CACM Webinar-Operating Rules

May 27, 2011 by Loewenthal, Hillshafer & Carter, LLP

David A. Loewenthal
Loewenthal, Hillshafer & Carter, LLP

Wayne Guralnick
Guralnick & Gilliland, LLP

OPENING POLLING QUESTION

What type of manager are you?

Portfolio Manager

On-site Manager


POLLING QUESTION NO. 1

Do you manage at least one account with 500 or more units.

Yes

No

 

POLLING QUESTION NO. 2

How long have you been an association property manager:

1 to 5 years;

6 to 10 years;

10 years plus.

 WHAT IS A VALID OPERATING RULE?

  • Civil Code section 1357.100 defines Operating Rules as follows:

a)     “Operating” means a regulation adopted by the Board of Directors of the Association that applies generally to the management and operation of the common interest development or the conduct of the business and affairs of the Association.”

b)     “Rule Change” means the adoption, amendment or repeal of an operating rule by the Board of Directors of the Association.

  • Civil Code section 1357.110 — enforceability of an operating rule :

a)     The rule is in writing.

b)     The rule is within the authority of the Board of Directors of the Association conferred by law or by the Declaration, Articles of Incorporation, or the Bylaws of the Association.

c)     The rule is not inconsistent with governing law and the Declaration, Articles of Incorporation or Bylaws of the Association.

d)     The rule is adopted, amended or repealed in good faith, and in substantial compliance with the requirements of this Article.

e)     The rule is reasonable.

  • Determining Reasonableness of a Rule

In order for a rule to be deemed valid, it must be reasonable.  The Courts have interpreted the issue of reasonableness in several cases.

  • Nahrstedt v. Lakeside Village:  The restriction is presumed to be reasonable and will be enforced uniformly against all residents of the common interest development unless the restriction is arbitrary, and poses burdens on the use of land that it affects that substantially outweigh the restrictions benefits to the developments, residents, or violates a fundamental public policy.
  • Nahrstedt further states:  “Section 1354 requires court’s determining the validity of a condominium use restriction to apply the deferential standards of equitable servitude law.  These standards grant courts no unbridled license to question the wisdom of the restriction.  Rather, courts must enforce restrictions unless the challenger can show that the restriction is unreasonable because it is arbitrary, violates the fundamental public policy, or imposes burdens on the use of affected property that substantially outweighs the restrictions benefits.”
  • Though Nahrstedt dealt with an original CC&Rs provision which was contained in the projects declaration, the analysis regarding the rule adopted by a Board of Directors will be viewed by the Court in the same manner.
  • Liebler v. Point Loma Tennis Club expounded upon Nahrstedt by stating as follows:  “The framework of reference, as the court made clear, is not the reasonableness specific to the objecting homeowner, but reasonableness to the common interest development as a whole.  Thus, restrictions recorded in the declaration are presumptively reasonable.
  • Standard of Review for an Operating Rule:
  • Courts will find a rule to be reasonable if it is applied in good faith, not arbitrary or capricious, and by procedures which are fair and uniformly applied.
  • “Arbitrary” is defined generally as follows:  “Dependent upon individual discretion and not fixed by law; not restrained or limited in the exercise of power; based on or determined by individual preference or convenience rather than by necessity or the intrinsic nature of something; existing or coming about seemingly at random or by chance.”  (Merriam-Webster Dictionary)
  • “Capricious” is defined generally as follows:  “Governed or characterized by being impulsive and unpredictable.”  (Merriam-Webster Dictionary)

 

POLLING QUESTION NO. 3

Do you need to go through the formal Operating Rule process to either adopt or amend an election rule?

Yes

No

  1. I.              WHAT CONSTITUTES A RULE CHANGE?
  • Architectural Rules.
  • Standard Rules and Regulations (such as the three Ps, pets, people and parking).
  • Collection Policy and standards for delinquent assessment payment plans or procedures adopted by the Association for resolution of assessment dispute.
  • Election Rules.
  • Any rule intended to cover the use of common area or exclusive use common area.
  • Enforcement procedures, fine schedule and anything related to member discipline, including any scheduled monetary penalties for violation of the Governing Documents and any procedure for imposition of penalties.


POLLING QUESTION NO. 4

Do you believe that changing the time that a pool will be open for use requires that the Association go through the Operating Rule adoption procedure.

Yes

No

 

POLLING QUESTION NO. 5

Do you believe that a Board of Directors decision to change the heating temperature of an Association’s swimming pool from 80° down to 77° requires that the Board of Directors go through the formal Operating Rule adoption procedure?

Yes

No

  1. II.            WHAT DOES NOT CONSTITUTE A RULE CHANGE?
  • A decision regarding maintenance to the common area.
  • A decision on a specific matter that is not intended to apply generally to the entire community.
  • A decision setting the amount of regular or special assessments.
  • If a Board policy is intended to apply to the entire community and violation of same could subject the owner to discipline/sanctions, then it is a rule.

Additional Caveat:  Although a rule change, Associations can dispense with the thirty (30) day member notice and comment period and adopt a rule change that is required by law or is merely repetitive of existing law or the Governing Documents (example, a rule that generally repeats that which is contained within the use restrictions of the CC&Rs).  The Association must still give notice of adoption within fifteen (15) days.

  1. III.          STARTING THE RULE-MAKING PROCESS
  • Delivery of Notices.  Civil Code §1350.7 identifies the method of delivering notices and documents to the membership related to the rule-making process.  Civil Code §1350.7 recognizes that notice to the membership can be facilitated by any one or more of the following methods:
    *        Personal delivery.
    *                First class mail, postage pre-paid, addressed to the member at the address last shown on the books of the Association with delivery deemed to be complete on deposit in the United States mail.
    *                E-mail, facsimile or other electronic means, but only if the recipient has agreed, in p
    writing, to that method of delivery.  If a document is delivered by electronic means, delivery is complete at the time of transmission.
    *                Publication in a periodical / newsletter that is circulated primarily to the members of the Association.
    *                Part of the Association’s broadcast television programming used for the purpose of distributing information on Association business to its members.
    *                Any method of delivery of a notice which is provided in a recorded provision of the Association’s governing documents (e.g., the Association’s CC&Rs).
    *                Any other method of delivery of the notice, provided the recipient has agreed to that method of delivery.

Civil Code §1350.7 also indicates in subsection (c) that a document / notice may be included in or delivered with a billing statement, newsletter or any other notice that is delivered by the methods identified above.  Note that the Association cannot deem a method of delivery to be approved by the membership if it is only identified in an unrecorded provision of the Association’s governing documents.

  1. IV.          BOARD APPROVAL TO DISSEMINATE THE RULE CHANGE
  • Although the actual approval of a rule must be done at an open Board meeting, the Board of Directors can authorize the initial dissemination of the rule change either at a prior open meeting of the Board of Directors or by unanimous written consent.

 

POLLING QUESTION NO. 6

If the Board of Directors provides a proposed Operating Rule change to the membership, then receives membership comment which the Board incorporates into the Operating Rule, what is the Board of Directors next step:

(a)   The Board must send the revised proposed Operating Rule back to the membership for another thirty (30) day comment period and then reschedule a new open meeting for a formal adoption of the rule; or

(b)  The Board may simply adopt the Operating Rule with the changes during the originally scheduled open meeting and then advise the members of the adoption within fifteen (15) days thereof.

  1. V.            NOTICE AND MEMBERS RIGHT TO ATTEND BOARD MEETINGS WHERE RULE CHANGE IS TO BE CONSIDERED BY THE BOARD
  • Unless circumstances demand otherwise, the Board’s decision to draft a proposed rule change should be made at an open meeting, pursuant to Civil Code section 1363.05 and then sent to the members for the thirty (30) day comment period.
  • A more liberal approach to this decision making process is that if the Board has agreed, via unanimous written consent, to the draft Rule and Regulation, then such draft rule can then be sent to the membership for its thirty (30) day comment period.  Again, unless there are extenuating circumstances, it is this panel’s belief that the decision to draft the rule and then send it to the membership should be conducted via an open meeting.
  • The one exception to the above would be an emergency rule pursuant to Civil Code section 1357.130(d).
  • Civil Code section 1357.130(b) pertains to the notice of a proposed rule change and states:  “A decision on a proposed rule change shall be made at a meeting of the Board of Directors, after consideration of any comments made by Association members.”
  • In addition, 1357.130 requires that the Board of Directors permit comments from the members at an open meeting.  In addition, the Board cannot take action until members have had the ability to comment on the rule change within the specified time frame notice set forth within Civil Code section 1357.130 (minimum 30 days).
  • Issue:  What should the Board do if the rule that was presented to the members is modified by the Board prior to the time that the Board is voting to adopt the rule as a result of either comments submitted by the membership during the thirty (30) day comment period or at the time of the meeting wherein members may attend?  Items that should be reviewed and analyzed include, but are not necessarily to, the following:
  1. Is the change substantive, i.e., significantly changing what the rule is; the extent of the rule; the breadth of the rule and what the rule covers, etc.  Conversely, is it not a substantive change, i.e., minimum change such as spelling, word usage, etc.
  2. Other items to consider include the time involved in sending the proposed rule back to the membership for another thirty (30) day comment period; the expenses that the Association will incur for mailing and an additional meeting including, management and attorneys fees ; how controversial is the rule, etc.
  • A conservative approach in dealing with changes to a proposed rule that arise during the thirty (30) day comment period or at the time of the board meeting would be to send any rule change back to the membership for another thirty (30) day comment period and then reset the board meeting for a vote on the new rule language.  This of course will take additional time, i.e., at least thirty (30) days, as well as increased costs for mailing, postage and possibly management and attorneys fees.  However, this process will ensure full technical compliance with 1357.130.
  • Another view shared by many attorneys within the industry is that as long as the change or modification to the rule from what was originally sent to the members is either not substantive or, well within the confines of what the rules original intent and description was, that rule does not need to be sent back to the members for another thirty (30) day comment period and an additional board meeting to vote upon its adoption.
  • We would strongly suggest that if you have questions with respect to this issue that you consult with your Association attorney for a further discussion and analysis on what to do in the event of a change to the originally proposed rule.
  1. VII.  NOTICE TO MEMBERS OF ADOPTION OF THE RULE
  • Civil Code section 1357.130(c) states as follows:  “As soon as possible after making a rule change, but not more than fifteen (15) days after making the rule change, the Board of Directors shall deliver notice of the rule change to every Association member.  If the rule change was an emergency rule change made under subdivision (d), the notice shall include the text of the rule change, a description of the purpose and effect of the rule change and the date that the rule change expires. “

 

POLLING QUESTION NO. 7

Do you believe that the following fact patterns would qualify as an emergency rule:  A homeowners association has existed for ten (10) years and has always allowed vehicle street parking.  The Board then decides to create an Operating Rule prohibiting street parking so as to allow better access for emergency vehicles on the streets.

Yes, this is an emergency rule and can therefore be adopted by the Board; or

No, it is not an emergency rule and must be adopted via the normal Operating Rule adoption requirements.

  1. VIII.   EMERGENCY RULES
  • The Thirty Day Member Notice and Comment Requirement does not apply to emergency rules which need to be adopted to address an imminent threat to public health or safety or imminent risk of substantial economic loss to the Association.  If the board determines that an immediate rule change is required to address this emergency situation, it may make the emergency rule change and no notice is required to be given to the membership or any provision for them to comment at an open meeting.

However, an emergency rule change is only effective for one hundred twenty (120) days unless the rule change provides for a shorter effective period.  Furthermore, an emergency rule cannot be readopted and, therefore, if there is a need for the emergency rule to last more than one hundred twenty (120) day limitation, the board should process the emergency rule as a permanent rule during the one hundred twenty (120) day period of time.

If the emergency rule is adopted, the board must still provide notice of the adoption of the emergency rule within fifteen (15) days after making the rule change, which notice must include the text of the rule, a description of the purpose and effect of the rule change, as well as the date that the rule change expires.

  1. IX.  MEMBERS RIGHT TO SEEK A REVERSAL OF A RULE CHANGE
  • Civil Code section 1357.140 pertains to the members’ right to attempt to seek a reversal of a rule change.  The following items must be met in order to effectuate a reversal.

(a)   Members of an Association owning 5% or more of the separate interest may call a special meeting of the members to reverse a rule change.

(b)   A special meeting of the members may be called by delivering a written request to the president or secretary of the Board of Directors, after which the Board shall deliver notice of the meeting to the Association members and hold a meeting in conformity with section 7511 of the Corporations Code.  The written request may not be delivered more than thirty (30) days after the members of the Association are notified of the rule change.  Members are deemed to be notified of a rule change upon delivery of notice of the rule change or of the enforcement of the resulting rule, whichever is sooner…”

(c)    The rule change may be reversed by the affirmative vote of the majority of the votes represented and voting at a duly held meeting at which a quorum is present (which affirmative votes also constitute a majority of the required quorum), or if the declaration or bylaws require greater proportion, by the affirmative vote or written ballots of the proportion required.  In lieu of calling the meeting described in this section, the Board may distribute a written ballot to every member of the Association in conformity with the requirements of section 7513 of the Corporations Code.

(f)     A rule change reversed under this section may not be re-adopted for one year after the date of the meeting reversing the rule change.  Nothing in this section precludes the Board of Directors from adopting a different rule on the same subject as the rule change that has been reversed.

(g)    As soon as possible after the close of voting, but not more than fifteen days after the close of voting, the Board of Directors shall provide notice of the results of a member vote held pursuant to this section to every Association member.  Delivery of this notice under this subdivision is subject to section 1350.7.

(h)   This section does not apply to an emergency rule change made under subdivision (d) of section 1357.130.”

  1. X.  PRACTICAL APPLICATIONS AND RECOMMENDATIONS

Non-Emergency Rules.

Step 1:  Determine if the operating rule fits into one of the exceptions or exemptions.  For example, emergency rules, rule changes required by law, rule changes that merely repeat existing law or governing documents, a decision by the board regarding maintenance of the common area, the setting of the amount of a regular or special assessment or a decision on a specific matter that is not intended to apply generally.

Step 2:  If the rule change requires prior thirty (30) day member notice and comment, then written notice, including the text of the proposed rule change and a description of the purpose and effect of the proposed rule change must be given to the membership at least thirty (30) days prior to the board’s consideration of its adoption.

Step 3:  The Board of Directors permits comments from the members at an open board meeting scheduled after compliance with the Thirty Day Member Notice.  Also the board cannot take action until members have the ability to comment on the rule change.  Board of Directors then adopts the rule, if they believe it is appropriate.

Step 4:  Deliver the notice of the rule change to every Association member (within fifteen (15) days of the board’s decision) consistent with the delivery options identified in new Civil Code §1350.7.

Step 5:  Calendar thirty (30) days from the date the Association delivered notice of the rule change to the membership.  (Caveat: Remember new Civil Code §1350.7 says that the delivery is deemed to be complete on deposit in the United States mail).

Step 6:  Determine if a written request / petition for rule reversal is received within the thirty (30) day period.  Any written request / petition received after the thirty (30) day period can be rejected as untimely.

If a written request / petition is received within the thirty (30) days, determine if it contains signatures from unit owners representing at least five percent (5%) of the owners within the community.

Step 7:  If a proper written request / petition is received, give notice of a special meeting (or mail a written ballot to the membership) for a vote by the membership not later than twenty (20) days after presentation of the rule reversal written request / petition.  This special meeting would need to be scheduled or the return of ballots received not less than thirty-five (35) nor more than ninety (90) days after the Association’s receipt of the rule reversal written request / petition.

Step 8:  If a rule reversal written request / petition is successful and it is approved by a majority of a quorum of the members (or a higher percentage as so required under the CC&Rs or Bylaws), the board may not consider a similar rule for a period of one (1) year.

Additionally, fifteen (15) days after the close of voting, the Board of Directors must provide written notice of the results of the rule reversal vote to every member and provide notice consistent with the new delivery notice requirements under Civil Code §1350.7.

Emergency Rules

Step 1:  Determine if the proposed rule change is necessary to address an imminent threat to public health or safety or imminent risk of substantial economic loss to the Association.

Step 2:  If the board determines to adopt the emergency rule, the board must provide fifteen (15) days written notice to the members of the emergency rule change, which notice shall include a text of the rule change, a description of the purpose and affect of the emergency rule, as well as the date that the emergency rule expires.

Step 3:  Since emergency rules can only be effective for a maximum period of one hundred twenty (120) days, if there is a need for the emergency rule to last for a longer period of time, the board should process through the emergency rule as a permanent rule, complying with the Thirty Day Member Notice and Comment Requirements identified above (which process should be completed prior to the expiration of the emergency rule).

Caveat:  Many community Associations combine the notice of the proposed adoption of an emergency rule to take effect immediately with and in the same notice, the proposed adoption of the rule on a permanent basis which would take effect after an open board meeting therefore putting the rule into effect immediately, but also following up to make the rule more permanent after the thirty (30) day member notice and comment period has been complied with the board adopts same at an open board meeting.