California's legislators were busy in 2023 amidst an ever-revolving and uncertain insurance crisis affecting common interest communities statewide. While the topic of insurance dominated board meeting water cooler discussion, other important issues quietly went to press that my developer and common interest owner association clients took great interest in. The Governor signed several bills last fall that should place associations on notice beginning January 1, 2024:
Virtual Board Meetings
- Amending Civil Code § 4090.
- Adding Civil Code § 4926.
Prior to this year, Associations were required to designate a physical location, and station at least one director at the location, if any board or member meeting was being held in whole or in part by telephone or video.
Now, Associations can hold a board or member meeting entirely by audio or video without such designation of location or placement of director if the meeting notice (1) instructs members on how to join the meeting; (2) lists a phone number and email of a person able to provide technical assistance before and during the meeting; and (3) reminds the membership their right to individual delivery of meeting notices. Further, directors and members must be afforded the same participation rights virtually as they would posses in-person, and any director vote is performed by roll call.
Designating a physical location and placing a director there remains a requirement for tabulating ballots in a secret ballot election.
Authority to Reduce Quorum Requirements in Director Elections
- Amending Civil Code § 5115.
- Amending Corporations Code § 7512.
Prior to this year, Associations with burdensome quorum requirements would deem a director election failed if an insufficient number of ballots were received to constitute a quorum.
Now, if an Association received an insufficient number of ballots necessary to constitute a quorum, their Board may schedule a subsequent meeting at least 20 days following the initial meeting at which the directors would be elected, and the quorum requirement is reduced to 20% of the membership (voting person or proxy) at the subsequent meeting (unless a lower percentage is authorized by the governing documents). Here's how:
- The pre-ballot general notice contains a statement of the board's ability to adjourn to a subsequent meeting 20 days later than the initial meeting, where the reduced quorum will be 20%; and
- The association generally notices the (a) date, time and location of the subsequent meeting; (b) the candidates names; and (c) 20% of voting members will satisfy the quorum and allow the inspector to tabulate ballots.
Tweaking Candidate Qualifications
- Amending Civil Code § 5103.
- Amending Civil Code § 5105.
Prior to this year, qualifications for candidates seated by acclamation were not applied equally to presently seated candidates. Now, any Association that disqualifies a candidate under 5105 must also require presently seated directors to adhere to the same requirements in its election rules.
Effective this year, Associations must disqualify nominees in director elections if they've "termed out" under their governing documents. Also, if any seated director ceases to be a member during their term, they must forfeit their directorship position.
Corporate Transparency Act Reporting Requirements (For Now...)
In primary effort to reduce money laundering, corruption, tax fraud, and other financial crimes committed by small corporate businesses, the Financial Crimes Enforcement Network (or "FinCEN") is requiring "reporting companies" to report information to FinCEN about the individuals who ultimately own or control them. Generally, a "reporting company" is any entity, including a non-profit corporation such as a homeowners association, that files their formation documents with the Secretary of State. There are 23-distinct types of "reporting companies" that are exempt from the reporting requirements but, for now, incorporated homeowners associations are not excepted. Institutions, such as CAI, are working with the State's Legislature to except certain non-profits like homeowners associations.
Our understanding is that the Association's President/CEO and Treasurer/CFO will be required to fill out and submit a Beneficial Ownership Information Reports, after obtaining a FinCEN ID through FinCEN’s website.
The penalties for failing to report, or filing a report fraudulently, are steep, and include civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.
Homeowners Associations and their managers are encouraged to review FinCEN's requirements for more information.
Disproportionate Allocation of Regular Assessments Among CIDs with Deed Restricted Affordable Housing Units ("DRAHUs") (Post-2025 CIDs Only).
- Amending Civil Code § 5605.
- The following requirements apply to increases in regular assessments only, not special assessments.
- The following requirements apply only to CIDs created after January 1, 2025.
- The following requirements do not apply to CIDs with 20 or fewer units, even if the CID was created after January 1, 2025.
- The following requirements do not apply to CIDs where the percentage of DRAHUs exceeds the percentage required by the applicable zoning ordinance.
- In jurisdictions without an applicable zoning ordinance, the following requirements do not apply to CIDs where the percentage of DRAHUs in the CID exceeds 10% of the total units in the CID.
- In jurisdictions without an applicable zoning ordinance, where a CID was approved on condition 15% of the units be offered at affordable housing cost, the following requirements do not apply to CIDs where the percentage of DRAHUs in the CID exceeds 15% of the total units in the CID.
Effective this year, a Board cannot impose upon DRAHUs a regular assessment greater than 5% plus the percentage change in cost of living (from April 1 to April 1). Regardless, the regular assessment increase for DRAHUs cannot exceed 10% of last years' assessment.
This change in the law effectively permits boards to assess DRAHUs disproportionately to traditional units.
LNSU #1, LLC v. Alta Del Mar Coastal Collection (2023) 94 Cal.App.5th 1050.
Holding: Board members may communicate by electronic (e-mail) communication without fear for constituting the discussion as a "board meeting" provided that the directors are not "taking action" under the e-mail communications.
In common parlance, "taking action" means approving a duly noticed director's motion on an Association's item of business.
Lake Lindero Homeowners Association v. Barone (2023) 89 Cal.App.5th 834.
Holding: In the event of conflict between Corporations Code § 7212 [the law] requiring at least a majority of a quorum to approve a recall in a CID of more than 50 members, on the one hand, and the Association's governing documents requiring more than 50% of the members to approve a recall even if the recall election is held on a reduced quorum, the law will prevail.
Lauckhart et al. v. El Macero Homeowners Association (2023) 92 Cal.App.5th 889.
Holding: In the event a homeowners association is created without "common area" (as defined in Civil Code § 4095), the association may be converted to a CID if it later purchases or acquires "common area".
Takaguchi v. Venetian Condominiums Maintenance Corporation (2023) 90 Cal.App.5th 880.
Holding: In director elections, members appearing under proxy, through delivery of a ballot, or in person at the meeting, are all counted towards constitution of a quorum to conduct the election.
For example: if the Association's director election quorum requirement is 51% in a CID of 100 members, and the inspector of elections receives 47 ballots from members directly or by proxy, and at least 5 members who did not cast ballots attend the meeting to elect directors, then the quorum requirement is satisfied and the election may be conducted.
In conclusion, Associations or Board members following these updates may want to consider amendments to or restatements of their community's CC&Rs, Bylaws, or Operating Rules. For more information or requests for proposal, please find us at the "Contact" tab at the top of this page or message me directly at [email protected]. All queries welcome.
Kyle C. Sproul, Esq.