As we previously reported, effective January 1, 2024, corporations are required to file reports identifying all “beneficial owners,” defined as “individuals who directly or indirectly own or control” a corporation. Corporations in business before January 1, 2024, have until January 1, 2025, to file their initial Beneficial Ownership Information (BOI) report. Penalties for non-reporting range from $500 to $10,000 per day.

Our annual legal update is here! Below is the latest on virtual meetings, ADUs, director elections, and more.

All new laws summarized below are effective January 1, 2024, unless otherwise noted. Contact your favorite HGCT attorney if you have questions on how these changes impact your association. 

New Legislation

AB 572: Limitation on Regular Assessment Increase for Affordable Housing Units

Prohibits regular assessment increases of more than 5% plus cost of living (capped at 10%) over the previous year for any deed-restricted affordable housing unit. Applies to associations with more than 20 units with original declarations recorded on or after January 1, 2025. Amends Civil Code section 5605.

Takeaway:

Be aware of budgeting and funding challenges in post-2025 associations with affordable housing units.

AB 648: Virtual Meetings

Associations can conduct meetings entirely by teleconference (including video conference) without a physical location. The notice must contain technical instructions and contact information to assist members to connect remotely. Board votes must be conducted by roll call. Meetings at which secret ballots are opened and tabulated must include a physical location. Amends Civil Code section 4090 and adds Civil Code section 4926. 

For a more in-depth discussion of this bill, please see our October newsletter.

Takeaway:

All meetings may now be conducted via video conference, which many boards believe encourages greater participation, is more convenient, and is safer. Consult with counsel regarding meetings at which secret ballots are to be opened and tabulated. 

The Latest Law on ADUs

AB 976: ADU Occupancy

Authorizes local agencies to impose minimum rental terms of more than 30 days for ADUs. Prohibits local agencies from imposing owner-occupancy requirements on ADUs, regardless of date of ADU construction. Amends Government Code sections.

AB 1033: Sale of ADUs

Allows local agencies to adopt ordinances to permit owners to sell an ADU separately from the primary dwelling, with lender and association approval. Member approval also required if stated in the governing documents. Amends Government Code section 65852.2.

Takeaway:

Consult with legal counsel regarding ADU rules and whether amendments to CC&Rs to impose specific member approval requirements are recommended.

AB 1458: Reduced Quorum for Director Elections

Allows associations with quorum requirements higher than 20% of the members for director elections to reduce the quorum requirement to 20% if the quorum requirement in the governing documents is not achieved. This reduced quorum is solely for the election of directors. Amends Civil Code section 5115 and Corporations Code section 7512.

For a more in-depth discussion on this bill, please see our November newsletter.

Takeaway:

This bill will hopefully help associations that are unable to elect directors simply because people don’t vote. Work with legal counsel to ensure that the association complies with the notice requirements in the law to take advantage of reduced quorum.

AB 1572: Restrictions on Watering Nonfunctional Turf

Beginning January 1, 2029, associations will be prohibited from using potable water (water fit for human consumption) to irrigate nonfunctional turf. “Nonfunctional turf” is defined as turf that is located within street rights-of-way and parking lots (grass-covered parkways, open spaces, and lawns) and is not for recreational purposes such as sports fields. Amends Water Code sections 10608.12 and 10608.14. 

Takeaway:

Work with your association’s landscaper to create a plan for changing out turf that is “nonfunctional” for other materials, or to use non-potable water to irrigate nonfunctional turf.

AB 1764: Director Qualifications and Term Limits

Cleanup legislation which clarifies that sitting directors and candidates for the board are subject to the same qualifications, adds term limits as grounds for disqualification if included in the association’s bylaws, and states that a director who ceases to be a member of the association is disqualified from serving on the board. Amends Civil Code section 5103 and 5105. 

Takeaway:

If your association has term limits, or wants to establish them, consult with legal counsel. We typically don’t recommend term limits because it reduces the pool of qualified candidates when many associations have difficulty finding people to run for the board.

SB 71: Small Claims Limits

Changes the limit for small claims filed by natural persons from $10,000 to $12,500 and changes the limits for associations from $5,000 to $6,250. However, does not change the $2,500 limit for multiple claims in a calendar year.

Takeaway:

If your association is sued in small claims court, consult with the association’s legal counsel for assistance. Although attorneys are not permitted in small claims court, we can help prepare the association’s representative.

Corporate Transparency Act (Federal Legislation)

Beginning in 2025, all corporations, including associations, are required to file reports regarding “beneficial owners” (directors, officers and anyone who owns 25% or more separate interests). Penalties for non-reporting range from $500-$10,000 per day.

Takeaway:

Efforts are being made to exclude community associations so stay tuned.

Case Law

Fairly-Haze v. Whitesails Community Association

US v. Aqua 388 Community Association

Both of these cases concern requests for accommodations regarding disabled parking. They confirm the obvious – associations must make a reasonable effort to accommodate disabled parking requests. While associations must provide an accommodation if it is possible and “reasonable on its face,” they are not required to provide everything the member requests.

Takeaway:

Reasonable accommodations must be provided for disabled residents when requested, however associations are not necessarily required to provide everything requested. Consult legal counsel whenever an accommodation request is received.

Lake Lindero Homeowners Association v. Barone

The Corporations Code controls over an association’s bylaws with respect to the member approval requirement for director recall votes. Bylaws cannot impose an approval threshold higher than the Corporation Code requires for the removal of a director.

Takeaway:

Recalls are complicated and require some analysis of the Davis-Stirling Act and the Corporations Code. Contact legal counsel as soon as a recall petition is received.

Lauckhart v. El Macero Homeowners Association

An association member sought to cancel 1995 CC&Rs and bar the association from acquiring a common area lot. The court held that cause of action to cancel the CC&Rs was barred by the statute of limitations, the CC&Rs were found to be valid and enforceable against all owners, and that the Business Judgment Rule protected the association’s acquisition of the lot. The recording of the 1995 amendments put all owners on notice of the changes in the CC&Rs, and the authority to annex property. Therefore, the owners had missed their 4-year window to challenge the validity of the amendments.

Takeaway:

The Business Judgment Rule continues to protect associations, their boards and individual directors when informed decisions are made.

LNSU #1, LLC v. Alta Del Mar Coastal Collection Community Association

Bizarre case in which the court held that email discussions among board members are not “board meetings” and do not violate the Open Meeting Act. Both a request for depublication and a petition for review have been filed and are currently under consideration by the Supreme Court. This decision may be overturned, modified, or ordered to have no controlling impact. 

For a detailed discussion of this case, please see our September email update.

Takeaway:

Boards should tread lightly. There are numerous issues with the reasoning in the case, and many reasons why email discussions among board members should be avoided.

Manrodt v. Albelo (Unpublished)

This case addresses when gathering evidence become harassment. Ongoing surveillance to confirm an owner is complying with rules or to attempt to catch potential violations is harassment. 

See our September newsletter for a more in-depth summary and discussion.

Takeaway:

Board members, community members, and managers cannot preemptively surveil members in anticipation of a potential rules violation. While evidence is necessary to impose fines or penalties for governing document violations, there is a fine line between capturing violations and harassment. Contact counsel immediately if there is any question about violations or appropriate methods of evidence collection.

North Coast Village Condominium Association v. Phillips

Association sought workplace violence restraining order on behalf of board members and employees. Discussion at trial court and appellate court levels involved whether a home office is a “workplace” for the association’s president. The appellate court held that the trial court should have evaluated the restraining order under the workplace violence requirements and not under a different standard of harassment. The appellate court also ruled that directors can qualify as association employees, even if they are unpaid.

Takeaway:

Typically, it is difficult for associations to obtain restraining orders on behalf of volunteer board members. However, facts matter. Contact the association’s legal counsel regarding any harassment issues in your association.

River’s Side at Washington Square Homeowners Association v Superior Court

The case involved the association’s standing in a construction defect lawsuit. The development was a planned development; the only common area was a street and the association did not have maintenance responsibilities with respect to the lot. Court found that the association may be permitted to litigate construction defects involving separate interests via a class action lawsuit.

Takeaway:

Consult with experienced legal counsel regarding threshold issues such as standing.

Takiguchi v. Venetian Condominiums Maintenance Corporation

Boards must hold annual membership meetings to elect directors as required by the Corporations Code. Ballots and non-voting members present in person count towards quorum.

Takeaway:

Director elections are required by law. Consult with legal counsel regarding quorum requirements.

Effective January 1, 2024, community associations may conduct board and member meetings entirely by teleconference, meaning without a physical location. However, certain requirements must be met in order to meet entirely by teleconference.

Overview
Currently, in order to conduct a meeting via teleconference, the Open Meeting Act requires an association also designate a “physical location so that members of the association may attend, and at least one director or a person designated by the board shall be present at that location.”

Signed into law on September 22, 2023, Assembly Bill 648 adds Civil Code section 4926 to the Davis-Stirling Act and authorizes fully remote meetings if specified conditions are met.

Teleconference Meeting Requirements
1. The meeting notice must contain:

• • • Clear technical instructions on how to participate via teleconference;
    • Telephone number and email address of someone who can provide technical assistance before and during the meeting;
    • A reminder that a member may request individual delivery of meeting notices, with instructions on how to do so.

2. Every director and member must have the same ability to participate in the meeting that would exist if the meeting were held in person.

3. Any vote of the directors must be conducted by a roll call vote.

4. Any person entitled to participate in the meeting must have the option to participate via telephone.

A physical location is required for meetings at which ballots are to be opened and tabulated pursuant to Civil Code section 5120 (secret ballot election).

Or, Sometimes Judges Get it Wrong.

A surprising decision was recently published by the Fourth Circuit Court of Appeal (LNSU #1, LLC v. Alta Del Mar Coastal Collection Community Association). The case involved an interesting interpretation of the definition of “board meeting” and arguably dispensed with the requirement that board deliberations be conducted in an open meeting, allowing these deliberations to be conducted via email.

Section 4090(a) of the Davis-Stirling Act defines a “board meeting” as, “A congregation, at the same time and place, of a sufficient number of directors to establish a quorum of the board, to hear, discuss, or deliberate upon any item of business that is within the authority of the board.”

The Court of Appeal interpreted the definition to include a “physical location” requirement and held that email discussions do not constitute a “board meeting.”

The Court stated, “In sum, we conclude ‘board meeting,’ as defined by section 4090, subdivision (a), is an in-person gathering of a quorum of the directors of a homeowners association at the same time and in the same physical location for the purpose of talking about and taking action on items of association business. E-mail exchanges among directors on those items that occur before a board meeting and in which no action is taken on the items, such as those at issue in this case, do not constitute board meetings within the meaning of that provision.”

Analysis

This ruling contradicts long-standing and industry-standard legal advice regarding the use of email for board discussions and deliberations. Since the publication of the Open Meeting Act (Article 2 of the Davis-Stirling Act), legal counsel throughout the state have advised associations not to hear, discuss, or deliberate upon any item of business unless in an open board meeting, specifically advising board members to not use email for this purpose, except in the event of an emergency. This advice is supported by a plain text reading of the Davis-Stirling Act, specifically sections 4090, 4910, and 4920.

While many may see this case as an earth-shattering decision, we disagree. This decision complicates something that was straightforward and clearly defined by the Civil Code – do not hear, discuss, or deliberate upon any item of business via email (unless it is an emergency). These discussions must take place during a noticed, open meeting so the membership can observe the board conducting business (including deliberations and decision-making).

Ignores Intent of Open Meeting Act

The Open Meeting Act was enacted to ensure members could witness the board conducting business. By allowing deliberations by email, members (and potentially individual directors) are excluded from the process. If all discussion on a matter takes place via email, then the vote at an open meeting becomes a mere formality. As a result, members are unaware of the substance of discussions and deliberations and are in the dark about the basis for board decisions.

Ignores the Plain Language of the Civil Code

Civil Code section 4910(b)(1) states “the board shall not conduct a meeting [i.e., hear, discuss or deliberate] via a series of electronic transmissions, including, but not limited to, electronic mail….” A clear exception is made for emergency situations in Civil Code 4910(b)(2). The plain language of the statutes was apparently ignored in this decision and language that does not exist in the statutes was “added” to support the court’s reasoning.

Misguided Reasoning

This decision employs misguided reasoning to conclude that a board meeting must be held in a physical location, thus email cannot be considered a board meeting. This reasoning hinges upon the definition of “congregation” (as referenced in Civil Code section 4090(a)) and adding language to the Civil Code that does not exist.

Although the dictionary definitions of “congregation” cited in this decision do not include “physical location,” the court read that into the definition of “congregation” anyway, stating, “Although the definitions of ‘congregation’ in the dictionaries… say nothing explicit about physical location, the examples in those dictionaries ordinarily involve gatherings of persons in one location for a particular purpose.” The court concluded that, if a board meeting is a congregation and a congregation requires a physical location, email exchanges cannot be a board meeting.

However, emergency board meetings conducted by email are specifically authorized by Civil Code section 4910(b)(2) as a type of board meeting. This decision concludes that an emergency board meeting “is not a subset of the type of board meeting defined by section 4090(a)” but is a third type of meeting, “in addition to and different from those defined by section 4090.” This argument is not supported by any other provision in the Davis-Stirling Act.

Ruling May Overturned or Rendered Moot

This ruling can be overturned on appeal, superseded by another case, or made irrelevant by legislation.

Specifically, it is very likely that Assembly Bill 648 will become law and, as of January 1, 2024, the Civil Code will be amended to allow fully remote board meetings. This bill is currently awaiting the governor’s signature and by all indications, it will be signed. Once signed, any “physical location” requirement for board meetings will become moot as teleconference meetings will be authorized.

Takeaways

Continue to Limit Email Communication

Despite this ruling, we strongly encourage boards to limit email communication.

• Use email to push information or for administrative purposes only. Do not comment, express opinions, or discuss matters via email.
• Think of email as “evidence” mail. Emails are a permanent discoverable record, meaning they can be disclosed if subpoenaed. Imagine your email being read in open court, in front of a judge and jury. The board in this case certainly never thought their emails would become part of a published case with their comments attributed to them by name. For example, after receiving an email accusing the board of violating the association’s governing documents, the board’s email discussion included one board member replying, “Blah blah blah!” and another responding, “We need to get rid of (plaintiff). He is not part of our community.”

Remember the Purpose of the Open Meeting Act

• The Open Meeting Act was enacted to ensure transparency in board decision-making, including all deliberations. Is the decision-making process truly transparent if the full discussion takes place via email with only the vote taking place during a board meeting?
• Members may challenge decisions made by the board, especially if deliberations are conducted privately via email. Members can still argue decisions were made at unnoticed board meetings, despite this ruling. Litigation to defend these actions can be protracted and costly. This case was litigated for more than five years and cost the association more than $400,000 in legal fees. Err on the side of caution and be as transparent as possible in all decision-making activities.

Anticipate Meetings Without a Physical Location Required in 2024

• AB 648 will likely be signed by the governor, which will eliminate the physical location requirement for board meetings, allowing meetings to be conducted entirely by teleconference (and negating the court’s reasoning in this case).

And remember – sometimes judges get it wrong! Contact your favorite HGCT attorney if your association needs legal assistance with any board or member meeting questions.

New association client? Congratulations! Here’s a list of documents you need in order to serve your associations with distinction.

A complete copy of the association’s governing documents. Your attorney can usually assist you in obtaining recorded documents, such as amendments to CC&Rs and Declarations of Annexation. If some of these documents are missing, contact the association’s legal counsel regarding recommended steps. The governing document package includes:

• The recorded, effective Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) and all amendments
  • Make sure the CC&Rs are: (1) recorded; (2) signed; and (3) have all exhibits attached (check text of CC&Rs for references to exhibits)

• Any Declarations of Annexation
  • Declarations of Annexation are documents that are recorded when developments are developed in phases
  • Declarations of Annexation make homes within subsequent phases subject to the CC&Rs

• Bylaws and all amendments
  • Ensure the Bylaws are signed

• Articles of Incorporation (provided the association is incorporated) and all amendments
  • Ensure the Articles of Incorporation are: (1) signed and (2) filed and endorsed by the Secretary of State
• Election rules
  • If an association has not adopted election rules, get election rules drafted and adopted right away
• All operating rules of the association (including architectural rules or guidelines, parking rules, any schedule of fines, etc.)

Remember these other important documents:

• All board and annual meeting minutes
• Most recent Annual Budget Report and Annual Policy Statement and any other annual disclosure information provided to the members
• Maintenance manual (check CC&Rs to see if one exists or should exist)
• Assessment collection policy (if not contained in the Annual Policy Statement)
• Dispute resolution policy (if not contained in the Annual Policy Statement)
• Complete condominium plan (often attached as an exhibit to the CC&Rs) if a condominium project
• Subdivision map or maps if a planned development
• Most recent reserve study
• Most recent budget (at least; more if possible)
• List of current key vendors (e.g., CPA, attorney, collection company, landscapers, maintenance company, security company) and contact information for each
• Copies of current contracts with key vendors
• Complete membership list, including any alternate or secondary address to which notices from the Association are to be delivered, legal representatives in case of an extended absence, and the occupancy status