Raising Dues and The Law? by Julie Peterson

Published January 20, 2002

Q:   I am an owner in a small Association and my Association is in poor financial shape and really needs to raise the homeowners dues. However, we received our annual financial/budget package later than 45 days prior to the start of the next fiscal year. My reading of Civil Code Sections 1365(a) and 1366(a), is that in providing this package later than 45 days prior to the start of the next fiscal year, the Board of Directors has lost its ability to raise the dues even $1 without a majority vote of the Association membership. Is this a correct reading of the statutes?

A:   Yes, you are correct in your interpretation of the code. Civil Code Section 1365 states, in part, that a pro forma budget must be distributed to all owners no more than 60 days nor less than 45 days prior to the beginning of the Association's fiscal year end.

Civil Code Section 1366 (a) states that, except as provided in this section, the association shall levy regular and special sufficient to perform its obligation under the governing documents and this title. However, annual increases in regular assessments for any fiscal year, as authorized by subdivision (b) shall not be imposed unless the Board has complied with subdivision (a) of section 1365 with respect to that fiscal year, or has obtained the approval of owners, constituting a quorum and casting a majority of the votes at a meeting of the Association.

If indeed your association is in poor financial shape, the Board still retains the authority to hold a special meeting and take a vote of the owners in relation to increasing the fees. In the event that the budget had been mailed out in a timely manner as required by law, a vote of the homeowners would not be necessary unless the association wanted to increase the fees in excess of 20%. As you can see there are still options open to the Board, however, this could have been handled in a more proactive manner.

It is also the obligation of the Board (and also a state law) that the reserves be reviewed by the Board on an annual basis. Perhaps if this had been done, the Board would have better understood the overall financial picture and may have been more inclined to have their budget approved and ready for mailing within the specified time-frame.

Unfortunately, many times Board of Directors or Budget Committee members get bogged down in micro managing of the budget such as bickering over the amount to budget for a particular line item rather than being able to look at the broad overall picture and the bottom line.

In the event that the Board is unable to resolve their individual differences of opinion regarding a proposed budget, than the Board could simply adopt the current existing budget as is and mail it to the homeowners so as to comply with Civil Code 1365. After that is done, the Board could revisit the budget at a later date at its leisure. As long as the budget was mailed out according to the above Civil Code Section, the Board would then have the option of increasing the budget by 20% or less as long as the Board gave the prescribed notice to all homeowners. Of course the option always remains of taking a vote of the homeowners to increase the existing budget in excess of the 20% if needed.

Julie Peterson is the Vice President of Management Services for N.N. Jaeschke, Inc. and is a member of the Community Associations Institute (CAI). Readers can visit the CAI website at www.cai-sd.org and can get their condominium or homeowners association questions answered by calling the Community Associations Institute at (619) 299-1376 or e-mail at q&a@cai-sd.org.

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