In California, homeowner associations are required to levy regular and special assessments to meet their obligations. However, unexpected expenses arise sometimes, so an association must increase regular assessments, levy special assessments, or both to meet its obligations. Under California law, boards of directors may increase regular assessments or levy special assessments within specific percentage thresholds, but if the amount needed exceeds those thresholds, the board must seek a vote of the membership.
More specifically, California Civil Code Section 5605(b) provides that a board of directors may not impose a regular assessment that is more than 20 percent greater than the regular assessment for the association's preceding fiscal year without a vote of the members. Similarly, a board of directors may not impose special assessments that, in the aggregate, exceed 5 percent of the association's budgeted gross expenses for that fiscal year without a vote of the members.
But when should a board of directors increase regular assessments instead of levying a special assessment and vice versa? This issue was addressed in a recent unpublished court of appeals case, Taggart v. North Coast Village Home Owners Association, 2023 WL 8228855.
In this case, plaintiff Tim Taggart (“Mr. Taggart”), a member of North Coast Village Home Owners Association (“Association”), sued the Association, alleging that its board of directors levied a special assessment in excess of 5% without seeking a membership vote as required by Civil Code Section 5605(b).
According to the case, members of the Association were paying a monthly assessment of $590 in 2020. In May of that year, the Association's finance committee determined that an additional assessment of $1,000 per unit would be necessary to meet the Association's obligations due to increased operating expenses, such as insurance, wages, and utility costs. Based on the finance committee's findings, the board approved a $1,000 special assessment per unit. The assessment could be paid as a lump sum, two payments of $500, or quarterly payments of $250. The billing statements to the homeowners described the $1,000 as a special assessment.
The following year, in May 2021, the finance committee again determined that additional funds would be needed to offset increases in operating expenses. It recommended that the board raise monthly assessments to $645 and impose a special assessment of $1,000 per unit. Unlike the first one, the second $1,000 assessment was to be paid in two payments of $500.
In October 2021, Mr. Taggart sued the Association, seeking the return of the two $1,000 assessments. Mr. Taggart alleged that the board exceeded its authority when it levied the two assessments without seeking a membership vote because it exceeded the 5% threshold for special assessments under Section 5605(b).
In response, counsel for the Association argued that the two $1,000 assessments, although identified by the association as special assessments, were, in fact, regular assessments.
In 2022, the court decided that counsel for the Association was proper and that the two $1,000 assessments were regular assessments and not special assessments. The trial court relied on the money being used for recurring operating expenses. The court was persuaded that the intended use of the funds for operating costs superseded the special assessment label given to it by the Association. Mr. Taggart appealed the decision to the Court of Appeal, Fourth District.
Upon review, the Court of Appeal affirmed the lower court's decision. It held: “We therefore conclude that the HOA's interpretation, which defines assessments as either ‘regular' or ‘special' based on their intended and actual use, is the correct one. Furthermore, because the assessments at issue were used for essential operating expenses and not for capital improvements or other extraordinary or unforeseeable costs, we agree with the trial court's determination that they were ‘regular assessments' not subject to the 5 percent limitation under section 5605, subdivision (b).”
Although an unpublished case, a board should consider the intended use of the funds raised when deciding to increase regular assessments or levy a special assessment. Based on the court's decision, an increase in regular assessments is appropriate if funds are needed to cover increased operating expenses. However, a special assessment is appropriate if funds are being raised for the construction of capital improvements, to make up a shortfall in reserves, or for an emergency situation as defined by Civil Code Section 5610. It's also important to note that a court may look beyond the label of an assessment given by an association to determine the true nature of an assessment and can recharacterize the assessment. Associations should consult with legal counsel when considering increases in regular assessments or levying special assessments requiring a vote of the members under Section 5605(b).
