Issues when a Project is a Planned Development under Davis Stirling David Van Atta, Hanna & Van Atta, 2020 ©

Often we run across situations where a residential development was established many years ago, sometimes substantially before the enactment of the Davis Stirling Common Interest Development Act (“Davis Stirling Act” or “Act”) that was enacted in 1985 and amended in 2014.* However when the Davis Stirling Act was enacted, these properties, if qualified as being under the Davis Stirling Act, are subject to the Davis Stirling Act and must perform their obligations and administration in accordance with the Act (Civil Code Section 4200)*.

The first question is what is a planned development that qualifies to be a common interest development?  Under the Act a project is a planned development per Section 4175 if the following requirements are satisfied:

1. The project needs to have lots that are “separate interests” and some sort of “common area“(Section 4175). Common area can either be [i] a separate lot owned by an association [or in tenancy in common by the lot owners] or [ii] commonly used easement areas that are maintained and operated by an association (Section 4095(b)).
2. In addition for a property to be a common interest development under the Act, a declaration must have been recorded on the property as a governing document (Section 4175) and there must be an association (Sections 4800 and 4805). [The association can be an incorporated association or an unincorporated association.]
3. In addition, that association must have a right to levy assessments against the lot owners for the expenses of operation of the association (Section 4100), and
4. Importantly, that the association must have a lien right stated in the governing documents to enforce unpaid obligations under the assessments (Section 4175(b)).

A question that often arises for older projects is whether or not there is actually an association?

When we review documents for much older projects we sometimes find that there is not an official association that had been established by filing Articles with the Secretary of State. Sometimes there is some reference to an association, although perhaps informally.  In these instances the association requirement can be satisfied. The Davis Stirling Act states that an association can be incorporated or unincorporated (Section 4805).

Sometimes we find that there is some sort of “committee” that has been given oversight for certain elements of the project, such as maintaining trails or architectural review and other categories of responsibility. The question is whether this “committee” is actually an association even if it is not denominated as an association.  Can there be a “putative” association? In other words, if the body or entity acts in the capacity of an association for the property owners as its members, is it essentially deemed to be an association?

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**Code Section references are to the California Civil Code unless otherwise stated. Prior to 1985 planned development projects were not covered by any statutes. The prior law only dealt with condominiums.

Assuming that the requirements under the Davis Stirling Act are met [that there is a residential development of lots with common area or common easement areas maintained by the committee which has assessment and lien rights, the “committee” can be interpreted to being an association even if it is not denominated as an association.  The properties would be subject to the Davis Stirling Act, even if the project was formed and documented well before the imposition of the Act.

What does it mean to be a Planned Development under the Act?

The Davis Stirling Act has many requirements and obligations for the operation of a common interest development and the common interest development owners association.

The following is a summary of those requirements:

Importantly when the Board of Directors of such an Association is to be elected, this has to be undertaken pursuant to a secret ballot process provided in the Act.  In addition there are other actions that can only be undertaken by the association by secret balloting: this includes amendments to the project declaration, amendments to the bylaws, and other items to be discussed.

Another major issue for a common interest development is that meetings of the Association’s Board of Directors must be held as open meetings so that all members have a right to attend. This is similar to the “Brown Act” for municipal and state government operations. Included under these requirements is that communications outside of a meeting by a majority of the board members, including by e-mail, is not allowed.

The Davis Stirling Act has extensive provisions that deal with the imposition of assessments and the lien rights to enforce collection of those assessments. A detailed process is spelled out in the Act.   In addition there are reserve study requirements that must be met under the Act.

Another important concern is that the Davis Stirling Act requires that an owners association provide a variety of documentation and reports to its members on an annual basis. These reports include an annual budgeting report that includes not only budget information but also other information required under the statutes.   This includes information regarding insurance, statements regarding the association’s processes and procedures for enforcement under the governing documents and other detailed requirements.

The Davis Stirling Act also states that an association may not undertake enforcement of the project documents or proceed against owners for violations, and likewise owners cannot proceed against the association without undertaking a dispute resolution process as spelled out in the Act. This includes various notices and rights to hearings. This also includes requirements to consider alternative dispute resolution.

If a project is a planned development or other common interest development, these statutory details must be understood. To the extent these are not stated in the project governing documents, the lot owners should consider amending their documents to comply with the Act. In considering these amendments, the requirements of secret ballot voting must be followed. The secret ballot voting has some complexity in that there are timing requirements for sending notices to members, conducting the vote by ballots, and the fact that the ballots must be tallied by qualified inspectors of elections.

What follows is a more detailed review of many of the operational and administrative concerns that association directors and managers must consider and act upon.

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Davis Stirling Act Provisions as to Association operations and obligations

The Davis Stirling Act provisions that need consideration as far as operational concerns are the following:

Notice Requirements: The Davis Stirling Act has some details as to how an association is to provide notices to its members. Section 4041**, as one instance, provides that association members must give notice to the association of their addresses and contact information and that the association is to request this notice annually.  The Davis Stirling Act also has specific provisions as to how notices are to be delivered to members, including that email notice is only allowed if an owner informed the association that it is willing to have information sent to it by email [See Sections 4045, 4050 and 4055].

Defined Terms: The provisions regarding what is a common interest development are stated in Section 4100; the definition of a planned development is defined in Section 4175.  The term “Reserve accounts” is defined in Section 4177 and there is a definition of reserve account requirements set forth in section 4178.

Application of Act:  The application of the Act as described in section 4200 provides that the Act applies where there is a declaration, a final map or parcel map, with the creation of separate interests, being lots in a planned development context, coupled with an interest in common or membership in an association.

Note: Section 4201 states that nothing in the Act shall be construed to apply to real property where the development does not contain common area.

Section 4225 provides that certain restrictive covenants which are in violation of Government Code Section 12955 are subject to being removed by action of the board of an association.  This provision deals with improper racial and other discriminatory covenants.

Note: Section 4235 states that if the governing documents make reference to a Davis Stirling Act provision that was repealed and continued in a new provision of the Act the Board may amend the governing documents solely to correct the cross references by adopting a board resolution showing the corrections; member approval is not required for this type of amendment if only the code section references are being revised.

Declarations of Covenants: The provisions of section 4250 provide that a common interest development must have a declaration as defined. There are certain requirements with respect to such declarations. For instance there is a provision for notice of airports in the vicinity.  There is also a requirement for a provision regarding the San Francisco Bay conservation and development commission if applicable. There are provisions that deal with continuation of declarations that either have or do not have termination dates. See Civil Code Section 4265.

Amendment of Declarations: Section 4270 provides for amendments to declarations and how those declarations are to be amended in the future.  Section 4275 provides for a method of obtaining a court approval of an amendment to a declaration where more than 50% is required to approve.   This sets out a court procedure for accomplishing this.

Incorporated or Unincorporated Associations: Section 4280 pertains to the articles of incorporation of an incorporated association. Note that it is not required that associations file articles with the Secretary of State or that association must be incorporated. However, if filed with the Secretary of State, the articles must meet the requirements of section 4280.

Operating Rules: Section 4340 pertains to operating rules and the adoption of operating rules. Essentially what this means is that for an association to adopt what is defined as an operating rule the board must go through a very particular process where the board has to give 30 days of advance notice prior to adopting any such operating rule and provide members the right to attend a board meeting to deal with the proposal. If at least 5% of the members object to the rules as adopted by the board, they can attempt to have the rule voted out.

Disclosures on Sales: Section 4525 pertains to transfer disclosures that are required to be given to prospective purchasers by owners of lots in a planned development. The association is given responsibility for dealing with this requirement. The code section actually sets out a format for what the association is to disclose on behalf of an owner, if so requested.

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**Section references are to the California Civil Code

Exclusive Use Areas and Common Areas: Section 4600 pertains to restrictions on transfers of exclusive use common areas. Section 4635 states the transfer of a lot in a planned development includes a transfer of the lot’s interest in the common area.

Use Restrictions:  Section 4700 lists a variety of limitations on the authority of the association or the governing documents to regulate the use of members’ lots as a separate interest. This includes displaying of signs, solar energy systems, dealing with racial restrictions, disability issues, and family daycare issues.

There are other restrictions as to the association being able to prohibit certain activities: e.g., restrictions on flags (Section 4705), types and nature of signage (Section 4710), keeping of pets (Section 4715 – at least one pet must be allowed); roof repairs and installations dealing with fire issues and the like (Section 4720), antennas on residences or exclusive use areas (Section 4725), low water use issues (Section 4735). Section 4740 pertains to limitations allowed on leasing or renting in governing documents.

Electric Vehicles: Section 4745 concerns limitations and requirements for electric vehicles in common interest developments.

Alterations/Architectural Review: Sections 4760 and 4765 govern rights and obligations regarding improving and/or altering improvement on lots or common areas, including details as to how a board or architectural committee is to function.

Maintenance of Common Areas: Section 4775 sets forth the basics as to maintenance of common areas by the Association.

Association Powers: Sections 4800 and 4805 deal with the powers of an Association, whether incorporated or not [including the powers granted to a nonprofit mutual benefit corporation, as enumerated in Section 7140 of the Corporations Code, except that an unincorporated association may not adopt or use a corporate seal or issue membership certificates in accordance with Section 7313 of the Corporations Code and the powers granted to an association in the Act].

Directors Meetings: Sections 4900 – 4955 deal with meetings of the Board of Directors of the Association including notice of meetings (4920), emergency meeting (4923) and rights of members to attend board meetings (4925).  Importantly, Section 4910(a) provides that the Board shall not take action on any item of business outside of a board meeting and that directors shall not conduct business by e-mail except in emergency situations (4910(b)). Section 4935 pertains to executive sessions of boards.

Members Meetings: Section 5000 pertains to meetings of members of the association: providing (a) that meetings of the membership of the association shall be conducted in accordance with a recognized system of parliamentary procedure or any parliamentary procedures the association may adopt and (b) The board shall permit any member to speak at any meeting of the membership of the association. A reasonable time limit for all members to speak at a meeting of the association shall be established by the board.

Elections: Sections 5100 – 5145 govern member election requirements, process and procedures. These include adoption of election rules and provides for secret balloting for the election of directors to the association board as well as for other matters, such as amending the project’s governing documents.

Inspection of Records: Sections 5200 – 5240 set forth rights and requirements for inspection of association records by members and the directors.

Annual Budget Report: Importantly, common interest development associations have an obligation to provide on an annual basis a raft of information to the members under Section 5300. This includes an annual budget report with proforma operating budget and summary of reserves, reserve plans and a summary of association insurance. [Note: an Assessment and Reserve Funding Disclosure Summary form, prepared pursuant to Section 5570, shall accompany each annual budget report or summary of the annual budget report.]Annual Policy Statement: Section 5310 provides that the association must deliver to the members an annual policy statement within 30 to 90 days before the end of its fiscal year. The annual policy statement is to include all of the following:(1) The name and address of the person designated to receive official communications to the association, pursuant to Section 4035. (2) A statement explaining that a member may submit a request to have notices sent to up to two different specified addresses, pursuant to subdivision (b) of Section 4040.(3) The location, if any, designated for posting of a general notice, pursuant to paragraph (3) of subdivision (a) of Section 4045.(4) Notice of a member’s option to receive general notices by individual delivery, pursuant to subdivision (b) of Section 4045.(5) Notice of a member’s right to receive copies of meeting minutes, pursuant to subdivision (b) of Section 4950.(6) The statement of assessment collection policies required by Section 5730.(7) A statement describing the association’s policies and practices in enforcing lien rights or other legal remedies for default in the payment of assessments.(8) A statement describing the association’s discipline policy, if any, including any schedule of penalties for violations of the governing documents pursuant to Section 5850.(9) A summary of dispute resolution procedures, pursuant to Sections 5920 and 5965.(10) A summary of any requirements for association approval of a physical change to property, pursuant to Section 4765.(11) The mailing address for overnight payment of assessments, pursuant to Section 5655.(12) Any other information that is required by law or the governing documents or that the board determines to be appropriate for inclusion.

Association Accounting: Under Section 5500, unless the governing documents impose more stringent standards, the board shall do all of the following:

(a) Review, on a monthly basis, a current reconciliation of the association’s operating accounts.

(b) Review, on a monthly basis, a current reconciliation of the association’s reserve accounts.

(c) Review, on a monthly basis, the current year’s actual operating revenues and expenses compared to the current year’s budget.

(d) Review, on a monthly basis, the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts.

(e) Review, on a monthly basis, an income and expense statement for the association’s operating and reserve accounts.

(f) Review, on a monthly basis, the check register, monthly general ledger, and delinquent assessment receivable reports.

Use of Reserves and Reserve Studies: The limitations and requirements for use of reserve funds and for conducting Reserve Studies by common interest development association are set out in Sections 5510 – 5520 and for Reserve Studies in Sections 5550 – 5580 [reserve studies required every 3 years].

Assessments: Sections 5600 – 5690 and 5700 – 5740 provide for a process of establishing assessments by the association, including rights of imposing and enforcing liens on the lots that fail to pay assessments.

Liability and Insurance Issues.  Sections 5800-5810 deal with liability and insurance issues.

Dispute Resolution and Enforcement Issues.  Sections 5850-5985 deal with dispute resolution and enforcement issues for common interest developments.

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