DUTY TO FUND RESERVES

There is no statute that specifically requires associations to fund their reserves. The Legislature has repeatedly amended the reserve statute and has had many opportunities to impose funding requirements. It has not done so. Instead, it keeps increasing notice requirements. Some argue there is an indirect requirement to fund reserves because boards have a duty to impose regular and special assessments sufficient to perform their obligations under the governing documents. Civil Code §1366(a) Setting aside sufficient funds to repair and replace major components is arguably one of those duties.

Funding Through Special Assessments. In a 1998 case, an owner in the Foothills Townhomes Association claimed that a special assessment to fund reserves violated Civil Code §1366.1. He argued that it "exceeded the amount necessary to defray the costs for which it is levied" because there was no requirement that reserves be funded. The court disagreed. Foothills Townhomes v. Christiansen (1998). The court in another case, Raven's Cove v. Knuppe, held that the failure of the developer-controlled board to properly fund the reserves was a breach of its fiduciary duty.

Prudent Funding. Even though there is no direct order by the legislature to fund reserves, the prudent course is to fund reserves in accordance with the association's reserve study funding recommendations.

Updated by ADAMS KESSLER 10/22/2008