Does homeowner board need to disclose legal expenses?
Question: Is our homeowner association’s board obligated to disclose legal actions to titleholders? Does the board have a duty to disclose the costs of legal fees incurred for such legal actions, or do we owners just sit back and wait to be slammed with several thousand dollars’ worth of special assessments months or years later to cover those fees? Our pro forma annual report is sparse, so how can owners protect themselves from something like this?
Answer: Owners should never sit back and wait to be slammed with assessments. The board has a duty to be transparent and to provide owners with certain information, and owners have a corresponding duty to regularly request all that the law entitles them to.
While the legal action itself may or may not have to be disclosed, all accounts payable and receivables, including payment of legal fees, are available for review by titleholders. There may be no written rule that the board voluntarily disclose, but there is a legal duty to disclose upon titleholder request, making regular owner requests for documents imperative.
In the Common Interest Development Act that went into effect Jan. 1, 2014, the words “pro forma operating budget” were replaced with “annual budget report.” A description of the annual budget report is located under Civil Code section 5300. Arguably one of the most important reports published by the association, this report should be scrutinized by all owners in every common-interest development such as condo, town-home and time-share developments.
In order to effectively exercise their rights, titleholders must methodically request access to the association’s books and records (Civil Code sections 5205 and 5210 and Corporations Code 8333). Additionally, “legal fees” ought to be a line item in every association budget, which must be distributed to all owners pursuant to Civil Code section 5300.
Civil Code section 5300 sets forth that the “assessment and reserve funding disclosure summary form,” prepared pursuant to Civil Code section 5570, shall accompany each annual budget report or summary of the annual budget report that is delivered to owners. Titleholders need to be able to compare what was budgeted with what was spent, and should be asking the board why it is budgeting the amount shown and on what it is spending that money.
The board’s duties require responsible allocation of funds and monitoring of payments made to vendors, including attorneys. Part of the board’s job is to avoid waste of association funds.
Owners of residential deed-restricted properties should not make the mistake of becoming complacent while waiting to be “slammed” with assessments before asking to view documentation substantiating board actions, especially expenditures. Pursuant to Civil Code section 4925(b) the board shall permit any owner to speak at any meeting of the association excluding, if warranted, executive sessions. If you suspect or have been advised that the association is engaged in litigation, ask the board during the meeting’s “open forum” what the money is being spent on and how much, if any, special assessments will be required to fund those expenses. More important, how long is the litigation expected to continue?
Property sales may be jeopardized with assessment and litigation disclosures, so there is no sense in avoiding a thorough investigation — no buyer wants to purchase a liability and a lawsuit and no seller wants to be sued after escrow closes.
If the board won’t disclose its litigation involvement, homeowners can uncover past or present litigation by doing some simple research at the courthouse. By entering the association’s name and/or the parties’ names on the courthouse computer, one can learn whether the association is a party to any lawsuits. An examination of the court’s file in that case or cases should let you know whether or not litigation is appropriate.
If enough homeowners think litigation is not appropriate, they should remove the present board entirely, elect a new board, then take steps to resolve issues using other means. If the board won’t disclose the association’s accounting books and records after a proper written request, then titleholders may bring a civil action to enforce the turnover of records. Corporations Code section 8336 details “enforcement of rights and court appointed inspectors.”
Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.
