dealing with the issue is to secure a governing document amendment that puts the burden on the members, not the board. Short of that, asking the members to vote on an issue that should be decided by the board definitely raises the specter of post-earthquake claims for breach of fiduciary duty even if the members rejected the insurance proposal.
Finally, where the governing documents do allow the members to decide, it will usually be true that the board's duty is limited to acquiring relevant information and then candidly and reasonably submitting the matter to a membership vote. In extreme cases, the board's general fiduciary duty to operate the development in the best interests of the community might require it to obtain earthquake insurance even where the membership refuses. However, this will be the exception and not the rule.
Association's, like all land owners, are obligated to use “reasonable care” to protect residents and owners from foreseeable injuries and financial damage resulting from how common area is maintained. These injury-causing conditions can be physical, such as the failure to fix leaking roofs culminating in mold growth; financial, such as a loss of value sustained by an investor or seller as a result of deferred maintenance; or involve the conduct of third parties, such as the famous Francis T case in which the association (and directors) were held liable for failing to protect a resident from criminal assault. The “dilemma” in the context of our current discussion arises when the directors know (or should know) that conditions are dangerous but the members refuse to finance a repair or other techniques for dealing with those conditions (security guard, new lighting, signage, etc.). While members have the right to reject proposed special assessments or bank loans to finance solutions, the association itself remains exposed to claims from those injured or damaged as a result of inadequate maintenance or the failing to cure dangerous situations. The exposure can be high and while directors may, if properly advised, protect themselves from suit, no amount of “good faith” will insulate the Association from suits, damages and judgments.
The most important “vote” the members make is for the directors who represent them. That is because almost all decisions affecting a community are made by the association's directors and not the members. The members' right to vote is always spelled out in the governing documents; if not found there, such a right usually does not exist. In certain cases, a board will be able to look to the members to make the final decision on particularly important matters but, where the authority to make a decision clearly rests with the board, its failure to exercise that authority could subject it to future claims.
Continuing legislative interest in the mechanics of association operations also affect the distribution of power in a community. Directors and members have a strong interest in knowing something about these laws so as not to waste time arguing over issues that have been pre-empted by legislative regulation and instead to focus on areas where “local rule” continues to be a permitted model of how a community functions.
Steven Weil is a founding partner at the law firm of Berding & Weil, Alamo, CA. He is a member of the ECHO board of directors.