By Laurie S. Poole, Esq. and Laurie F. Masotto, Esq.
Our firm represented the Fourth La Costa Condominium Owners Association (“Association”) in their petitions filed to reduce the percentage of votes required to amend its CC&Rs and Bylaws under California Civil Code Section 1356 and Corporations Code Section 7515. On January 30, 2008, the Fourth District Court of Appeal ordered publication of its January 4, 2008 decision where it affirmed the trial court’s granting the petitions. In Fourth La Costa Condominium Owners Association v. Seith (2008) DJDAR 1698, the court addressed many important issues regarding these unique procedures.
FACTS OF THE CASE
In 2004, the Board of Directors for Petitioner, Fourth La Costa Condominium Owners Association (“Association”), desired to restate its CC&Rs and Bylaws. The documents had been in effect since 1969 and had never been amended. The Board wanted to delete the provisions which pertained to the developer, clarify ambiguous provisions, and bring the documents up to date with current law. Both the CC&Rs and the Bylaws required approval of seventy-five percent (75%) of the voting power of the Association. Additionally, the CC&Rs required approval of seventy-five percent (75%) of the holders of mortgages or deeds of trust (“Lenders”) to approve any amendment.
In August, 2005, the Association mailed proposed First Restated CC&Rs and First Restated Bylaws to the Owners of the 48 Units asking for approval of both documents. The Association held an informational meeting about the proposed restated documents on October 1, 2005. Additionally, the Association mailed reminders to the Owners regarding the vote in September, 2005 and again on October 11, 2005. Despite these efforts, the Association did not obtain approval of seventy-five percent (75%) of the voting power for either document. However, the Association did obtain approval from a majority of the total voting power. Twelve (12) Units did not vote.
In early 2006, the Association mailed, via certified mail, return receipt requested, copies of the First Restated CC&Rs and a ballot to the Lenders. The letter informed the Lenders that their signature on the “green” card would be deemed their written consent, unless a ballot was returned within thirty (30) days. As of February 8, 2006, seventy-five percent (75%) of the Lenders had consented, or were “deemed” to have consented to the First Restated CC&Rs.
In February, 2006, the Association filed a petition (“Petition”) under California Civil Code Section 1356 asking that the court reduce the percentage of votes necessary to approve the First Restated CC&Rs. In July, 2006, the Association filed a supplemental Petition under Corporations Code Section 7515 asking that the First Restated Bylaws be approved. Barbara Seith (“Seith”), is an Owner of two condominiums in Fourth La Costa and filed objections to the Petitions. She objected to the procedures used by the Association to obtain the votes of the Owners and the Lenders. She also raised objections to many specific provisions of the documents and claimed that Civil Code Section 1356 is unconstitutional.
After briefing and oral argument, the trial court granted the Petitions on August 21, 2006. Seith then filed an appeal. The Association determined not to have its legal counsel represent it on appea, nor did it elect to file a respondent’s brief, and thus, the case was decided based on the trial court record, Seith’s appellate brief and oral argument. The Appellate Court affirmed the ruling of the trial court’s decision to grant the Petitions.
BACKGROUND OF CIVIL CODE SECTION 1356
Civil Code Section 1356 was one of the original statues included in the Davis-Stirling Common Interest Development Act when it became effective in 1985. It has never been amended. The statute provides a tool for assisting amending the CC&Rs of a common interest development. Pursuant to this statute, associations or owners can file a “petition” asking the Superior Court to reduce the percentage of affirmative votes required to amend the CC&Rs when the document requires that more than a majority of the voting power (a “supermajority” ) must approve the amendment.
Under the statute, the petitioner must provide the court with documentation showing, among other items, the following:
- The proposed amendment;
- The current governing documents;
- That a “reasonably diligent” effort was made to obtain the “supermajority” vote;
- That at least a majority of the total voting power approved the proposed amendment; and
- That the proposed amendment is reasonable.
Once the petitioner provides the court with the required documents, and after notice of the hearing to the owners, the Superior Court judge, in his or her discretion, may grant the petition. Granting the petition effectively reduces the approval percentage required by the CC&Rs to amend.
Prior to the instant decision, there were only two published opinions which are based on proceedings brought under Civil Code Section 1356: Blue Lagoon Community Assn. v. Mitchell (1997) 55 Cal.App.4th 472 and Peak Investments v. South Peak Homeowners Assn, Inc. (2006) 140 Cal.App.4th 1363. Those cases involved procedural issues: Blue Lagoon determined that a proceeding under Section 1356 is not an adversarial proceeding which results in the award of attorneys fees. Peak Investments clarifies that in order for the court to consider a petition under Section 1356, a majority of all the separate interests in the development must be in favor of the amendment.
The instant opinion is the first to set forth several important rules of law regarding proceedings brought under Civil Code Section 1356.
STANDARD OF REVIEW ON APPEAL
At the beginning of its opinion, the Appellate Court recognized that Section 1356 gives the trial court “broad discretion” in ruling on a petition. As such, the Court concluded the standard of review of a ruling made by a trial court under Section 1356 is abuse of discretion. “Discretion is abused whenever, in its exercise, the court exceeds the bounds of reason, all of the circumstances before it being considered.” Denham v. Superior Court (1970) 2 Cal.3d 557, 566. This case is the first to clarify the standard of review upon appeal of a trial court order regarding a proceeding brought under Section 1356.
Civil Code Section 1356(c)(2) provides that voting on the proposed amendment must be “conducted in accordance with all applicable provisions of the governing documents.” Seith contended that because the CC&Rs did not expressly authorize that the vote could be conducted by mail that the Association had not complied with the provisions of its governing documents.
The Court disagreed and determined that where a vote has been taken by ballot and mail (versus holding a meeting) an association is not prevented from bringing a petition under Civil Code Section 1356. In so holding, the Court stated:
The Legislature intends to allow mail ballots unless they are expressly prohibited by the governing documents, and their use would run afoul of section 1356, subdivision (c)(2) only if the governing documents prohibited their use.
Under Civil Code Section 1363.03 (which was not effective at the time the vote in this case was conducted), “elections” (i.e., voting) regarding amendments to the governing documents where membership approval is required must be by ballot and, therefore, would now not be voted upon at a meeting.
PROCEDURE TO OBTAIN LENDER APPROVAL
The Appellate Court upheld the trial court’s determination that the procedure used by the Association to obtain consent of the Lenders was reasonable. The Appellate Court stated:
As the court noted, the CC&R’s required an affirmative vote of owners, but only written consent by lenders. The court explained “[t]his would tend to indicate that the CC&R’s, as originally drafted, contemplated a distinction between the forms of approval required from each group, with the approval from the latter group being more relaxed in form. The CC[&]R’s did not specify the method by which the consent may be obtained. [The Owners Association’s] method of assuring receipt of the proposed changes by the lenders and thereafter providing them with 30 days within which to reject the changes is as good as any.” We agree with the court’s assessment.
The Court’s ruling is important because many CC&Rs require consent of Lenders in various circumstances. This opinion, which affirms the reasonableness of the procedures used to obtain consent where the documents are silent, clarifies this issue for many other associations whose documents may be silent as to the method by which consent of the Lenders can be obtained.
ABILITY TO CHANGE AMENDMENT PROVISIONS
Perhaps one of the more significant rulings of this case is the issue of whether an association can amend its documents to require less than a specific percentage to approve, when the amendment provision, by its express terms, states that it cannot be amended. The Association’s 1969 CC&Rs provided that it could be amended upon approval of seventy-five percent (75%) of the Owners and that the amendment provision could not be amended to allow for approval by less than seventy-five percent (75%) of the Owners. The First Restated CC&Rs changed this amendment provision to require approval of a majority of the voting power and the trial court upheld this change in approving the Petition.
Seith contended the trial court exceeded the authority of Section 1356, subdivision (d), which provides:
If the court makes the findings required by subdivision (c), any order issued pursuant to this section may confirm the amendment as being validly approved on the basis of the affirmative votes actually received during the balloting period or the order may dispense with any requirement relating to quorums or to the number or percentage of votes needed for approval of the amendment that would otherwise exist under the governing documents.
The Court of Appeal recognized this is an issue of contract interpretation and that the language of the current CC&Rs would be upheld if clear and “does not involve an absurdity.” The Court, relying on the arguments raised by the Association at the trial court level, stated:
The court found reasonable the provision of the First Restated CC&R’s to allow a majority vote to amend the document, and we agree. It would be rather absurd to allow the governing documents to restrict an association’s ability to amend the document in perpetuity, even if, for instance, 100 percent of the owners preferred a majority vote rather than a supermajority vote. Accordingly, the court did not exceed its authority under section 1356 by approving the majority vote amendment. (Emphasis added)
Determining that these provisions are “absurd” and will not be upheld is important to those associations whose CC&Rs contain similar restrictions on the ability to amend the documents.
BURDEN OF PROOF ON PARTY BRINGING PETITION
Another important discussion in the case is which party at the trial court level has the burden of proving that a proposed amendment is reasonable. The Appellate Court agreed with Seith’s assertion that proposed amendments to CC&Rs do not have the presumption of reasonableness that recorded CC&R provisions have under Civil Code Section 1354. The Court clarified therefore that the party bringing the petition under Section 1356 has the burden of proving that the proposed amendment is “reasonable.” Here, the trial court’s order recognized that the Association satisfied the requirements of Civil Code Section 1356 and found that the provisions contained in the First Restated CC&Rs that Seith objected to were “reasonable.” Accordingly, the Appellate Court determined that the trial court applied the correct burden.
CIVIL CODE SECTION 1356 IS NOT UNCONSTITUTIONAL
Seith contended that as applied retroactively to the original CC&Rs, Civil Code Section 1356 is unconstitutional. She relied on provisions of the United States and California Constitutions which provide that laws may not be passed which impair the obligation of contracts. The Appellate Court noted that these constitutional provisions have been read to not proscribe any impairment. Instead, courts have applied a three part test to determine whether a statute impermissibly impairs a contract. The statute must first be read to determine whether there is any impairment of a contract, and, if so, how substantial. If there is impairment, the statute can be upheld if there is a significant and legitimate public purpose. Here, the Appellate Court, determined that any impairment of CC&Rs by Civil Code Section 1356 serves a legitimate public purpose:
Owners have a substantial interest in the long-term viability of a condominium project, and that interest is not served when a supermajority vote requirement and voter disinterest combine to preclude or unduly hinder an association’s efforts to amend outdated governing documents.
The Court upheld the constitutionality of Civil Code Section 1356.
FOR SALE AND FOR RENT SIGNS ARE “COMMERCIAL”
Seith objected to the language in the First Restated CC&Rs concerning signs. The provision states that no “commercial” signs can be posted in the Development except for one “For Sale” or “For Rent” sign per Unit. The provision further sets forth additional restrictions on the posting of these signs, such as placing them in the window, requiring that they be professionally made and removed within three (3) days of the close of escrow.
Seith contended that the provision violated Civil Code Section 1353.6 which limits an association’s restrictions on “non-commercial” signs. She argued that sale and lease signs are “non-commercial” because Owners are not engaged in buying or selling property and are therefore, not engaged in commerce. The Court of Appeal rejected this argument and recognized that other cases have determined that signs advertising a property for sale do constitute commercial speech.
Seith further argued that the sign provision violates Civil Code Section 712. That code section states that provisions affecting a grant of a fee interest in real property which unreasonably restrict the right of the property owner to display sale or lease signs are void as an unreasonable restraint upon the power of alienation. The Appellate Court rejected Seith’s challenge under this code section, noting that Section 712 addresses the ability of a property owner to display signs on his or her real property. In a condominium, the “real property” is the Unit and the owners have no right to post signs on the common area. The Appellate Court determined that the provision in the First Restated CC&Rs which allows an owner to post a sign in the window of his or her Unit would be viewable to the public. The Court also saw “no problem” with allowing only one sign per Unit, or requiring that signs be removed within three days of a lease or sale. The Court determined that this provision was reasonable.
Seith objected to a provision of the First Restated CC&R’s that requires leases to be in writing and to state the tenant is bound by the provisions of the CC&R’s. At the trial court, the Association explained that it sought written leases to ensure that provisions of the CC&R’s are contained in the lease, as lessees would not otherwise be bound to follow them. The Appellate Court recognized that community associations face enforcement problems if a tenant engages in behavior that violates the governing documents. The Court determined that this provision is reasonable.
THE ASSOCIATION MADE A DILIGENT EFFORT TO OBTAIN VOTES
The Court also addressed whether the procedures used by the Association to obtain votes met the requirement of making a “reasonably diligent effort . . . to permit all eligible members to vote on the proposed amendment” as is required by Civil Code Section 1356(c)(3). In the Petition, the Association submitted the declaration of its property manager that stated the property manager mailed the proposed CC&R’s and ballots to all record Owners on August 29, 2005. The declaration also set forth that in mid-September a reminder memorandum was sent to owners who did not respond, another reminder was included in the Owner Association’s September newsletter, on October 1 it conducted a special meeting regarding the proposed amendment, and on October 11 another reminder and ballots were sent to Owners who had still not responded. The Court recognized that while the Association could have made phone calls to the 12 Owners who did not vote, it concluded that the Association’s efforts were sufficient to satisfy the “reasonably diligent” standard set forth in Section 1356.
CORPORATIONS CODE SECTION 7515 CAN BE USED FOR BYLAWS AMENDMENTS
Since Civil Code Section 1356 only applies to CC&Rs, Corporations Code Section 7515 has been used by associations to reduce the “super-majority”approval requirements for amendments to the Bylaws. The case of Greenback Townhomes Homeowners Assn. v. Rizan (1985) 166 Cal.App.3d 843 concerned a set of CC&Rs and was brought under Corporations Code Section 7515 because Civil Code Section 1356 had not been enacted at the time the vote in question was taken. However, there has been no published decision affirming that Section 7515 can be used to reduce the percentage required to approve Bylaw amendments.
Here, the Court set forth such an affirmation and held that Corporations Code Section 7515 can be used retroactively to approve amendments to the Bylaws. The Court recognized that similar to Civil Code Section 1356, the Corporations Code section is intended to allow and association to overcome voter apathy.
This case is important for homeowners associations, as it sets forth new rules of law concerning the ability of associations to amend their governing documents.