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April 28, 2006
ELECTIONS RULES - IS A RUSH TO THE ALTER A GOOD IDEA?
Elections Reform - the bane of HOAs in California.
Many attorneys are telling associations that they need to approve Election Rules before July 1, 2006, or the process will be much more difficult. I felt there was some urgency myself, so associations could be prepared on time. Some people are getting the impression, justified or not, that if an association waits until after July 1 to approve its Election Rules, that it will require a vote of the owners. That is not true, unless the governing documents for the association require that the board get approval of the owners before imposing any rules.
The fact of the matter is that if an association Board of Directors approves the Rules prior to July 1, 2006, the rules do not technically, under the law, need to be circulated to the owners before approval. They may not anyway, if they are sufficiently reflective of the new law. As you may or may not know, current California law (Civil Code Section 1357.100 and following) requires an association that is making new operating Rules, or changing existing operating rules, (the subject matter is defined in the laws) to circulate the proposed rules to the membership prior to approval by the board, if they contain any provisions that are not provided elsewhere in California law or the governing documents of the Association. There is a 30-day comment period in this process, allowing the owners to provide feedback to the board about the proposed rules. The feedback does not prevent the board from approving the rules. The process also allows owners, through a petition process, to seek termination of any of the rules by asking the Board of Directors to put a particular rule to a vote (asking for termination of it) by the members. Some attorneys, and some board members and managers, believe that it is better for their association to get these rules approved before the July 1 day so that the process on rule approval found in Civil Code section 1357.100 does not apply.
There is merit to this argument in some cases. If the Board of Directors has an election relating to assessments, directors for the board, amendments to governing documents, or transfer of common area property in July or August, this would be one reason to rush the Election Rules process. If an association believes that it may receive unreasonable resistance to the rules based on past experience with one or more owners, then this might be another case where the board would be justified in proceeding prior to July 1, 2006. Certainly, it simplifies things for a Board of Directors to approve rules without sending them out to the membership for the comment period, so this might be a reason to push for approval before July 1, 2006. And if the Association is very large, cost can be a concern. However, (see below), Boards may not be able to avoid this circulation process if they jump the gun and the law changes sufficiently to warrant circulation of modified rules and processes.
Keep in mind that there is some potential benefit to sending the rules to the membership prior to approval by the board and to allow the members to comment. This would be an opportunity for the board to initiate the process should open with a passage saying that California law requires associations to adopt Election Rules that will result in a secret ballot through the mail process, so owners will be aware that the new process is required by law. The rules should align closely enough to SB 61 that if any owner wishes to pull the statute, they will see that the board is making a good-faith effort to comply with California law. If in the course of the comment period owners come “unglued”, this will be up the opportunity to educate them further, before you get into the middle of a voting process and have to deal with criticism of the process. This should make the elections go more smoothly. If any owners petition the board to reverse a rule and that rule is required by the statute, that would be grounds to refuse to vote. The owners cannot change the law. Circulating the rules before approval may add another element to the “integrity” of the process if a Board is challenged in an election. The new law invites challenges because of its lack of clarity and failure to integrate the processes with most existing governing document provisions and other laws regulating corporations (which many associations are). Although it attempts to resolve conflicts with other laws (of which there are many) by its own terms, it does not do so seamlessly. Any hearing officer considering the challenges to an association's process may be swayed favorably by an Association that circulated the rules prior to adoption, and considered homeowner feedback important. If no owners comment, that bolsters the Association’s argument of satisfying all possible “due process” aspects. The same process could be accomplished by sending the rules to owners after approval by the board but that would be a “one step” initiation process. Some attorneys are not even recommending that. If the rules are sent out prior to adoption by the Board for the “comment” period and then again after they are approved by the board, this would be a “two-step” initiation process, and it may actually help with owner relations over these new processes. It may bolster trust and better prepare owners.
This is a major change for many associations. I think the “two-step” process is warranted. However, it is not required.
There is a very valid reason to defer the final draft of the Election Rules until after July 1, 2006. The cleanup legislation that is proposed has some substantial changes that could require any set of Election Rules that is approved before July 1, 2006, to have changes made. Practitioners who have already written and circulated rules to clients have already had to notify clients that changes will or may be needed. Any changes that come into play may have to be circulated to the members, and this will trigger a two-step initiation process anyway. SB 1560 is still unsettled. Various industry groups are vying for additional changes to the elections law. The legislator who authored the original elections reform law, and introduced the cleanup bill, has threatened to pull the bill if the industry groups cannot agree on changes. Thus, the final rendition of the elections reform law is as yet unsettled.
If you are an association that has a meeting in June, and it might be necessary to schedule an adjourned meeting in July because of a lowered quorum in the bylaws, you might consider providing notice both meetings at the same time, the first and the tentative second meeting, so that the scheduling of both well fall before July 1. If the board has a meeting in June and it is not possible to schedule a tentative second meeting in June, or has a voting measure on one of the qualifying elections, then those associations will require independent legal advice as to how to proceed since the voting period falls during the change in elections processes. In any case, you need to seek legal advice on this as this article does not constitute legal advice.
Right now, the four elections that are affected by the new law are elections on assessments (that exceed legal limit increases), amendment of governing documents, choosing board members, and transfer of common area property. If you do not have any of these elections falling until September or after, then my suggestion would be to wait until after July 1 or until SB 1560 is finalized one way or the other, to see if and what the final amendments that have been proposed for cleanup are signed into law. That way, you could have better chance of having Election Rules that do not require amendments because of changes in the law. However, waiting will require that the Board circulate the rules to the owners for the 30-day comment period before approving them. I do not think this is a disadvantage that is outweighed by the advantages to be gained, but you might.
SB 1560 is proposed as urgency legislation, so once a decision is made on it by the author, given the proposals for amendments, it should fly through the Legislature and be signed by the governor right away, giving it the possibility of being settled by July 1. Associations should know that they can choose to defer this process until the law is settled if they wish, unless they have a crossover election in June that might spill over into July, or have an election in July or August. I feel that the communications of attorneys in this state, frustrated with the elections reform problems, and anxious to provide “quick fix” solutions, coupled with manager and board misinterpretation of attorney comments, have created a “sky is falling in” misimpression of what will happen if boards wait until after July 1 to approve Election Rules. It is not the end of the world.
For more on the Elections Reform, check out earlier blogs, and also visit the Guru at http://www.californiacondoguru.com and click on the box on the first page on "Elections per SB 61".
Posted by Beth Grimm at April 28, 2006 11:52 AM