– By Simon J. Freedman,Esq. (originally published in October 1999)
In August of this year, the California Supreme Court adopted a standard of “judicial deference” to be used when challenging decisions made by a Homeowner Association’s Board of Directors regarding maintenance of common areas.
In Lamden v. La Jolla Shores Clubdominium Homeowners Association, owner Gertrude Lamden requested the Homeowners Association to fumigate her building for termites. The Association had an inspection performed which concluded that fumigation was one option, but “spot treating” the building was another option. After considering certain factors such as the cost of fumigation, the cost and inconvenience involved in moving people out of their units for fumigation, and the opinion of experts regarding the extent of the damage, the Association’s Board of Directors decided to perform spot treatments only. Lamden sued the Association, claiming that the spot treatments were inadequate.
The trial court applied the traditional “business judgment rule” and determined that since the Board was disinterested and independent, acted in good faith and was reasonably diligent in informing themselves of the facts, it took appropriate action in developing “a plan” to treat the infestation. Later, the court of appeal disagreed and determined that a more stringent test, that of “objective reasonableness”, should apply when Boards make business decisions.
The California Supreme Court disagreed with the appellate court and essentially affirmed the trial court’s decision. In so doing, the California Supreme Court adopted a rule of “judicial deference” that applies to community association board decision-making:
|“We hold that where a duly constituted community association board, upon reasonable investigation, in good faith and in regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statues, covenants and restrictions, to select among means for discharging an obligation to maintain andrepair a development’s common areas, the court should defer to the Board’s authority and presumed expertise.”|
The Court was careful to state that the “business judgment rule” as established in a corporate context did not apply directly to the Lamden situation. The first reason is because statutory protection of the “business judgment rule” (Corporations Code Section 7231) extends to individual directors, but not to corporate business decisions. Secondly, neither the statutory nor the common law “business judgment rule” protects non-corporate entities. (Here, La Jolla Shores Clubdominium was not incorporated.) Thus, the Court created a new “judicial deference” rule which would apply to common interest developments, regardless of their corporate status. This new rule protects associations from those seeking to litigate the decisions made at the discretion of the Board.
In reaching its decision, the Supreme Court was careful to preserve the protections of individual owners against over-reaching boards. The Court reiterated there is a duty to maintain the common areas in a reasonably safe condition and to protect owners from unreasonable risk of physical injury. Additionally, the court applauded the “significant protection” offered by judicial oversight of boards who seek to control the activities of owners and tenants within their units. Finally, it specifically upheld homeowners’ right to bring litigation to enforce provisions of governing documents.
What this means to Associations and their managers is that instead of “second guessing” board decisions, courts will apply this rule of “judicial deference” to evaluate board decisions regarding the maintenance and management of the common areas. So long as a board can show that it:
1) conducted a reasonable investigation;
2) acted in good faith and in regard for the best interests of the community association and its members; and
3) exercised discretion within the scope of its authority under relevant statutes, covenants and restrictions, the decision should be upheld.