DIRECTORS AND OFFICERS

DIRECTOR AUTHORITY
“Can a board stop maintaining amenities, such as shutting down the pool, spa, and sauna or can they cancel services like parking patrol, etc. to cut costs without any legal repercussions?”

Depending on the particular community, some amenities and services can be cancelled or scaled back but which ones and how the problems addressed must be handled very carefully. Any cessation of services or amenities that increases the risk of harm to residents or guests should be very carefully analyzed. An association can be held liable for injuries and damages for conditions that result from a lack of prudent management of project components required to be or which actually are maintained by the association. Examples would include cutting back on lighting, fencing, security, staffed guard gates, etc. Reduction or elimination of recreational amenities or facilities that do not result in increased safety risks may be appropriate (i.e. a tennis court at a tennis & racquet club), but even so care should be taken to insure compliance with the CC&Rs and any applicable legal requirements. Whether, when, and to what degree services should be cut back requires a balancing of considerations (which should be done in an open, properly noticed meeting).

“Can the board of directors evict a tenant for violating the use restrictions in the CC&Rs or board policy?”

Only if the CC&Rs authorize the association to evict the tenant and provided the association follows whatever procedures for eviction are required by law and the CC&Rs. The association will not generally have a direct relationship with a tenant so an amendment to the CC&Rs is required to create the right to evict; that right would be based on the tenant's violation of the governing documents and would probably entitle the tenant to the same types of due process protections that would be afforded an owner subject to discipline. The CC&Rs should also require that leases specifically reference the tenant's obligation to comply with the governing documents and that the failure to do so could result in an eviction action by the association.

“We can't get anyone to step forward to serve on the board. We understand a receiver could be appointed by the court to act in the place of the board. What does it take to get a receiver appointed? What does the receiver do? What does it cost? And, how long does it last?”

Yes, “Receivership” may be a remedy in some cases but it is an extreme remedy. A petition to appoint a receiver may be granted by the Superior Court pursuant to Code of Civil Procedure § 564. Receivership may be appropriate where the association is insolvent, is in imminent danger of insolvency, or has forfeited its corporate rights or where necessary to preserve the property or rights of any party or to enforce the rights of a secured lender. Once appointed, a receiver can abolish the board, levy assessments without membership approval (including assessments to cover the receiver's fees) and generally operate the association. The receiver may retain new professional management or other contractors or consultants as the receiver deems reasonable and necessary. Receiverships can be expensive and while their activities are generally supervised by a court (who will require periodic reporting supported by documentation of income and expenses), members themselves have little control once a receiver is appointed.

“Can an association's board of directors ever approve a transaction that would financially benefit a director?”

Association boards often avoid interested director transactions because they can be politically divisive. This may be a very prudent approach. However, there is no absolute prohibition in the California Corporations Code or the Davis-Stirling Common Interest Development Act against an association entering into contracts or transactions with directors who have a material financial interest in the arrangement or with any corporation, firm, or association in which a director has a material financial interest. To the contrary, each statute contemplates that such transactions might come up for consideration from time to time. To prevent misuse of this power, these statutes set parameters for such transactions.

The Davis-Stirling Act subjects interested director transactions to the requirements of California Corporations Code section 310. Generally, under this statute, a transaction is not void or voidable simply because it is between an interested director and an association provided that:

  • The director's interest and the material facts of the transaction are fully disclosed to or known by the board, and
  • The board authorizes, approves or ratifies the transaction in good faith (not counting the interested director's vote), and
  • The transaction is “just and reasonable” as to the association at the time it is entered.

Be careful. In addition to these statutory requirements, a board must ensure that the association's governing documents do not prohibit such transactions. And of course, each director must comply with his/her fiduciary obligations to the association and its members at all times.

Be proactive. An association can adopt guidelines to address this issue. An association may choose to completely prohibit such transactions or, instead, to adopt a policy that outlines the minimum requirements and procedures for approval of such transactions. Your association's general counsel can assist with the development of such guidelines if the board wishes to adopt them.