California Enacts Significant Changes to Davis-Stirling Homeowners Association Laws

On October 12, 2019, California Governor Gavin Newsom signed Senate Bill 323 (“SB 323”) into law.  This new statute makes significant changes to Civil Code § 4000 et seq., also known as the “Davis-Stirling Act.”  These revisions to Davis-Stirling touch upon serious functions of homeowners associations (“HOA” or “association”) and their management companies.  SB 323’s enactment will have the practical effect of requiring HOAs and their management companies to revisit election procedures, board nominee disqualifications, and the functions of inspectors of elections.

The new laws detailed below are set to go into effect starting January 1, 2020.

Elections

SB 323 imposes certain new requirements related to elections by acclamation and the timing of director elections.

While common in HOA governing documents, director elections by acclamation had never been explicitly addressed by the Davis-Stirling Act.  Typical bylaws provide that if the number of nominees does not exceed the number of director vacancies in any given election, those nominee directors are or may be elected by acclamation.  The new statute provides a limit on the use of election by acclamation.

Under SB 323, if the number of nominees is not more than the number of vacancies to be elected as determined by the inspector of elections, nominees shall be considered elected by acclamation only if: (1) the association includes 6,000 or more units; (2) the HOA provided individual notice of the election and the procedure for nominating candidates at least 30 days before close of nominations; and (3) the association permits all “qualified” candidates to run if nominated.

In addition, the new statute also provides clarification regarding the timing of director elections.  HOAs are required to hold elections for a seat on the board of directors at the expiration of a director’s term and at least once every four years.

Conditions That Disqualify Nominees

Under SB 323, there are limitations to the restrictions that an HOA may impose on board nominees.

            Required Disqualifications – Non-Members

Under the new statute, an association is required to disqualify nominees who are not members of the association at the time of the nomination.  This disqualification, however, would not restrict real estate developers from making nominations of non-member candidates under regulations contained under the Department of Real Estate or as set forth in an HOA’s governing documents.  This is a common disqualifying feature in HOA Covenants, Codes, & Restrictions (“CC&Rs”) or director bylaws.  If not already done by HOAs, the new statute makes this disqualifying feature explicit by operation of law.

            Permissive Disqualifications

SB 323 also provides limitations on when an HOA can disqualify nominees for election to the board.  

                        Failure Of A Member To Be Current On Assessments

First, an association may disqualify a nominee for their failure to be current in their payment of regular and special assessments.  There are exceptions to this disqualification.  An HOA may not disqualify a nominee for failure to be current in their payment of assessments if the nominee paid the assessments “under protest” under Civil Code § 5658.  In addition, a nominee may not be disqualified for nonpayment of assessments if they entered into a repayment plan under Civil Code § 5665.

It is also necessary to note that under the new statute, an HOA may not disqualify a nominee for nonpayment of “fines” (as opposed to assessments), fines renamed as assessments, collection charges, late charges, or costs levied by a third party.

Furthermore, SB 323 also requires that if the HOA requires a nominee to be current in the payment of regular and special assessments, then the HOA must also require a director to be current in the payment of regular and special assessments.

                        Serving At The Same Time As Co-Owner Of Property

Second, an association may disqualify a nominee if, at the time of the nominee’s election, that nominee would be serving on the board at the same time as another person who holds a joint ownership interest in the same property as the nominee, and the other person is either properly nominated for the current election, or is an incumbent director.

                        Member Of HOA For Less Than One Year

Third, SB 323 allows an HOA to disqualify a nominee if they have been a member of the association for less than one year.

Past Criminal Convictions Terminating Fidelity Bond Coverage

Lastly, an association may disqualify a person from nomination as a candidate if the HOA becomes aware that the nominee has a past criminal conviction which, if the nominee is elected, would either prevent the HOA from purchasing fidelity bond coverage, or cause such coverage to terminate.

                        Requirement For Internal Dispute Resolution

SB 323 further provides that an HOA cannot disqualify a person from nomination if that disqualified person has not been provided the opportunity to engage in internal dispute resolution (“IDR”) under Civil Code § 5900.  This provision has the practical effect of requiring HOAs to provide disqualified nominees with some notice of their disqualification, a reason for the disqualification, and an invitation by the board to engage in IDR.

It is important to note that the only required disqualifying condition is the provision regarding membership.  The new Civil Code § 5105(b) states that an association shall disqualify a person from a nomination as a candidate for not being a member of the association at the time of the association.  As to the other disqualifying conditions above, they are merely permissive, and the new Civil Code § 5105(c) states that an HOA through its bylaws or election operating rules “may disqualify a person from nomination as a candidate” pursuant to the above restrictions.

It is also necessary to note that the new law has been constructed such that the above permissive disqualifying conditions are the only disqualifying conditions that an HOA may impose upon nominees.  This has the practical effect of precluding HOAs from imposing other disqualifying restrictions that do not conform to any of the categories above.

Nomination Procedures

The new statute provides more detailed procedures on the nomination process for HOA director elections.

            Nomination Procedures Notice

An HOA is to provide “general notice” (see Civil Code § 4045) of the nomination procedures and the deadline for submitting nominations at least 30 days prior to any deadline for submitting a nomination.  Individual notice (see Civil Code § 4040) is required only if a member requests individual notice.

            Pre-Voting Notice

An HOA is required to provide general notice of all of the following at least 30 days prior to ballots being distributed: (1) the date and time by which, and the physical address where, ballots are to be returned by mail or handed to the inspector or inspectors of elections; (2) the date, time, and location of the meeting at which ballots will be counted; and (3) the list of all the candidates’ names that will appear on the ballot.  Again, individual notice is required only if a member requests individual notice.

Inspector Of Elections

SB 323 also imposes significant changes to inspectors of elections.

Management Companies May No Longer Be Inspectors Of Elections

A management company may no longer be the inspector of elections for HOAs.  The Davis-Stirling Act provides that an inspector of elections must be an “independent third party.”  Presently, under Civil Code § 5110(b), an inspector of elections “may not be a person, business entity, or subdivision of a business entity who is currently employed or under contract to the association for any compensable services unless expressly authorized by rules of the association adopted pursuant to Civil Code § 5105(a)(5).”  SB 323 amends Civil Code § 5110(b) and does away with this express authorization exception.

This revision has the practical effect of precluding management companies, or their affiliates, from acting as the inspector of elections for HOA board elections.

Enhanced Inspector Of Elections Duties

The new statute requires that an HOA adopt rules regarding an inspector of election’s distribution of election materials.  These rules must require that 30 days before an election, inspectors of elections must deliver to each member a ballot, and a copy of the election operating rules.  Election operating rules may be delivered by either: (1) posting the election operating rules to an internet website and including the corresponding internet website address on the ballot, together with the phrase in at least 12-point font: “The rules governing this election may be found here [insert website address]”; or (2) individual delivery to each member.

Document Retention By Inspectors Of Elections

The new statute also enhances document retention by inspectors of elections.  In addition to sealed ballots, inspectors of elections must now also retain signed voter envelopes, voter lists, proxies, and candidate registration lists.  As per the original statute, these items are to remain in the custody of the inspector or inspectors of elections until the time allowed by Civil Code § 5145 for challenging the election has expired.

Election Operating Rules and HOA Retention of Election Materials

Under SB 323, election operating rules may not be amended less than 90 days prior to an election.

Furthermore, the new statute requires that the HOA adopt operating rules requiring an HOA to retain association election materials which should include: (1) a candidate registration list, and (2) the voter list.  The voter lists must include the following information for each member-voter: name, voting power, and either: (1) the physical address of the voter’s separate interest; (2) the parcel number of the voter’s separate interest; or (3) both.  The mailing address for the ballot shall be listed on the voter list if the mailing address differs from the physical address of the voter’s separate interest, or if only the parcel number is listed.   Under this same provision, the HOA is now required to permit members to verify the accuracy of their individual information on both lists at least 30 days before ballots are distributed.  The HOA or member shall report any errors or omissions in either list to the inspector or inspectors who shall make the corrections within two business days.

Association Records

The new law is revised to define “association records” as inclusive of “Association election materials.”  The new statute defines “Association election materials” as returned ballots, signed voter envelopes, the voter list of names, parcel numbers, and voters to whom ballots were to be sent, proxies, and the candidate registration list.  This enhanced definition of “association records” has the practical effect of requiring HOAs to make the “association election materials” as defined above, available to members for inspection and copying pursuant to the timelines stated in Civil Code § 5210(a)-(b).  See Civil Code § 5205(a), (c)

As a limitation, however, the new statute makes clear that signed voter envelopes may be inspected but not be copied.

Right To Vote

The new statute requires that the election operating rules prohibit the denial of a ballot to a member for any reason other than not being a member at the time when ballots are distributed.  Furthermore, the new statute prohibits denying members’ attorneys-in-fact who have obtained such status by way of a duly executed general power of attorney from voting.

As a practical matter, it is typical for HOAs to implement voting restrictions for members who are past due in fines, assessments, or other charges.  The new statute precludes such restrictions.  Under SB 323, the only reason an HOA can deny a ballot to a potential voter is due to potential voter not being a member at the time of distribution of the ballots.

Changes To Judicial Enforcement Of Elections Violations

SB 323 also provides revisions to the statutory provisions that provide relief to members seeking civil remedies for elections violations.

            Statute of Limitations

The previous statute only had a provision allowing a cause of action to be brought within one year of the date when the cause of action accrues.  The statute is now revised to allow a member to bring a cause of action within one year of either: (1) the date that a cause of action accrues; or (2) the date that the inspector of elections notifies the board and membership of the election results – whichever of these dates is later.

            Evidentiary Burden

SB 323 also does away with any ambiguity on a member-plaintiff’s evidentiary burden in a lawsuit for election violations.  SB 323 provides that, in order to prevail, a member must establish their case by a “preponderance of the evidence.”

            Mandatory Voiding Of Elections Results

The new statute also does away with the permissive language of Civil Code § 5145(a).  The prior statute stated that, upon a finding that the election procedures were not followed, a court “may void any results of the election.”  By contrast, the new law states that if election procedures were not followed, a court “shall void any results of the election…”  However, the statute provides that the election shall be voided “unless the association establishes, by a preponderance of the evidence, that the association’s noncompliance with this article or the election operating rules did not affect the results of the election.”

            Costs And Attorneys’ Fees In Small Claims

The new statute makes clear that a member prevailing in small claims is entitled to court costs and reasonable attorneys’ fees incurred for consulting an attorney in connection with this civil action.  Furthermore, SB 323 allows a member-plaintiff to bring a cause of action for elections violations in either the superior court or small claims court.

Required Internal Dispute Resolution

Notably, the new statute requires IDR before an HOA commences a lawsuit against a member. An HOA may not file a civil action regarding a dispute in which the member has requested dispute resolution, unless the association has complied with the internal dispute resolution procedures specified under Civil Code § 5910 by engaging in good faith in the internal dispute resolution procedures after a member invokes those procedures.

Conclusion

The new laws under SB 323 undoubtedly affect the way in which homeowners associations and management companies continue to handle their specific statutory duties in common interest developments.  Given these amendments effective January 1, 2020, HOAs and management companies will have to revisit their governing documents to ensure minimum compliance with the Davis-Stirling Act.  Even for experienced HOAs and management companies, these revisions are complex.  Clausen Miller attorneys Ian Feldman and R. Mick Rubio can provide further information regarding the continually changing landscape of common interest developments, and advice on how HOAs and management companies can avoid the pitfalls of these changes to the Davis-Stirling Act.