REQUIREMENTS OF RESERVE STUDY

Q. 
How often is a homeowners association required to obtain a reserve study?

A. 
The California Civil Code requires associations to complete reserve studies every three years and to review them for accuracy each year. Reserve studies are excellent for planning and generally eliminate the need for special assessments as well as the liability associated with special assessments. Top

WHAT IS A RESERVE STUDY?

Q. 
What is a reserve study?

A. 
It is a written report that evaluates the common area of the association. It provides guidance on how much your association should be setting aside each month for reserves so it can meet its future obligations without special assessments. Reserves are needed to pay for the replacement of common area components such as roofs and parking lots and to pay for major maintenance items such as exterior painting. The California Civil Code sets forth the minimum requirements for reserve studies. Your association's management company should have the in-house expertise to prepare a reserve study since it is part of the budgeting process. Top

INVESTMENT OF RESERVE FUNDS

Q. 
Our homeowner association recently lost money on its mutual fund account. Is a board of directors allowed to invest association funds in a mutual fund?

A. 
Absolutely not. All funds must be placed in an insured account in a bank, savings and loan association or credit union. Top

WAIVING RESERVE STUDY

Q. 
We live in a small homeowners association. Can our board of directors waive the legal requirement for a reserve study?

A. 
No. Top

ACCURACY OF RESERVE STUDIES

Q. 
Our homeowners association has not obtained a reserve study for more than four years. We do obtain audits each year. Can an audit report be truly accurate if we don't have a current reserve study, when the audit is completed?

A. 
No. Without a current reserve study, the balance sheet included in your audit report will reflect the numbers on your books, but it will not reflect your association's current, actual liability for future replacements. This liability may be substantial.

The California Civil Code requires associations to complete a reserve study every three years and to review it for accuracy each year. Not only are reserve studies required by law, they are excellent planning tools. Top

NEGLIGENCE OF BOARD

Q. 
Our board of directors refuses to obtain a reserve study for our homeowner association. Can board members be held legally liable for negligence if they won't obtain a reserve-study?

A. 
Yes. Negligence is a civil wrong (tort) that has the following elements:

(1) The defendant must owe a legal duty to conform to a certain standard of care for the protection of the plaintiff,

(2) The defendant must have breached his duty by failing to conform his conduct to the required conduct,

(3) The breach must be a legal cause of the plaintiff's injury, and

(4) The plaintiff must have suffered actual harm.

The California Civil Code, with few exceptions, requires the board of directors of an association to obtain or prepare a reserve study at least once every three years. Whenever a board is required by law to do something, it owes a legal duty to act accordingly. Failing to obtain or prepare a legally required reserve study constitutes a clear breach of duty. If such a breach causes harm to members of the association, the legal elements of negligence have been satisfied and the members may successfully prevail in a suit.

Failure to obtain a serve study can result in any one or more of the following types of harm:

(1) It may result in a large special assessment being imposed which some members of the association may find difficult or impossible to pay.

(2) A member of the association may find it difficult to sell or refinance his or her home which may cost money or even result in a foreclosure. Buyers and lenders are becoming more knowledgeable and are often refusing to become involved with associations that do not comply with the law.

(3) Owners may suffer the consequences of being a member of an association involved as a defendant in litigation brought by another member. Top