(originally published in Winter 2005)

The California legislature has enacted several new laws and amended many existing laws relating to common interest developments. Associations are now required to follow a new informal dispute resolution procedure before they may resort to the existing Alternative Dispute Resolution (“ADR”) process identified in Civil Code section 1354 (Moved to Civic Code section 1369.520 on January 1, 2005). This new procedure essentially amounts to a pre-ADR meeting between the owner and a board member, at which the parties attempt to resolve the matter. If an association fails to adopt its own procedure, it must follow the one enacted in Civil Code section 1363.840.

The new legislation also imposes additional requirements on associations with respect to reviewing owners’ architectural change applications and distributing financial documents pursuant to Civil Code section 1365. Unless otherwise noted, the new laws discussed in this chapter take effect on January 1, 2005.

A. AB 1836 – Dispute Resolution Procedure and Alternative Dispute Resolution

AB 1836 adds sections 1363.810 through 1363.850 to the Civil Code. These sections expand the manner in which associations and owners attempt to resolve disputes. While this bill does not change the current ADR process currently described in Civil Code section 1354 (Moved to Civic Code section 1369.520 on January 1, 2005), it does require associations to adopt a “fair, reasonable and expeditious procedure” for informal dispute resolution that must be followed before ADR may be commenced. This procedure must provide parties the opportunity to meet and confer in an effort to resolve the dispute. If an association does not adopt such a procedure, it will be required to follow the procedure outlined in newly enacted Civil Code section 1363.840.

Under this procedure, a meeting can be requested by either an association or an owner. If the association requests a meeting, the owner is not required to participate; however, if an owner requests a meeting, the association must participate. The owner may not be charged a fee to participate in the process. Any procedure adopted by an association must set forth prompt deadlines and time frames within which an association must respond to a request from an owner. At the meeting, the parties must make a good faith effort to resolve the dispute. Any resolution reached during the meeting must be put in writing. Under certain circumstances, a resolution will be judicially enforceable. Any applicable statute of limitations is tolled during this procedure.

Associations must provide members a summary of this procedure on an annual basis. The summary must include the exact language set forth in Civil Code section 1369.590. This summary may be included in the annual “mail out” required by existing Civil Code section 1365, with the exception that the prior language referring to Civil Code section 1354, must be modified to refer to new Civil Code section 1369.520 et. seq. Other than this exception the disclosure remains the same as in years prior.

AB 1836 also adds Civil Code section 1369.530, which expands the channels by which an ADR Request For Resolution may be served to include first class mail, express mail, facsimile “or other means reasonably calculated to provide the party being served with actual notice of the request.”

In addition, this bill adds a new Civil Code section 1368.4 and renumbers existing Civil Code section 1368.4 as 1368.5. New section 1368.4 allows an owner facing a CC&R enforcement lawsuit to raise the “comparative fault” of the association or its property manager as a defense to the lawsuit. The owner, however, may not use comparative fault as the basis for an action against the association or its manager, where damage is only sustained by the association or its members.

B. AB 2376 – Architectural Review

Most CC&Rs identify specific procedures that owners must follow prior to making any physical changes to their units. These procedures typically require the owner to submit an architectural application to the association for approval. AB 2376, which adds section 1378 to the Civil Code, imposes new requirements on associations with respect to the review of such architectural applications.

First, the association must put its decision to approve or deny the application in writing. Second, if the association denies the application, it must explain its reasons for doing so in the written response. It must also include in the response a description of the procedure for requesting a reconsideration. Owners are entitled to have their applications reconsidered at an open meeting of the board of directors unless the original decision was made by a board acting as the architectural review committee. Reconsideration by the board, however, does not constitute dispute resolution within the meaning of Civil Code Section 1363.820 (described above). Each year, associations must provide owners with a summary of the requirements for obtaining approval, a listing of the types of changes that require approval, and a copy of the procedure used to review changes.

When a board of directors makes a rule change that affects one or more of the subjects listed in existing Civil Code section 1357.120, the procedures identified in sections 1357.130 and 1357.140 are triggered. These procedures require the board to provide owners written notice of the proposed rule change and allow the owners to reverse the rule change in certain circumstances. AB 2376 amends Civil Code section 1357.120 to add the association’s rules for reviewing architectural applications to the list of subjects that fall under the procedures set forth in Civil Code sections 1357.130 through 1357.140.

C. AB 2718 – Financial Statements and Reserves

AB 2718 amends Civil Code section 1365, which governs the annual distribution of financial documents to members. Pursuant to this amendment, if an association decides to levy or anticipates levying a special assessment to repair, replace, or restore a “major component” or provide reserves for such a project, it must prepare and distribute a statement to owners identifying the estimated amount, commencement date, and duration of any such special assessment. In this statement, the association must also indicate how the board intends to fund the reserves to repair or replace major components. For example, the board may choose to levy assessments, borrow money, use other assets, or defer other maintenance to fund the reserves.

This bill also amends section 1365(a) to include specific language regarding the formula to be used for calculating cash reserves, including the percentage rate of return. Also pursuant to this amendment, Section 1365(a) now allows associations to distribute a copy of the operating budget not less than 30 (instead of 45) nor more than 90 (instead of 60) days prior to the beginning of the association’s fiscal year. Similarly, the association may now distribute copies of its collection policies and practices and insurance policies not less than 30 nor more than 90 days prior to the beginning of the association’s fiscal year.

These new provisions are specific and should be referenced when preparing financial statements and documents for distribution after July 1, 2005.

AB 2718 also adds Civil Code section 1365.2.5, which provides an “Assessment and Reserve Funding Disclosure Summary” form that associations must use to summarize its reserve funding information. Also added is Civil Code section 1365.3, which requires “community service organizations” to comply with financial disclosure and distribution obligations. Finally, AB 2718 amends Civil Code section 1368 to allow owners to provide required documents to prospective purchasers in electronic format.