New and Improved Law to Govern Commercial Common Interest Developments in California

by Holland & Knight LLP
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Effective January 1, 2014, the establishment, governance and operations of commercial and industrial common interest developments (commercial CIDs) in California are governed by the new Commercial and Industrial Common Interest Development Act, added by SB 752 and signed into law on October 5, 2013 (the "New Act").

The New Act adds Sections 6500-6876 to the California Civil Code and makes conforming changes to other related statutes. Most important, it clarifies the law applicable to commercial CIDs and removes unnecessary burdens for commercial interests that were in place to protect residential homeowners.

Defining Commercial CIDs Under the New Act

Common interest developments include condominium projects, planned developments and stock cooperatives. They are typically characterized by the inclusion of both "separate interests" in property as well as "common area" owned by an owners' association or by the owners in common that are made subject to covenants, conditions and restrictions set forth in a recorded declaration, commonly referred to as CC&Rs.

Under the New Act, commercial CIDs are defined to mean a common interest development that is limited to industrial or commercial uses by law or by recorded CC&Rs. Unless a contrary intent is clearly expressed, a local zoning ordinance is construed to treat like structures, lots, parcels, areas or spaces in like manner regardless of the form of the commercial CID. The New Act further provides that commercial uses include, but are not limited to, the operation of a business that provides facilities for the overnight stay of its customers, employees or agents. Commercial CIDs can range from small retail strips or office parks to large mixed-use projects containing retail, industrial and office developments.

An Improvement Over the Davis-Stirling Act

Prior to the New Act, both commercial CIDs and residential common interest developments were governed by the provisions of the Davis-Stirling Common Interest Development Act (amended and recodified, effective January 1, 2014, at California Civil Code sections 4000 et seq.). The inclusion of both types of common interest developments under the former version of the Davis-Stirling Act often proved confusing for property owners, associations and managers, and their counsel.

Several years after the Davis-Stirling Act was implemented, an additional provision was put in place to exempt commercial CIDs from certain aspects of the Davis-Stirling Act intended to protect homeowners. Over time, however, numerous new provisions were added without separate analysis of whether they should apply to commercial CIDs, inadvertently subjecting commercial CIDs to consumer protection provisions aimed at homeowners.

The New Act has been established separate from the Davis-Stirling Act to clarify the law applicable to commercial CIDs and prevent further confusion when new consumer protection provisions are added to the common interest development laws.

Provisions of the New Law

The New Act mirrors much of the reorganized Davis-Stirling Act with respect to statutory definitions, the types and contents of governing documents, powers of the association, establishment and collection of regular and special assessments, and resolution of construction defect claims. However, the extent of member protections in the commercial CID context have been substantially reduced through the exclusion of multiple provisions of the Davis-Stirling Act, such as, but not limited to: (1) those requiring disclosures to members, (2) those requiring "open" Board meetings and broad member voting rights, (3) those limiting annual increases in assessments, and (4) those requiring the association to adopt procedures for resolving disputes or for affording members certain alternative dispute resolution rights in the event of disputes with their association.

The New Act leaves most governance matters to the provisions of the CC&R and other governing documents of the association, as well as any applicable provisions of the California Corporations Code in the case of incorporated associations. Under the New Act, there are no requirements for the distribution to members of an association budget or other financial disclosures, and there is no requirement for an owner or the association to provide disclosures to prospective purchasers of separate interests. Owners within a commercial CID do not have a statutory right to request alternative dispute resolution in the event of a dispute under the governing documents, even with respect to actions taken by the board regarding delinquent assessments.

The New Act also serves to expand certain laws applicable to commercial CIDs. Under prior law, commercial CIDs were exempt from the provisions of the Davis-Stirling Act regarding amendment of CC&Rs. As a result, it was not clear what actions would be considered valid for the amendment of commercial CC&Rs. The New Act establishes amendment procedures applicable to commercial CC&Rs, similar to the procedures set forth in the Davis-Stirling Act without certain owner rights. In addition, the New Act increases the required minimum coverage amount for liability insurance for commercial CIDs. Under the New Act, a commercial CID with 100 or fewer separate interests is required to maintain at least $2 million in liability insurance (versus $500,000 under the Davis-Stirling Act) and $3 million in liability insurance if the commercial CID has over 100 separate interests (versus $1 million under the Davis-Stirling Act).

The New Act also contains a "savings clause" for certain documents and actions taken prior to its effective date. The law provides that nothing in it shall be construed to invalidate a document prepared or action taken before January 1, 2014, if the document or action was proper under the law governing common interest developments at the time that the document was prepared or the action was taken. It continues to require each commercial CID association to file an information-reporting statement with the California Secretary of State on a prescribed form.

To update governing documents in effect for existing commercial CIDs, the New Act authorizes an association board without member approval to revise existing CC&Rs to correct references to applicable law pursuant to a resolution of the board. The New Act also authorizes existing CC&Rs to be restated in corrected form and recorded in the public records provided that the board resolution authorizing such restatement is recorded as well.

In connection with a restatement and re-recording of CC&Rs, the board of a commercial CID may want to consider conducting a comprehensive review of the CC&Rs to determine if there are provisions not applicable to commercial CIDs included in their CC&Rs that could be eliminated or amended to make the operation and governance of a commercial CID less onerous. Any amendment to CC&Rs beyond correcting statutory references will require compliance with amendment procedures, such as owner approval.

Applicability of the New Act

The legislative intent with respect to the New Act is that it is to apply only to those common interest developments that are limited to commercial and industrial use. For any common interest development that includes residential and commercial use, the Davis-Stirling Act will continue to apply. Developers should carefully consider the implications of applicable law when constructing new mixed-use developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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