What are the Restrictions on HOA Annual Assessments?

The recent California appellate decision in Ruffier v. Volcano Hills Road Maintenance Association, was about California’s statutory scheme governing condominiums and other “common interest developments.”

In the 1970’s, a common interest development was formed to maintain private roads used by 22 parcels of land in Amador County.

Each parcel was subject to an initial annual assessment of $100. Increases in the annual assessment amount were contemplated, but a limit of $200 per year per parcel was imposed.

Volcano Hills Road Maintenance Association (the Association) currently administers the common interest development. Ownership of at least one parcel of land in the common interest development constitutes membership in the Association.

At the Association’s June 2019 annual meeting, members voted to eliminate the $200 limit.

When the Association’s board of directors later voted to increase the annual assessment from $200 to $1,000, a few members (plaintiffs) challenged the increase in a lawsuit against the Association and others.

Plaintiffs sought a declaratory judgment that the assessment increase was invalid under California law, in part because the board of directors did not obtain the approval of a majority of a quorum of members.

The trial court denied plaintiffs’ request for declaratory relief.

On appeal, plaintiffs argued the trial court erred.

The appellate court agreed and reversed and remanded the matter with directions that the trial court issue a declaratory judgment stating the challenged assessment increase imposed by the Association’s board was void and invalid.

In a 1974 document referred to as “the Declaration,” multiple Amador County landowners, who proclaimed themselves to be “desirous of establishing a means of providing for the maintenance of certain private roads” that touched their properties, established a “Road Maintenance Committee” (Committee) and empowered it to charge annual assessments of $100 for each of the 22 parcels of land covered by the Declaration.

The Declaration also (1) empowered the Committee to increase the assessment for each parcel “up to a maximum . . . of $200 per year per parcel” (“the $200 limit”) and (2) contemplated a successor body to which all the powers and duties of the Committee would pass.

Four years later, the Association was formed and assumed the powers and duties of the Committee, as contemplated in the Declaration.

The Association’s articles of association provide that there is only one class of voting membership—each parcel is entitled to one vote.

The articles also provide that they may be amended “only by the vote or written consent of members representing ownership of sixty six and two thirds (66-2/3) percent or more of the property.”

Since the Association’s formation, its bylaws have provided, inter alia, that

(1) the presence of members entitled to cast 51 percent of the votes of the membership at any annual meeting or special meeting is a quorum for any action not otherwise prohibited by the Declaration, articles of association, or bylaws;

(2) once a quorum has been established, members may continue to do business even after the withdrawal of one or more members leaves “less than a quorum”;

(3) the bylaws may be amended “by a majority of the members at any annual meeting or special meeting of the members called for that purpose”; and

(4) the business and affairs of the Association are managed by a board of directors, all of whom must be members of the Association.

Members constituting the bare minimum necessary for a quorum—those owning 12 parcels of land—were present at the Association’s annual meeting in June 2019, when the chairman of the board made a motion to amend the bylaws, ostensibly to eliminate the $200 limit, which had been reached by that point.

Because one member left before voting occurred, the vote on the motion was 10 in favor and 1 opposed (10-1). When the board of directors met a month later in July 2019, it voted to increase the annual assessment for the 2020-2021 fiscal year to $1,000 per parcel.

In April 2021, plaintiffs’ predecessors in interest filed a verified complaint for declaratory relief.

Relevant here, they claimed the June 2019 amendment of the bylaws that ostensibly eliminated the $200 limit was void for multiple reasons. One reason was that the amendment contradicted the Association’s articles of association and the Declaration, which are “governing documents” that outrank the bylaws in the hierarchy of documents set forth in the Davis-Stirling Common Interest Development Act (the Act). (Civ. Code, §§ 4000-6150.)

Another reason, plaintiffs argued, was that a valid quorum of the Association’s membership never ratified the amendment, contrary to the Act.

Plaintiffs also claimed the July 2019 vote by the board of directors to raise the annual assessment from $200 to $1,000 was void under the Act because it did not obtain the approval of a quorum of members.

The first cause of action in the complaint sought a judicial determination that the rate increase was illegal and/or invalid.

After holding a bench trial, the trial court issued a statement of decision, concluding the increase in the annual assessment was not unlawfully levied for the purpose of funding the repairs necessary to maintain the Association’s roads. This was so, the trial court reasoned, because the Association’s bylaws were properly amended in June 2019 and because the $200 limit was unreasonable and therefore unenforceable.

Noting that, after insurance costs, the $200 limit left the Association with only $1900 per year to maintain its roads, the trial court invoked section 5975—which, in the trial court’s words, provides the covenants and restrictions of a Declaration will be enforced unless they are unreasonable—and determined that because a public policy is that the association fulfill its fundamental purpose, the $200 limit “effected an unreasonable restriction and therefore an unenforceable restriction.

Accordingly, the trial court entered judgment in May 2024 denying the request for declaratory relief.

Enacted in 1985, the Act consolidated the statutory law governing condominiums and other common interest developments, and provides that a common interest development is created whenever a separate interest coupled with an interest in the common area or membership in an association is, or has been, conveyed and a declaration, a condominium plan, if one exists, and a final or parcel map are recorded.

Common interest developments are required to be managed by a homeowners association defined as a nonprofit corporation or unincorporated association created for the purpose of managing a common interest development, which homeowners are generally mandated to join.

There was no dispute that the Act applied in this case.

Under the Act, the term governing documents means the declaration and any other documents, such as bylaws, operating rules, articles of incorporation, or articles of association, which govern the operation of the common interest development or association. (§ 4150.)

There is a clear hierarchy: the law shall prevail in any conflict between the governing documents and the law; the declaration prevails in any conflict with the articles of incorporation (or association); and the articles of association prevail in any conflict with the bylaws. (§ 4205.)

The declaration is often referred to as the development’s constitution and establishes a system of governance. Importantly, it contains the development’s covenants and restrictions, which are ‘enforceable equitable servitudes, unless unreasonable.

In relevant part, section 5605 provides: (a) 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, or has obtained the approval of a majority of a quorum of members at a member meeting or election; (b) Notwithstanding more restrictive limitations placed on the board by the governing documents, 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 without the approval of a majority of a quorum of members. (§ 5605, subds. (a), (b).)

Accordingly, under the Act, a board that has complied with the pertinent requirements in section 5300 may increase an annual assessment up to 20 percent without the approval of a majority of a quorum of its members (§ 5605, subds. (a), (b)).

A board that has not complied with the requirements in section 5300 may not increase an annual assessment by any amount without the approval of a majority of a quorum of its documents for many older homeowners associations required supermajority votes for amendments, but voter apathy and other reasons often make achieving such a supermajority impractical.

The legislative history indicates the statutory scheme is the result of a careful balancing: granting to homeowners associations the tools and flexibility needed to adequately maintain and repair common areas on the one hand, and protecting individual members of the associations from large, unforeseen assessment increases on the other hand.

Plaintiffs contended the Association’s board did not have the authority to raise the annual assessment in July 2019, because under section 5605, subdivision (a), the board neither complied with section 5300’s reporting requirements nor held a vote to obtain the approval of a majority of a quorum of its membership.

They further contended that section 5605, subdivision (b) mandates that even if the board had done the required reporting that would have allowed it to increase the annual assessment, any increase greater than 20 percent required the approval of a majority of a quorum of members.

The Association did not dispute that it did not comply with section 5300’s reporting requirements.

But the Association contended:

(1) the trial court correctly determined that the $200 limit was unreasonable;

(2) the governing documents did not preclude the assessment increase;

(3) even if the assessment increase was inconsistent with section 5605, plaintiffs are not entitled to declaratory relief because the Association’s roads presented an emergency threat to health and safety under section 5610; and

(4) even if section 5610 did not apply, the trial court did not abuse its discretion in declining to invalidate the assessment increase because the Act (a) requires an association to levy regular and special assessments sufficient to perform its obligations under the governing documents and the Act (§ 5600), and (b) does not provide a means for members of an association to invalidate an assessment increase.

The appellate court agreed with plaintiffs that the July 2019 assessment increase by the board was void due to noncompliance with section 5605. This is so because the record reflects the membership was never asked to approve the increase, and it is undisputed the board did not comply with the pertinent requirements of section 5300.

LESSONS:

1.         Common interest developments are required to be managed by a homeowners association defined as a nonprofit corporation or unincorporated association created for the purpose of managing a common interest development, which homeowners are generally mandated to join.

2.         There is a clear hierarchy: the law shall prevail in any conflict between the governing documents and the law; the declaration prevails in any conflict with the articles of incorporation (or association); and the articles of association prevail in any conflict with the bylaws. (§ 4205.)

3.         Accordingly, under the Act, a board that has complied with the pertinent requirements in section 5300 may increase an annual assessment up to 20 percent without the approval of a majority of a quorum of its members (§ 5605, subds. (a), (b)).