FEATURE
Common Legal Questions About Reserves (No Math Required) By Laurie S. Poole, Esq., CCAL
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ommunity association attorneys are often asked questions about reserves. So long as those questions don’t require mathematics (we went to law school for a reason!), reserve questions are always welcome since there are significant legal requirements governing the board’s treatment of reserves. The following are some of the common legal questions regarding reserves.
How Much Are We Required to Have in Reserves? Many boards ask this question, believing there is a legal requirement for the amount needed to fund reserves. However, the Davis-Stirling Common Interest Development Act does not have any statute that specifically requires associations to fund their reserves. Instead, this duty is implied because boards have a duty to impose 32
Quorum May, 2019
regular and special assessments sufficient to perform their obligations under the governing documents. (Civ. Code §5600(a).) Boards also are required to exercise prudent fiscal management in maintaining the integrity of the reserve account.” (Civ. Code §5515.) In Raven’s Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal. App. 3d 783, the court determined that the failure of the developer-controlled board to fund the reserves was a breach of fiduciary duty. Upon their election to the board of a common interest development, directors become fiduciaries with powers to act on behalf of the association. As fiduciaries, directors are held
to a higher standard of conduct and have two primary duties: (i) duty of care, and (ii) duty of loyalty. Therefore, even though there is no mandate by the legislature to fund reserves, the prudent course is to fund reserves in accordance with the association's reserve funding plan. To lessen risks, boards should: • Review and understand the reserve study, follow the reserve funding recommendations – leaning on the fiscally conservative and risk-averse side where possible. • Rely on advice of your reserve analyst and legal counsel.
"BOARDS MAY NOT SPEND RESERVE FUNDS FOR ANY PURPOSE OTHER THAN THE REPAIR, RESTORATION, REPLACEMENT, OR MAINTENANCE OF, OR LITIGATION INVOLVING THE REPAIR, RESTORATION, REPLACEMENT, OR MAINTENANCE OF, MAJOR COMPONENTS THAT THE ASSOCIATION IS OBLIGATED TO REPAIR, RESTORE, REPLACE, OR MAINTAIN."
