Here is the scenario: a board adopts the annual budget and notifies the owners that assessments will increase from last year by 10%. After the beginning of the association’s fiscal year, and months later, the board realizes that expenses are greater than anticipated and wants to again increase the assessments, this time by another 10% (for a total of a 20% annual increase). Some attorneys, managers and board members believe that the board has this power; others (including this writer) disagree based on the language of the Civil Code, the intent of the legislature, and common sense. Owners are entitled to know at the beginning of the fiscal year what their association’s assessments will be. The board has a fiduciary obligation to determine what the assessments will be for that fiscal year and has a right to use the remedy provided in the Civil Code if expenses are greater than anticipated. Otherwise, the legislature would not have imposed a sanction for a board’s failure to timely distribute the new fiscal year’s budget, and a board could simply send out whatever they have and finalize the budget later.
The Civil Code and Raising Assessments
The Civil Code makes it clear that the board’s power to increase assessments flows with the creation, adoption and distribution of the association’s budget. §5605(b) of the California Civil Code provides, in part, that notwithstanding more restrictive limitations placed on an association’s board of directors by the association’s governing documents (meaning no matter what an association’s CC&Rs say), the board “may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association’s preceding fiscal year….” If the association’s board adopts a budget increase in regular assessments at the beginning of its fiscal year that is less than 20% of the prior year’s assessments, some practitioners advise that this provision of the Civil Code allows the association’s board latitude to increase the rate of regular assessments mid-year, without homeowner approval, as long as the total increase in regular assessments for the year does not exceed 20% over the prior year’s assessments (this mid-year increase would presumably be levied if budgeted regular assessments are not sufficient to cover the association’s current expenses). I, and others, do not agree.
Boards Can’t Raise Assessments Mid-Year Without Approval
Following the scenario referenced above, there are a number of reasons why a board is not permitted to increase regular assessments up to 20% whenever they feel the need. First, this action is contrary to the language of §5605(a), which provides, in part, that
Annual increases in regular assessments for any fiscal year…shall not be imposed unless the board has complied with paragraphs (1), (2), (4), (5), (6), (7), and (8) of subdivision (b) of Section 5300 with respect to that fiscal year.
§5300 of the Civil Code deals with fiscal matters and financial documents, including an association’s pro forma operating budget. This Section provides that the budget shall include the estimated revenue and expenses, including regular assessments, on an accrual basis, meaning that the board is required to estimate the expenses for the association at the time the budget is first distributed.
§5300(b)(5) provides that an association’s annual pro forma operating budget is to be distributed 30 to 90 days prior to the beginning of the association’s fiscal year. If the association does not timely distribute its budget, then it does not have the right to increase regular assessments, at least not without approval of the homeowners (as described below in reference to §5605(b). This language makes it clear that it was the legislature’s intent that the budget be distributed once (and prior to the beginning of the association’s fiscal year), and that homeowners are entitled to know at the time the budget is distributed what the rate of assessments will be. To allow a board the ability to increase regular assessments mid-year does not allow the association’s homeowners to budget their personal finances properly and allows the board to approve and distribute a budget that is not a fixed and accurate accounting of the association’s projected costs for the fiscal year. The Civil Code does not specifically provide that an association has the right to increase assessments mid-year (without owner approval) just because it did not increase regular assessments by 20% when the budget was distributed prior to the beginning of the association’s fiscal year.
Exception for Emergency Assessments
Civil Code §5605(b) provides that this Section’s restrictions on regular assessment increases (and the imposition of special assessments) “does not limit assessment increases necessary for emergency situations.” Although this Section suggests that assessments levied for emergency situations are (regular) assessment increases, this language is generally interpreted to be with respect to the levying of emergency special assessments (see below). If the board had the ongoing power and authority to increase regular assessments on whim, the emergency situations provision would be superfluous.
Emergency situations are defined, under §5610 (a)-(c), as including an extraordinary expense (1) required by order of a court, (2) necessary to repair or maintain the common interest development or any part of it for which the association is responsible where a threat to personal safety on the property is discovered, or (3) necessary to repair or maintain the common interest development or any part of it for which the association is responsible that could not have been reasonably foreseen by the board in preparing and distributing the pro forma operating budget under §5300. §5610(c) provides that prior to the imposition or collection of an extraordinary assessment for unforeseeable repairs or maintenance (number 3 above), “the board shall pass a resolution containing written findings as to the necessity of the extraordinary expense involved and why the expense was not or could not have been reasonably foreseen in the budgeting process, and the resolution shall be distributed to the members with the notice of assessment.” This language authorizes special assessments, but not an increase in regular assessments, that are levied on homeowners in the event the board determines that the budget does not provide sufficient revenue to pay for certain bills.
Regular Assessments are Bound by the Budget
Civil Code §5610(c) makes it clear that a board of directors for an association boards may not increase the amount of regular assessments, but may levy a special assessment, if an expense(s) was not and could not have been anticipated at the time the board distributed the association’s pro forma operating budget. At some associations, boards have been challenged on their decision to levy a special assessment where the owners contend that the expense should have been anticipated. What would be the purpose of the provisions of this Section if carte blanche authority to increase regular assessments after budget distribution is presumed to be granted to the board? It is obvious that the legislature intended to establish the rate of regular assessments when the budget is distributed, as the Civil Code provides a mechanism for a board to levy a special assessment if there is an extraordinary expense that could not have been anticipated when the budget was first prepared.
The Civil Code does however provide an association an avenue for increasing regular assessments mid-year. In fact, Civil Code §5605(b) allows the board to solicit the approval of the homeowners for a mid-year regular assessment increase (in lieu of a special assessment). For such increase approval, a majority of more than 50% of the homeowners (the quorum requirement under this Section) must cast a secret ballot, and a majority of those voting must vote in favor of the increase.
It seems fairly clear that the legislature’s intent was for the board of directors to timely distribute the budget with the projected regular assessment increase prior to the beginning of the association’s fiscal year, so that homeowners can rely on that information for their own budgeting purposes. The Civil Code allows a board to levy a special assessment for emergency situations when there is an extraordinary expense, which would indicate that the board of directors should be careful to budget for all anticipated expenses in the association’s pro forma operating budget. The language of the Civil Code cannot be reasonably interpreted to mean that a board has the ability to increase the rate of regular assessments in the middle of a fiscal year simply because they did not increase the assessments by 20% (as statutorily permitted) when they distributed the association’s budget. To come to another conclusion would sanction the actions of a board that does not take the time and effort to budget properly for their association’s fiscal year.
David Swedelson is a founder and senior partner at the law firm of Swedelson & Gottlieb in Los Angeles. The firm focuses its practice on the full-service representation of community associations and is an active member of ECHO. David can be contacted at dcs@sghoalaw.com