Homeowners Associations (HOA) FAQs (Part 2)

By Andy Sirkin (Part 2 of 3)

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Association Powers and Decisionmaking

Limits of Association Power

Do HOA decisions need to adhere to any standards?

Each homeowners association decision must adhere to the following standards:

• It must be within the scope of the association’s authority under the governing documents and the law;
• It must be based upon a reasonable investigation;
• It must be intended to serve the best interests of the association and the owners as a group;
• It must be made in good faith; and
• It must be reasonable in light of the information available at the time the decision is made.

Additional standards may apply for specific types of decisions such as owner discipline or alteration approvals. Where the association has formally established policies or procedures, they must be uniformly applied and followed. But the fact that the association has permitted or approved a certain activity or alteration by a particular owner at one time does not mean that the association must permit or approve that same activity by the same or a different owner at a later time. In evaluating an association decision for compliance with these standards, the courts will defer to the board’s authority and presumed expertise.

Is there a government agency with authority over HOA activities?

There is no governmental agency with authority to oversee homeowners associations. Association duties and standards must be enforced by owners and lenders through the court system or through some alternative dispute resolution process such as mediation or arbitration.

How can an owner change or challenge an HOA decision?

The owner should begin by attempting to discuss the matter with the president, a director, committee chair or property manager. If this attempt does not yield satisfactory results, the owner should attend a board meeting or call an owner meeting to discuss the problem with the other owners. If the owner wishes to pursue the matter further, he/she should consult an attorney.

When the HOA needs to get legal advice in order to respond to an owner, can it charge the owner for attorney’s fees?

A homeowner’s association is not entitled to recover its attorneys fees from an owner unless it prevails in a court proceeding or arbitration involving the enforcement of the governing documents.

Association Structure

What is the difference between an incorporated HOA and an unincorporated HOA?

The law allows a homeowners association to be either incorporated or unincorporated. An incorporated association has a legal identity that is separate from that of its members, just as Microsoft has a legal identity that is separate from its shareholders. Unlike Microsoft, which is a for profit corporation, an incorporated homeowners association is a non-profit mutual benefit corporation which means that its powers are limited to those normally associated with a homeowners association, and it is exempt from certain governmental fees and taxes.

Traditionally, homeowners associations have been incorporated to protect owners from responsibility for association debts, losses and liabilities. But California law extends most of these protections to owners of unincorporated associations provided the associations have proper insurance. Under current law, the advantages of incorporation are some (very limited) additional protection from owner liability, ease of opening association accounts with certain banks and vendors, and qualification of the units or lots for mortgage loans from lenders that require an incorporated association. Balanced against these advantages are the costs of forming the corporation, the burden of annually filing a form with the Secretary of State, and additional procedural formalities such as having officers and directors, and conducting formal meetings.

An unincorporated association can be incorporated by its owners at any time. The process of incorporation involves amending the governing documents, preparing Articles of Incorporation, and filing with the Secretary of State.

How are HOA powers distributed between the owners, the board, the committees, the officers, and the manager?

In general, the distribution of power and authority within the homeowners association is determined by the governing documents, but the law contains some restrictions on how the governing documents can distribute this power. The law presumes that most association power and authority will be exercised by the board without the direct involvement of the owners. Where the governing documents simply give the association power to do or approve something without specifically requiring owner approval, the power can be exercised by the board without owner approval.

The law imposes very few restrictions on how much power the documents can give the board. The following is a partial list of the acts which always require owner approval:

• Amending the CC&Rs (with some exceptions as described above
• Increasing regular assessments more than 20% except in emergency circumstances (defined as an extraordinary expense required by an order of a court, necessary to alleviate a threat to personal safety, or
  necessary for a repair that could not have been reasonably foreseen by the board);
• Imposing special assessments during one year that total more than 5% of the budgeted expenses for that year except in emergency circumstances as defined above; and
• Removing a director without cause.

In practice, most governing documents also require owner approval for a variety of major decisions including changing the items which the association is responsible to maintain, changing the owners’ assessment percentages, changing the unit or lot boundaries, and imposing leasing or resale restrictions.

The board has complete control over all committees, officers and managers. This means that the board decides who will serve in these capacities, and what authority they will have, subject only to restrictions in the governing documents. The board retains the power to override the decision of any committee, officer and manager.

Can the owners override a decision by the board, a committee, an officer or the manager?

In general, the owners cannot override a board, committee, officer or manager decision. If the owners are unhappy with a board decision, they can convene a meeting, vote to remove one or more directors, and hope the replacement directors make a more satisfactory decision. If the owners are unhappy with a committee, officer, or manager decision, they can attempt to convince the board to overrule it or, if that does not work, vote to change the board. Alternatively, one or more owner could challenge any board, committee, officer or manager decision through litigation or arbitration on the basis that the decision was not reasonable, made in good faith, and/or in compliance with formally established policies or procedures. One notable exception to the general rule is that owners may convene a meeting and overturn a new Rule or Rule change enacted by the board.

How should HOA decisions be made?

The first step in homeowners association decisionmaking is determining whether the course of action under consideration would be reasonable and in the best interests of all owners. If this question can be answered affirmatively, the next step is to review the governing documents and the Condominium Bluebook with the following questions in mind:

• Is a particular action or decision required under the governing documents and/or the law?
• Is a particular procedure for making the decision required under the governing documents and/or the law?
• Does the decision under consideration require an owner vote?

Questionable action should be reviewed by an attorney. If the action could have a significant impact on one or more owners, it is wise to get awrittenopinion of counsel before taking action upon which the board can rely in the event of a legal challenge. A legal opinion may protect the board from liability for an erroneous decision by allowing it to assert reasonable reliance on the advice of counsel as a defense. But remember that the failure of an association to follow the advice of counsel or its own internal decision-making procedures will make inappropriate action vulnerable to a legal challenge.

Who can write checks and sign contracts for the association?

The law states that the signatures of at least two directors, or of one officer and one director, must be required for withdrawals from the association reserve account(s). Withdrawal requirements for other association accounts are usually set in the governing documents, but if they are not, the requirements can be established by the board.

The decision of whether the association should enter into a particular contract is made by the board unless the governing documents require owner approval, or unless the board has delegated the decision to an officer, committee, or manager. The law is currently unclear regarding how many officers, and which officers, must sign the contract in order for it to be valid. Until this issue is settled by the courts, it is prudent to have the contract signed by two officers: (i) the president or vice president, and (ii) the secretary or chief financial officer.

The law provides that a contract signed by an officer can be binding even if there was never a proper association decision to enter into it. To avoid liability for non-approved contracts, the board should exercise extreme care in selecting officers, and provide written notice to all of its vendors that no contract should be considered valid unless the vendor receives a board resolution authorizing the agreement. A sample board resolution is provided in The Condominium Bluebook.

Can directors and/or officers be paid for their service?

While it is legal to pay directors and officers for their service, it is not a good idea. Under the law, volunteer directors and officers of properly insured homeowners associations face no personal liability for their decisions absent intentional fraud or self-dealing. Paid directors and officers can face personal liability for bad judgement and unintentional mistakes.

Owner Meetings and Decisions

What is the difference between a regular owner meeting and a special owner meeting?

A regular owner meeting is one held on a regular schedule prescribed in the governing documents. Most governing documents require one regular meeting (the “annual meeting”) each year. A special owner meeting is one that is not required by the governing documents, but rather has been convened for a special purpose.

Who can convene a special owner meeting?

A special owner meeting can be convened by the board, the chairman of the board (if any), the president, or any group consisting of at least 5% of the owners.

What kind of notice is required for an owner meeting?

Both regular and special owner meetings require a written notice at least twenty (20) but not more than ninety (90) days before the meeting. The notice may be given in several different way: (i) by email to an owner who has consented to receive notice in that manner; (ii) by first-class mail, registered or certified mail, express mail, or overnight delivery by an express service carrier; (iii) by posting the notice in a prominent location that is accessible to all owners and has been has been designated for the posting of notices in the association’s annual policy statement (see discussion above). When notice is given by posting, it must also be sent by one of the other permissible methods to any owner who has requested that he/she receive notices by mail or email. Note that notice is not required when the meeting is actually the continuation of another meeting that was adjourned within the previous 45 days as long as the time and place of the continuation meeting had been announced at the original meeting.

An owner meeting notice must include the place, time and date of the meeting, and the means of electronic transmission or electronic video screen communication, if any, by which owners may participate. For regularly scheduled owner meetings (such as the annual meeting), the notice must include a general description of the matters that the board expects to be discussed, and, in cases where directors are to be elected, the names of those who have been nominated (if any) prior to the notice date; however, matters not on the agenda may be discussed. For special owner meetings, the notice must include the general nature of the business to be transacted, and no business not described on the agenda may be transacted.

When a group of owners, acting independently from the board, wishes to convene a special meeting, they must send a written request to the board chairman (if any), president, vice president, or secretary, and that person isrequiredto notify all of the owners of the meeting within 35-90 days of the request. The date of the special meeting is set by the board.

What happens if an owner meeting is held without proper notice?

Decisions made at an owner meeting held without proper notice are valid only if all of the following are true: (i) enough owners (a “quorum”) were present to allow decisions to be made at a properly noticed meeting, (ii) none of the owners at the meeting objected to the improper noticeat the beginning of the meeting, and (iii) every owner who did not attend the meeting signs a waiver of notice or an approval of the meeting minutes.

Can the owners vote on matters not mentioned in the meeting notice?

Generally, at a regular owner meeting, the ownerscanvote on matters not mentioned in the meeting notice. An exception applies when less than 1/3 of the voting power is present. At a special owner meeting, the ownerscannotvote on matters not mentioned in the meeting notice.

How many owners must be present for a quorum?

The governing documents generally specify the minimum amount of owner voting power (the “quorum”) that must be present for decisions to be made at an owner meeting. Participation through electronic means is the same as physical presence at the meeting. In general, the law allows the governing documents to control how many owners constitute a quorum and does not impose any minimum requirements; however, there are rare instances where the law imposes a 50% quorum requirement that supersedes the normal quorum level required by the governing documents (most notably, for increases in regular assessments where the association has not satisfied statutory requirements for budgeting and reporting). Also, the law states that if the governing documents permit a decisions with less than a 1/3 quorum, the only matters that can be voted on while less than 1/3 of the voting power is present are those mentioned in the meeting notice. (Note that this voting limitation would apply to special meetings no matter how many owners were present, but would not apply to regularly scheduled meetings.) The law also provides that if the governing documents fail to specify a quorum requirement, it will automatically be set at 1/3 of the voting power.

Are there procedural rules for conducting an owner meeting?

The law requires that all owner meetings be conducted in accordance with a recognized system of parliamentary procedure or any parliamentary procedures the association may adopt. Suggested owner meeting procedures are provided in The Condominium Bluebook. For certain votes, the law imposes very strict secret balloting procedures as described below.

When is secret ballot voting required and how does it work?

In response to complaints from homeowners that they felt harassed or intimidated when casting their HOA votes, the California legislature has enacted law to protect the privacy and voting anonymity of HOA members. Under California law, secret balloting requirements apply to all owner votes relating to election and removal of directors, amendments to the governing documents, the grant of exclusive use of common area to an owner, and assessment increases that?legally require an owner (rather than a board) vote (such as non-emergency increases of more than 20% in regular assessments, all increases in regular assessments if the association has not followed proper budgeting and reporting requirements, and non-emergency special assessments of more than 5% of the total budget). The secret balloting rules generally require that the board appoint either one or three “Inspectors of Elections”. An Inspector of Elections can be an owner who is not on the board, or someone who is not an owner provided that person is not a manager or in any other business relationship with the association. The association must send a secret written ballot to each owner at least 30 days before the voting deadline, by first-class mail, registered or certified mail, express mail, or overnight delivery by an express service carrier. The ballot may not identify the owner by name, unit number, or otherwise. It must be sent with two pre-addressed envelopes, one of which must be pre-addressed to the Inspector of Elections. The ballot must be inserted into one envelope (the one that is not pre-addressed) then sealed and inserted into the second, pre-addressed envelope. On the second envelope, the voter prints and signs his/her name, and provides his/her address and unit number. The voter then mails the second envelope (with the other envelope sealed inside, and the ballot inside that) to the Inspector of Elections, who must count the ballots in an open meeting of the board or owners. For more detailed instructions, refer to Civil Code §§5110 et seq.

Do the secret balloting requirements apply to small HOAs, such as condominium projects with only 2-4 units?

The secret balloting requirements apply to all common interest developments in California, regardless of the number of units or lots.

What should an owner do if he/she cannot attend an owner meeting?

An owner who cannot attend an owner meeting should give another person a proxy, which is a written form authorizing the other person to attend and vote for the absent owner. Proxy and Proxy Revocation forms are provided in The Condominium Bluebook.

Under what circumstances can an owner decision be made without a meeting?

Any matter that could be decided at an owner meeting can also be decided without a meeting except the election of directors by cumulative voting. To make owner decisions without an owner meeting, written ballots must be distributed to all owners. The ballots must contain the following information for each proposed action:

• A description of the action;
• A place to indicate approval or disapproval;
• The response deadline;
• The number of ballots that must be received by the deadline to satisfy the association’s quorum requirements; and
• The percentage of approvals required for passage.

Owners must be given a reasonable time to return their ballots. Once returned, a ballot cannot be changed or revoked. A ballot is form is provided in The Condominium Bluebook.

How much voting power does each owner have?

A particular owner’s voting power is determined by the governing documents. In most homeowners associations, each owner has one vote of equal weight regardless of his/her ownership or assessment percentage, or the value or size of his/her unit or lot. If voting power is not specified in the governing documents, the law presumes that each owner has one vote of equal weight.

Are all owner decisions made by a majority vote?

The level of owner voting power required for approval is determined by the governing documents, and tends to vary depending on the type of decision. Most governing documents list a group of decisions requiring greater than majority approval, specify the level of approval required for each, and state that all other owner decisions are made by a majority. In instances where the governing documents are not specific, a majority approval requirement is presumed.

When interpreting voting requirements in governing documents or in the law, it is important to pay close attention to wording. When a matter requires the approval of a specified percentage, or the majority, “of all owners” or “of the total voting power of the association”, it means that the voting power cast for approval must be measured against the total voting power of all ownersincluding those who did not cast votes. When a matter requires the approval of a specified percentage, or a majority, “of the owners” (i.e. without using the word “all”), or “of the votes cast”, it means that the voting power cast for approval is only measured against the total voting power cast.

What rules apply to owner meeting minutes?

The law requires that the association prepare and maintain minutes of all owner meetings, and that these minutes be made available to owners for inspection on written demand at any reasonable time for any reasonable purpose. The governing documents usually provide that the secretary is responsible to prepare the minutes within a prescribed number of days following the meeting.

Director Election and Terms

Must the HOA have directors?

Incorporated associations are legally required to have directors. Unincorporated associations need not have directors.

Can the governing documents require directors to meet specific qualifications?

The governing documents can require that directors have certain qualifications provided the requirement is reasonable. In most associations, directors are must be owners. In some associations, directors must be resident owners.

How are directors nominated and elected?

The governing documents usually specify nomination procedures for director candidates. For associations with fewer than 500 owners, the only requirement imposed by law is that the procedures be reasonable, and that secret balloting procedures be followed (as described above). (See Corporations Code §§7521-7524 for additional requirements applicable to associations with 500 or more members.) The law does not require any specific nominating requirements or procedures. However, as a practical matter, since the secret balloting procedures require that written ballots be mailed to the owners at least 30 days before the election of one or more directors, the association must create a procedure under which owners must nominate candidates more than 30 days in advance. While some associations elect directors by simple majority vote of the owners, many associations use cumulative voting as explained below.

What is cumulative voting?

In an election of directors using cumulative voting, each owner is allowed to cast a total number of votes equal to the number of directors to be elected, and may combine or “cumulate” those votes in any way he/she wishes. Thus if there are five seats on the board to be filled at the election, each owner will be entitled to five votes, but will not be required to vote for five candidates. As an alternative to casting one of his/her votes for each of five candidates, an owner can cast five votes for one candidate, or three votes for one candidate and two votes for another, and so on. The purpose of cumulative voting is to give each owner a stronger likelihood of electing at least one or two directors who share his/her views. The law allows cumulative voting only if it is specifically authorized in the governing documents.

How long do directors serve?

The length of the directors’ terms is usually specified in the governing documents and, by law, cannot exceed four years. If the governing documents do not specify term length, the law provides that it will be one year. It is not necessary for all directors to have terms of the same length, or for all directors’ terms to expire in the same year. Frequently, the governing documents provide for staggered terms, so that fewer than all of the board seats are open at one time.

How can a director be removed from the board before the end of his/her term?

A director may be removed by owner vote at any time. The owners do not need a reason for the removal. The number of owner votes needed to remove a director is determined as follows:

• If the governing documents provide for cumulative voting, a director can be removed only if the total number of votes of the ownersopposingremoval, if cumulated and all cast in favor of the director, would be insufficient to elect him/her;
• If the governing documents provide for voting in classes or subgroups, a director elected by a particular class or subgroup can be removed only by vote of that class or subgroup;
• If neither of the first two paragraphs apply, and the association has fewer than 50 owners, director removal requires a majority of the total voting power of the association (rather than just a majority of the votes cast in the removal election); and
• If neither of the first two paragraphs apply, and the association has 50 or more owners, director removal requires a majority of the voting power cast in the removal election.

A director may also be removed by the other directors, but only if there is cause for removal. Appropriate cause for removal by the other directors includes mental incapacity and felony conviction. In addition, the governing documents may allow the board to remove directors for missing a specified number of meetings.

If a director resigns or is removed, how is the vacancy filled?

The method of selecting a director to fill a vacancy following a resignation or removal is usually prescribed in the governing documents. If the governing documents are silent on the issue, a vacancy created by resignation is filled by board vote, and a vacancy created by removal is filled by owner vote (regardless of whether the removal was executed by the owners or by the board).

Director Meetings

Who can call a board meeting?

In general, the governing documents will prescribe the frequency of regularly-scheduled board meetings, but allow the board to established the exact time and place. The governing documents usually also provide that the time and place of a regularly-scheduled meeting can be changed, or a special meeting can be scheduled, by the chairman of the board (if any), the president, or a specified number of directors. . If the documents are silent on the issue of who may call a special board meeting, the law provides that the chairman of the board (if any), the president, the vice president, the secretary, or any two directors may do so. Owners who are not directors or officers cannot call board meetings.

What type of notice of board meetings must be given to owners?

California law does not allow a board to discuss or take action on any item of association business outside of a board meeting that complies with all notice, formality and owner participation requirements imposed by the governing documents and the law. Any in-person gathering, teleconference, or email exchange, however informal, in which a majority of directors participate and discuss association matters, is prohibited unless it satisfies these requirements.

The requirements for owner notice of board meetings is different depending on the type of board meeting. In general, board meetings fall into three categories: (i) an “Emergency Board Meeting”, which is a special meeting to address circumstances that could not have been reasonably foreseen which require immediate attention and possible action by the board, and which of necessity make it impracticable to provide owner notice; (ii) an “Executive Session Board Meeting”, which is a special meeting limited to discussion of matters relating to litigation, contracts with non-owners, the?formation of contracts with third parties, owner discipline, personnel matters, or to meet with an owner regarding the payment of assessments; and (iii) a board meeting that does not fall into one of the other two categories. No owner notice is required for an Emergency Board Meeting. Notice of an Executive Session Board Meeting must be given to owners two days in advance, and notice of any other board meeting must be given to owners four days in advance. When required, owner notice of board meeting must be given in the same manner as notice of owner meetings (as discussed above), and must include: (i) the date and time of the meeting; (ii) the location at which one (1) director will gather and owners may congregate; (iii) a conference call-in number that enables any owner or director to hear and be heard by all other participating owners and directors; (iv) if a video link will be available, instructions relating to the usage of such link; and (v) an agenda of all items to be acted upon at the meeting.

How many directors must be present for a quorum?

The governing documents generally specify the minimum number of directors (the “quorum”) that must be present for decisions to be made at a board meeting. The law will not permit this number to be below 1/5 of the total number of directors, and also will not permit it to be below two. When the governing documents do not specify a director quorum, a majority of directors shall be required for a quorum. A majority vote of the directors attending a meeting can make decisions unless the governing documents impose a higher voting requirement.

Are owners entitled to attend board meetings?

Owners are entitled to attend all board meetings except Emergency Board Meetings (as described above) and executive sessions. The board is permitted to hold an executive session only to discuss litigation, contracts with non-owners, the?formation of contracts with third parties, owner discipline, personnel matters, or to meet with an owner regarding the payment of assessments. If only part of the meeting will be an executive session, owners may attend the remainder. Any gathering (including a conference telephone call) where a majority of directors discuss any item of business scheduled to be heard by the board is considered a director meeting, and triggers owner notice and attendance rights.

Must owners be permitted to speak at board meetings? Can their speaking time be limited?

Owners must be permitted to speak at all board meetings except executive sessions, but the board may establish a reasonable time limit for owner speeches.

Can directors discuss and act upon matters not described on the agenda that is part of the meeting notice given to the owners in advance?

Generally, directors may not discuss or take any action on any matters not listed in the agenda. There are some narrow exceptions to this rule that are listed in Civil Code §4930.

Are there procedural rules for conducting a board meeting?

The law does not require formal procedures during board meetings. Nevertheless, board meetings are likely to be more productive, and less frustrating for participants, if formal procedures are adopted and followed. Suggested owner meeting procedures are provided in The Condominium Bluebook. A suggested agenda for board meetings is also provided.

What rules apply to board meeting minutes?

The law requires that the association maintain minutes of all director meetings except executive sessions, that the minutes be prepared (at least in draft form) within 30 days of the meeting, and that the association provide copies of the minutes to any owner upon request. The governing documents usually state that the secretary is responsible for preparing the minutes. A sample board resolution is provided in The Condominium Bluebook.

Officers and Committees

Must the HOA have officers?

Incorporated associations are legally required to have at least (i) a chairman of the board or president, (ii) a secretary, and (iii) a chief financial office or treasurer, but, unless prohibited by the governing documents, one person may hold all of these offices. Unincorporated associations need not have officers.

How are the officers elected and removed?

Officers are chosen by the board unless the governing documents specifically provide for election by the owners. Officers chosen by the board may be replaced by the board at any time.

What types of decisions can an officer make?

The power and authority of each officer is determined by the governing documents, or, if the documents are silent, by the board. Regardless of how power and authority is delegated among the officers, the board can override the decision of any officer on any matter.

How do committees fit into the HOA organization?

Most governing documents authorize the formation of one or more specific committees, but the board has the authority to create committees even if that power is not specifically mentioned in the governing documents. Unless the documents specify the size of the committee, the qualifications required of the members, and the method of selecting and removing the members, these matters can be determined by the board. Committee recommendations are not binding on the board, and committee decisions may be overridden by the board. The law prohibits certain matters from being delegated to a committee, and these matters are listed in Corporations Code §7212(a).

Managers

Must an HOA have a professional manager?

Some governing documents require professional management, or state that an owner vote (or even the approval of mortgage lenders) is required to discontinue professional management. Absent these provisions, professional management is not required, but it is generally advisable, particularly for larger associations. The law allows any association to retain a professional manager.

What services do professional managers typically provide?

Professional managers offer a wide variety of services to homeowners associations including accounting, budgeting, record keeping, assessment collection, bill payment, meeting coordination, and common area maintenance. Associations choose from among the services available, and enter into a contract with the manager describing the scope of work. The management contract should also include the fee, the duration of arrangement, and the circumstances under which the arrangement can be terminated early. Some governing documents limit the duration of management agreements, or require specific early termination provisions. A sample management agreement is provided in The Condominium Bluebook.

While the law allows almost any association function to be delegated to a professional manager, most governing documents list certain association functions that cannot be delegated. Non-delegable functions typically include borrowing money, levying assessments, making capital expenditures in excess of budgeted amounts, and imposing discipline for violation of the governing documents. Regardless of what functions are delegated, and regardless of the content of the management agreement, the board retains the duty to supervise the manager and the authority to override any decision.

How is a professional manager selected?

The board has the authority to select the manager and determine content of the management contract, but it may appoint a committee to make recommendations. Managers of homeowners associations are not required to be licensed but must provide an extensive disclosures to the association.

What restrictions apply to a manager’s handling of HOA funds?

The law imposes stringent requirements on managers that handle homeowners association funds to prevent commingling and fraud.

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