Pacific Reserve Studies
Reserves-Duty to Fund
There is no stature in California that specifically requires associations to fund their reserves. The state legislature has repeatedly, amended the reserve provisions of the Davis-Stirling Act and has had many opportunities to impose funding requirements but has not done so instead, it has continued to increase notice requirements.
Indirect Duty. A legal argument can be made there is an implied duty to fund reserves because boards have a duty to impose regular and special assessments sufficient to perform their obligations under the governing documents. (Civil Code Section 5600 (a)) Setting aside sufficient funds to repair and replace major components is arguably one of those duties. In Raven's Cove v Knuppe, the court held that the failure of me developer-controlled board to fund reserves was a breach of the board's fiduciary duty.
Special Assessments. Boards must exercise prudent fiscal management in maintaining the integrity of the reserve account and an all, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by this section (Civil Code Section 5515 (e)) This special assessment is subject to the limitation imposed by Civil Code Section 5605 (b) (unless the expenditures were for emergencies as defined by Civil Code Section 5610). The board may, at its discretion, extend the date the repayment of the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment (Civil Code Section 5515(e)).
Fee Limitation Argument. A member of the foothills Townhomes Association sued his association claiming that a special assessment to fund the reserve account violated Civil Code Section 5000 (b) He argued that it exceeded the amount necessary to defray the cost for which it is levied because there was no requirement that reserves be funded. The court disagreed and ruled that replenishment of the association's reserve account was a proper basis for a special assessment. The plaintiff also argued that the special assessment was unnecessary because the reserves could have been funded incrementally over time. The court again disagreed:
Whether the fund could have been replenished over time is irrelevant to whether the assessment exceeded cost for which it was levied as a matter of law, an assessment does not violate Civil Code Section 1366.1 merely because the costs could have been recouped incrementally. Nothing in the language of the statute suggests that is so.
Proper Funding. Even though there is not a specific requirement established by the legislature to fund reserves, the prudent course of action is to fund reserves in accordance with the association's written reserve funding plan.
Pacific Reserve Studies