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alifornia has a history of natural disasters including wildfires, floods, and earthquakes. These disasters may cause unanticipated damage or destroy entire communities or a portion thereof. Oftentimes in the aftermath of these disasters, associations are asking what it will take to rebuild and what options are available. Many associations are not financially prepared to deal with the aftermath of a disaster due to insufficient insurance coverage, reserve funds, or other funds to cover the rebuilding costs. When an association is damaged or destroyed and there is insufficient funding, a board may levy a special assessment. Boards of directors may levy special assessments to fund the cost of minor repairs; however, if there are substantial rebuilding costs due to major damage or destruction, a board’s statutory authority to levy special assessments will be limited. In this regard, California Civil Code §5605(b) prohibits boards from levying special
assessments which in the aggregate, amounts to more than 5% of their association’s budgeted gross expenses for that fiscal year unless a majority of a quorum of the members approve the special assessment. An association’s governing documents may have more restrictive limitations on its board’s authority to levy special assessments, so it is important for boards to review their governing documents and check for any additional restrictions. A board may also levy an emergency special assessment if there is an “emergency situation.” The Civil Code defines an emergency situation in several ways. Pursuant to California Civil Code §5610(b) and (c), an “emergency situation” exists if there is an extraordinary expense that is necessary to maintain or repair all or part of a development that an association is responsible for. If either of the following circumstances exist: (1) there is a threat to personal safety on the property, or (2) the expense could not have been reasonably foreseen by its board when preparing and distributing the annual budget report, there is no statutory cap on emergency assessments and membership approval is not required. That means that the 5% limitation in Civil Code §5605(b) for special assessments do not apply to emergency assessments. Alternatively, an association may look to a bank loan to finance the cost of repairing or rebuilding all or part of their development. It is important to review the association’s governing documents for
WHEN DISASTER STRIKES How to financially prepare for wildfires, floods, earthquakes and other natural disasters and their impact on associations. By Darren M. Bevan, Esq. and Raihane A. Dalvi, Esq.
10 The Law Journal Winter 2021 | cacm.org
