FEATURE
How Boards Can Survive Unanticipated Court Judgments By Michael Knighten, Esq.
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homeowners association is obligated to prepare an annual budget to fund anticipated expenses for each fiscal year. The annual budget must take into consideration estimated revenue and expenses on an accrual basis. During the course of a year, there may be additional expenses that were not anticipated. What happens when there is an unanticipated expense such as a large construction project necessitated by life and safety issues or a judgment against a homeowners association? This article will discuss how a homeowners association can pay for an unanticipated judgment. Recently, a Riverside County Court entered a judgment against a local homeowners association. After the judgment was entered, the Court entered an attorneys’ fees award against the homeowners association in the amount of $873,000. To make the issue more pressing, California judgments gain interest at 10% per year, so each year, there will be over $80,000 in interest added to the judgment. What can a homeowners association do to pay the judgment if it does not have the money in the operating account to make the payment? Subject to any restrictions in the governing documents, there are options. For the purposes of this article, we will assume the homeowners association has a $1,000,000 annual budget and 300 homeowners, which would make the regular monthly assessments about $278 per member.
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Quorum September, 2019
ASSESSMENTS A homeowners association generally has the right to levy regular and special assessments. After an assessment is levied, the next step is collecting the assessment. Typically, homeowners have at least thirty (30) days to pay the assessment, then the homeowners association has to attempt to collect the assessment. For owners on fixed incomes, assessment increases might be impossible to pay all at once. To the extent they cannot pay, the homeowners association would have to utilize collection techniques to obtain the assessments. A homeowners association can raise regular assessments up to 20% of the assessment from the preceding fiscal year without membership approval, which would be about $55 per month. This means the association will receive about $198,000 per year. While there is no requirement that regular assessments be raised only at the beginning of the fiscal year, many times raising regular assessments in the middle of the year can cause homeowner confusion. Additionally, by raising regular assessments in the middle of the fiscal year, the homeowners association would not be able to raise assessments for the next fiscal year if it already increased regular assessments the maximum amount.
