Reader Questions - CC&R Changes: Saving for Legal Expense, Lenders Voting?

Kelly,

Can an association have a line item on the reserve study called “Updating Governing Documents”? Governing documents are recommended to be reviewed and updated (by the association’s attorney) every few years (5-8 years). The reserve replacement fund is “used to accumulate financial resources designated for future major repairs and replacements”.

Now, I suppose we could say we are “repairing the CC&Rs” or replacing them in the case of a total restatement, but my CPA friends are having a tough time calling the CC&Rs a capital item. I still think of it as an “association component” and worthy of having reserves set aside.

How does an association set funds aside so that they will have funding available when the time comes to update the governing documents?

S.S., Cathedral City

Dear S.S.,

Updating CC&Rs and Bylaws can be an expensive project for smaller associations, but for larger associations, the roadblock is the difficult task of obtaining sufficient members to vote. However, I do not agree that updating every 5-8 years is reasonable or necessary.

While, many associations find their initial developer-supplied documents as ill-fitting to their needs, once an association membership approves a replacement set of documents, it is hard to imagine that 5-8 years later they would need updating in most cases.

Civil Code 5550, which requires the board to obtain and review a reserve study, discusses “major components” of the property, but I do not think legal documents are “major components.”

An Association could plan on a rewrite project and then budget to accumulate a certain portion of that project each year – certainly if the HOA is planning to pursue the project, its cost is now an “anticipated expense” and the association may budget for a portion of that expense in one year, and the remainder in the next years. This should satisfy Civil Code 5600(b), which requires assessments to be collected for actual anticipated costs.

Alternatively, the HOA could borrow from the reserve account under Civil Code 5515, so long as it is restored to the account within one year.

Hope this helps,
Kelly

Mr. Richardson,

My homeowners association is planning to modify our CC&Rs. In voting for a change do we need to include those organizations that hold mortgages on homes in our association?

Thanks,

 T.M, San Clemente

Dear T.M.,

Many associations have CC&Rs which state that a certain percentage of mortgage holders must approve any amendments (along with membership approval). Association legal counsel should check the CC&Rs to confirm if lender approval is necessary.

Lenders generally do not respond to HOA ballots or notices, and if a majority of lenders had to vote to approve new CC&Rs, the task would be impossible.

Fortunately, the California appellate court in a 2008 case called Fourth La Costa v. Seith approved sending the proposed amendments to the lenders, along with a letter notifying them that their failure to respond within a stated reasonable time would be considered “consent.”

If your CC&Rs require lender consent or approval, don’t wait too long to get started. You’ll need someone to create a list of the mortgage holders, which in larger associations can take a number of hours to accomplish. Your association attorney should be familiar with this case.

Best,
Kelly

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.