Assessment Forgiveness

Mark T. Guithues, Esq.
Laurie F. Masotto, Esq.
Michael J. Alti, Esq.
Mark Allen Wilson, Esq.
Jeffrey W. Speights, Esq.
Tracy F. Linkowski, Esq.

April 9, 2020

Authority of Board to Waive Unpaid Assessments Due To Covid-19/Coronavirus

This article addresses the authority of an association to fully or partially reduce assessments for several months due to the coronavirus/Covid-19’s anticipated adverse fiscal impact on individuals’ finances and the economy in general.

Background.  Boards are concerned about the ability of many owners to continue to pay assessments over the next several months given the anticipated impact of Covid-19/coronavirus.  Boards are accordingly considering waiving or foregoing assessments for multiple months. Depending upon an association’s reserve funding level, and whether the association is planning or is aware of any large repair/replacement projects that will be needed within the next year, such waiver or reduction may be permissible.

Board’s Authority Regarding Assessments

Civil Code. Civil Code Section 5500(a) provides:

“… the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this act”

CC&Rs.  The associations CC&Rs might require full payment or might allow some discretion. They need to be reviewed and a determination made. Most CC&Rs and bylaws provide broad authority for the board to determine the amount of assessment.

Initial Conclusions. Pursuant to these provisions, most boards are obligated to ensure that the assessments levied are “sufficient” to meet the association’s obligations under its governing documents (such as maintenance and repairs, insurance, and administrative costs).  However, the board is generally authorized to change the assessment amount. Before the board changes the assessments to half or zero for the next several months, it should first evaluate such decision in light of the “Business Judgment Rule”, described in California law and the court cases below.

The Business Judgment Rule in Connection with Such Decision

Corporations Code Sections 7231(a) and (b) set forth the standard for board decision-making (the “Business Judgment Rule”), which provide:

• A director shall perform the duties of director … in good faith, in a manner such director believes to be in the best interest of the corporation, and with such care including reasonable inquiry as an ordinarily prudent person in a like position would use under similar circumstances.
• In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports and statements including financial statements and other financial data… prepared or presented by:
• One or more officers or employees….
• Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence….

Lamden Case.  In the Lamden case, the California Supreme Court adopted a rule of judicial deference for homeowners association’s board of Directors, wherein courts will defer to the board’s decision where it: a) performs a reasonable investigation, b) acts in good faith, with regard to the best interests of the association, and c) exercises discretion within its authority under relevant statutes, covenants and restrictions. See California Supreme Court case of Lamden v. La Jolla Shores Clubdominium Association (1999) 21 Cal. 4^th 249.

Application of the Business Judgement Rule. Here, at a properly noticed and agendized open meeting, the board should undertake a reasonable analysis as to its authority under its governing documents and the adequacy of its current budget, reserves, and future reserve needs in order to make a determination to what degree, if any, reducing or waiving several months of assessments might negatively impact the association’s ability to meet its future expenses.

For example, it should determine whether and to what extent the reserves may be impacted if there are no contributions for several months.  If reserves are fully funded, and the association has no large maintenance or repair projects which are foreseeable over the next year or so, these factors might well permit the board, in good faith, to determine that a “payment holiday” or a 50% reduction in assessments for several months is prudent under the circumstances and can be offered without negatively impacting its overall finances.

It should also consider related/ancillary factors that could also negatively impact the finances, such as when the waiver period is over, some owners may have prioritized other bills/invoices so as to be slow in restarting payments to the association.  Members might lack the ability to pay any further assessments, due to a job loss, layoff, illness or the like, resulting in the need for it to pursue foreclosure or to consider payment plans. This could possibly cause additional negative impact on the financial condition and future budgets in addition to the value of the several months of waived or 50% assessments.

The Board is Obligated to Make Such Decision at an Open and Properly Noticed Board Meeting

Before making a decision, an association’s board would need to have such item on an agenda for a properly noticed open/regular session board meeting, per Civil Code Section 4920, with at least four (4) days’ notice.

Any minutes for such meeting should properly document the nature and extent of reasonable investigation which has been performed (i.e. review of the budget, reserves, future potential maintenance/repair work, etc.), reference to and reliance upon any reports/statements of experts (such as the accountant, auditor, reserve study analyst, attorney, etc.) and that the board agrees that such decision is in, what it believes to be,  the best interest of the association, is being made in good faith, is prudent thereby still permitting the association to meet its obligations under law and the governing documents.

Given the current circumstances, the board may hold such meeting via video-teleconference pursuant to Civil Code 4090(b) where all of the directors can hear each and interpose objections. We can assist in setting up a meeting on Zoom whereby members would be able to call in and hear the meeting and discussion.

The Board Should Issue a Revised Budget Upon Any Change in Assessments.

If the board determines to “change” assessments to “zero” for the next several months, then it is obligated to give at least 30 days’ notice and no more than 60 days’ notice of such change, per CC&Rs Section 4.9.  We would also recommend that you accompany such notice with a revised budget, pursuant to Civil Code Section 5300, showing the revised estimated revenue and expenses, so that it fully discloses the reduced income in comparison to expenses. This means that if the board decides now and gives notice to the members (in March) to create such a payment revision, that the new (modified or zero) assessment would begin in the month of May, at least 30 days after distribution of the new/revised budget and notice of assessment.

The Board May Consider Waiving or Postponing Late Charges, Interest and Collection Proceedings.

The board may, in addition to or in lieu of waiving the principal amount of assessments, consider waiving late charges, interest and postponing collection remedies as a means of softening the effects of the anticipated economic impacts of Covid-19.  As you may be aware, the Governor of California has issued an initial 90-day grace period for payment of mortgages, and 60-day moratorium on foreclosures. This could of course be extended to a longer time. If the board were to also follow this timeline with respect to collections, the fact that it is consistent with the State’s mandate may give additional weight to such being a prudent and reasonable decision under these circumstances.

Whether or not collection fees or costs are waived/postponed, we recommend that the board, at minimum, authorize liens against properties which become delinquent in payment of assessments, to place the board in a better and secured position if an owner sells, refinances and/or files bankruptcy.

The Board has Discretion As to Future Legal Action With Regard to Collection of Delinquent Assessments

The board might elect to maintain assessments in their current amount but pursue a policy of graciousness before litigating late or nonpayment. When the board is faced with delinquent accounts after the Covid-19 situation decreases, the association has authority to reach a wide variety of settlement agreements under Beehan v. Lido Isle Community Association (1977) 70 Cal App. 3d 858.  In that case, an owner had violated a setback provision for a construction improvement. The board determined, in its business judgment, to forego pursuing an injunction for the violation because the costs (monetary and non-monetary) outweighed the potential benefits of filing a lawsuit to obtain an injunction.  When that decision was challenged, the Beehan court found the board had the right not to engage in legal action (and that the members could not substitute their own business judgment for that of the board.) Even where the board makes “incorrect” decisions as well as “correct” decisions, as long as it is faithful to the corporation and used its best business judgment, the individual directors would not be liable.

Final Thoughts. Depending on its analysis of the budget, the reserve study, and the reserves, a board may exercise several approaches to reducing the financial impact on the membership. We would be happy to discuss all of the above matters further with the board by phone/videoconference, and also to meet at an appropriate time in the future, to discuss whether and to what extent collections can and should (or should not) be pursued.