Can Board Dip Into Reserve for Crisis Repairs?

QUESTION: The board of directors of our condominium association has determined that the association is responsible for some repairs that will cost about $10,000. This is an unforeseen expense for an item that is not included in our reserve study.

Since our association has only 14 units, it will be impossible to accumulate this amount of money immediately so these emergency repairs can be done. I understand that the owners are entitled to 30 days notice before the billing of a special assessment. The repairs must begin right away to prevent further damage and more costly repairs in the future.

Does the board have the authority to use $10,000 from the reserve funds even though the reserves are designated for other expenses? What steps must be taken to replenish the reserve funds?

ANSWER: The use of reserve funds is covered in Section 1365.5 of the California Civil Code. New wording in this section of the code became effective Jan. 1, so your inquiry is timely. It is also a common question from many readers.

The board does have the authority to transfer money from the reserves for this unexpected emergency repair if they follow the procedures.

First, the board must document the reasons for the use of the reserve funds and the amount of the reserve funds that will be used. Then the board must decide how to replace the reserve funds and how soon they will do so. The reasons for the use of the funds and the method of replacing the reserve funds and the amount of time that will be needed to replace the funds must be noted in writing in the board meeting minutes. This is the first step in the disclosure of information to the owners.

The money should be replaced within one year. If the board finds that they have a good reason to delay the restoration of the funds beyond the one-year time limit, they must document this information and the reasons for their decision in the board meeting minutes.

The board may decide to approve a special assessment that will replenish the funds over a period of time. However, if the special assessment exceeds 5% of the budgeted annual expenses, the board would not have the authority to approve it. The owners would be entitled to vote at a special meeting called for the purpose of voting on the special assessment. The special meeting can only occur if a quorum is present. Then, a majority of those owners present would have to vote in favor of the special assessment.

If a special assessment is not approved, the board can increase the annual budget as much as 20% for the next fiscal year to replenish the reserves.

Can Reserve Funds Be Used to Pay Lawyer?

Q: Does our homeowner association’s board of directors have the authority to use reserve funds to pay attorney fees for a lawsuit against the builder/developer?

A: Yes, but the board must follow the same procedure of documentation and disclosure in the board meeting minutes as stated in the previous answer. In addition, new notification requirements took effect Jan. 1. The association must notify all of the owners when the decision is made to use reserve funds or to temporarily use reserve funds for litigation.

The board must notify the owners at its earliest convenience by mailing a copy of the minutes or by including the information in the next regularly published newsletter that is mailed to all owners.

The notification must include information about the availability of an accounting of the litigation expenses that are transferred from the reserves. Accounting records regarding the litigation must be made available for inspection by the members at least on a quarterly basis at the association’s office. If the association’s legal documents require a higher level of accounting disclosures, then the association must comply with those requirements.