Monday, September 10, 2012

Homeowner association must keep funding reserve account

The Davis-Stirling Act does not require associations to create a reserve account, but if one exists, the board can't choose not to fund it.

By Donie Vanitzian
September 9, 2012

Republished with permission from (c) Holder

QUESTION: I own a town home in an association that has a couple of hundred unit owners. We have a current liability of more than $1.3 million but only $180,000 in the actual reserve account. At the last meeting, the board handed out an article stating that associations are not required to have reserve accounts. Board members used this as proof that we did not need to fund the association's existing reserve account or have a reserve.

Our CC&Rs, however, state that we must have a reserve account. The board does not provide reserve account statements, does no annual inspections and provides no replacement cost estimates, nor does it plan to do so.

Who can decide not to fund the reserves? Is it up to the whim of each board in power at the time? Should owners be notified of the decision not to fund a reserve account? Is the board liable for not funding the reserve?

ANSWER: Even though there is no requirement in the Davis-Stirling Act to create a reserve account, if the association's covenants, conditions, and restrictions (CC&Rs) state that one must exist, the board is bound by the CC&Rs.
Once a reserve account is created, it must continue to be funded. There is no longer an option not to fund it. Failure to fund an established and existing reserve account could be a breach of the board's duty.

The Davis-Stirling Act states the requirements for how reserve accounts are managed, how the funds must be used and what data about the accounts are reported to homeowners.
It is important that a plan for the amount of reserve account funding is determined by the owners and the board. For example, a small reserve account could be maintained as long as the board provides notice that its policy for funding the major repairs or replacements will come from special assessments on an as-needed basis or from some other source such as association loans.

There are companies that provide this service, but during the course of conducting its due diligence, a board may conduct its own reserve study to determine the remaining life of a major component, the approximate cost to replace or repair the item and how much money must be collected to perform the repairs when the time comes. This is not difficult.

Homeowners should understand that payments into the reserve fund never stop. Be aware too that if the property is sold before the major repair is made, sellers are not entitled to a refund or money back from the association. A titleholder's only avenue to the funds would be to include a clause in the buyer's purchase agreement demanding payment equal to the seller's unused reserve fund payments.

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