To amend your HOA’s governing documents, you must begin by developing and presenting the amendments to the members. And sometimes, when a vote cannot be obtained, associations can use the judicial relief tool, allowing a court to authorize amendments and other “corporate” approvals
There are many reasons a board of directors might consider amendments to the CC&Rs, Bylaws and Articles of Incorporation. These might include a wish to update the documents or conform them to new legislation, to eliminate ambiguities or address problems that have become evident as a development ages. Likewise, there are times when membership consent is needed to obtain loans, buy or sell property, construct capital improvements, authorize annexations and in other situations.
The Process of Amending Governing Documents
A key challenge facing any board is the problem of membership apathy or high voting approval requirements contained in an association’s governing documents (Articles, Bylaws, CC&Rs and Rules). This article addresses the effort it takes to develop and present governing document amendments to the members and the infrequently used but terrific judicial tool which permits a Court to authorize amendments and other “corporate” approvals even where the voting requirements of the governing documents cannot be met.
Beginning the Amendment Process
The process usually begins when the board or manager recognizes that the governing documents are out of date or fail to address basic operational problems adequately. Documents become out of date mostly as a result of changes to the Corporations Code (for example, sections permitting electronic communications) or the Davis-Stirling Common Interest Development Act (“Act”). Problems that can be solved by amendments include disputes over maintenance or architectural requirements or the authority of the board or committees, to name a few.
Once the decision to amend has been made, next steps include getting the participation of key directors, committee or association members to assist in the process, selecting counsel and reviewing legal input as to the many amendment options available. Experienced counsel will have templates based on years of experience and analysis but these forms will always require modification, sometimes a great deal, depending on the needs, interests and wishes of the board or committee.
Informing the Community
Membership input can be key to a successful amendment project. “Q&A” letters, informational meetings and other forms of communication can elicit from the members issues that are very important, unimportant or, significantly, those which galvanize opposition threatening the entire process. Knowing what types of changes in the documents will or won’t aid in adoption of amendments can help the board and counsel frame the issues properly before submitting an amendment package to the members.
The amount of time the pre-voting process will take varies with each community and the issues it faces. The board should anticipate several months for the preparation and voting process. Some projects can be done faster, others will take longer; the difference is mostly in the type and amount of pre-voting input to the basic changes recommended by counsel that may occur on any given project.
Approval by Vote
Amending most governing documents requires “supermajority” approval, that is, the approval of 60%, 2/3rds or 75% of the membership. This high bar can be difficult to achieve. Techniques to increase the chance of obtaining the required approval include providing the members with clear explanations for changes and statutory requirements, a forum for discussion, flexibility in the “final product” and extending the voting deadlines. Even so, these efforts are not always enough to assure passage of the amendment. In some of these cases, a court may be willing to step in and validate the amendments even without the approvals required by the documents.
The same considerations apply to resolutions submitted to the members for approval. For example, many governing documents prohibit, without the approval of 75% of the members, expensive capital improvements, loans, easements or the sale and purchase of property. In those cases, a great deal of preparation and communication is needed to garner that approval. When the approval levels cannot be obtained, judicial relief may be available.
Four Steps to Acquire Judicial Relief
Generally, courts are reluctant to intervene in the “governance” of a homeowners association. However, the legislature has carved out exceptions which permit judicial intervention to authorize complete or “spot” amendments to the CC&Rs (Civil Code Section 4275) or corporate action, including amendments to the Articles of Incorporation and Bylaws and other types of proposed resolutions (Corporations Code Section 7515). In effect, these laws permit a Court to lower the voting requirements necessary to implement amendments or loans, sales, easements or other types of corporate activities. This article focuses first on the rules relating to CC&R amendments under §1356. Procedures concerning corporate approvals and amendments to the Articles and Bylaws are discussed towards the end of the article.
Obtaining judicial relief is a four step process: a Petition must be filed that sets forth the governing document voting requirements and the steps taken and documents used to comply with those requirements; a hearing on the granting of the Petition must be set and written notice must be provided all members; the association must persuade the Court that granting the Petition and approving the amendments is reasonable; and, if approved, the Order granting the Petition must be filed, recorded and, with the amendments, distributed to all members. Generally this process is very fast and should normally take 45 to 90 days. It will almost always be far less expensive than “litigation.”
Get in the Door
The association’s Petition must describe the effort made to solicit membership approval of the amendment as required by the governing documents, the number of votes cast in favor and against the amendment and the number of affirmative votes required to approve it. The association must also file copies of the governing documents, the amendment, the notice and voting solicitation materials and a short explanation of the reason for the amendment. Other information and documentation the association believes relevant to the issues may also be filed. Typically, this will include legal argument as to why the Petition should be granted.
Set the Hearing
At the time of the filing of the Petition, the association may apply for a hearing date. Unlike traditional lawsuits, the “trial” of the Petition will occur at a one day hearing in which the Court will hear arguments from counsel and anyone else (owners included) who wish to support or oppose the Petition. Notice of the hearing must be provided all owners and typically notice by first class mail is acceptable. The Notice usually will be accompanied by a copy of the Petition, the Order setting the hearing and a letter from counsel explaining the procedure and advising owners of their right to attend the hearing, write the Court and to obtain copies of all papers filed by the association in support of the Petition. At least 15 days notice of the hearing must be given; typically the hearing is held within 45 to 90 days of the date the Notice is mailed to owners.
Objections Before and During the Hearing
Opponents of the Petition may send written objections to the Court. These can be informal letters or formal briefs. Also, opponents (or their counsel) may attend the hearing and ask the Judge to permit oral argument. The association’s attorney will likewise be in attendance to address the Judge’s concerns and to respond to objections. Depending on the issues, the hearing will usually take between 15 and 45 minutes.
After the Hearing
If the Court grants the Petition, Association counsel will obtain a certified Court Order and cause it, related documents and the amendments filed with the County Recorder. Once filed the amendments become effective as if approved by the members. The amendments must thereafter be distributed to all members.
Even if all the requirements for judicial relief are met, the Court is not required to grant the Petition. It will be denied if the amendments take away the rights of voting classes (unless the amendment is approved by at least half the class), eliminate special developer rights or impact the security interests of lenders. And, importantly, the Petition can be denied if the Court does not think the amendment is “reasonable.”
Whether an amendment is “reasonable” will depend on many factors but unfortunately, there are no cases that specifically define how the Court should determine reasonableness. The legislative history to Section 1356 suggests that judicial relief should be used to address “important” amendments or those that failed as a result of membership apathy, but these requirements are not contained in the law itself. Other considerations might include whether the board extended the voting deadline to permit greater membership participation; if the amendment concerns the revision of maintenance responsibilities as a way of saving the association money or to avoid future responsibility for claims; the extent to which the amendment might impact one group of owners at the expense of others; the manner in which the amendment might change existing expectations of the members; and other considerations.
Judicial Approval of Corporate Action
Section 4275 of the Civil Code deals with the problem of amending what is basically a “deed restriction,” a document affecting the use of real property. By contrast, Corporations Code Section 7515 is much broader: it permits a Court to authorize corporate action if “for any reason it is impractical or unduly difficult” for that consent to be obtained by the board or members as provided in the Articles of Incorporation or the Bylaws. The procedural requirements of a hearing and membership notice are similar (but looser) than those mandated by the CC&R Petition procedure discussed above.
While a Section 7515 Petition can be used to obtain judicial approval of amendments to the Articles and Bylaws (A Petition for approval of Article and Bylaw amendments can be filed in conjunction with a Petition to reduce the voting requirements for CC&R amendments.), it can also be a powerful tool to achieve political goals that, owing to apathy or other reasons, cannot otherwise be accomplished. Thus, a Court could reduce the quorum needed to conduct elections or the number of membership approvals needed to authorize secured loans, the purchase or sale of property, easements, annexations, capital improvements and special assessments and even the IRS rollover.
Be Smart and Forward Thinking
Before embarking on a governing document amendment or any major project that requires membership support, the board and counsel should “look ahead” to situations in which judicial approval might be needed or could be used. Planning in advance how, when and what type of votes are submitted to the members can increase the chance that, “at the back end,” the judicial Petition tools created by the legislature can be used to achieve goals that promote the best interests of the association.
Steven Weil is a founding partner at the law firm of Berding & Weil in Alamo. His practice focuses on legal issues affecting community associations. He is a member of the ECHO board of directors and a frequent speaker at ECHO events.