By Tonya L. Todd, Esq. Adams / Stirling PLC
This article first appears in the CAI Channel Islands Channels of Communication Magazine, 2nd Quarter 2025 Edition here.
In January 2025, the Los Angeles area endured a series of devastating wildfires. The Palisades and Eaton
fires were among the most destructive in California’s history. The fires burned through tens of thousands of acres and structures, resulting in at least 29 fatalities and displacing thousands of residents.
Homeowners’ associations in the path of the Palisades and Eaton fires experienced varying levels of destruction and damage. Boards and owners were required to file insurance claims and determine what to do next amid the chaos and turmoil that followed.
Fires and other natural disasters causing such extensive destruction are rare. Consequently, most boards, owners, and their attorneys have not had occasion to review or enforce the damage and destruction provisions in their association’s Covenant, Condition and Restrictions (“CC&Rs”). When those provisions do have to be invoked and enforced, readers may find that they are poorly drafted and that the association’s options are very limited.
When the common area of a common interest development is partially or completely destroyed, associations must soon decide whether to rebuild or not. This decision revolves around whether the insurance proceeds recoverable are sufficient to pay the costs to rebuild the common areas. It can take the board several months to obtain the information necessary to make the decision whether to rebuild or not.
Most CC&Rs include language such as:
- If the Board determines that insurance proceeds will cover more than 80% of the total cost to rebuild
the Common Area, the Board must commence reconstruction of the Common Area without requiring a vote from the members. - If the Board determines that insurance proceeds will cover less than 80% of the total cost to rebuild the Common Area, reconstruction must proceed unless 67% of the voting power within the Association votes against rebuilding the Common Area.
- Additionally, most CC&Rs also contain a provision similar to the following: The Board shall levy an emergency special assessment upon all owners to cover any shortfall between insurance proceeds and the cost of rebuilding the Common Area.
Rebuild Cost
“Rebuild cost” refers to the cost of reconstructing the common area from the foundations up. Conversely, “market value” is the price prospective buyers would pay for a home or structure. Property insurance coverage is based on rebuild costs, not market values. A home’s or structure’s market value is frequently higher than its rebuild cost. However, rebuild costs can exceed market value in some cases due to debris removal and demolition expenses, and increased material and labor costs in heavily impacted areas, for example, in the Palisades and Altadena areas.
From practical and legal standpoints, when the common area is partially destroyed, associations may be compelled to rebuild despite apparent options in their CC&Rs that allow them to refrain from rebuilding. The factors impacting an association’s decision whether to rebuild or not are detailed below.
Membership Approval
Understandably, when insurance proceeds substantially fall short of rebuild costs, owners with undamaged units may vote against reconstruction to avoid hefty special assessments. In contrast, owners of destroyed units typically favor rebuilding. Some CC&Rs provide the owners of the destroyed units with veto power to override decisions by the other owners opposing reconstruction. In addition, even without that veto power, the greater the number of affected owners, the more power those owners have to swing the vote in their favor. If the membership votes to rebuild, then the association must rebuild the destroyed common area. If the decision is to forgo rebuilding, the association will face a number of other obstacles to affect that decision.
Lender Approval
The CC&Rs of most condominium projects stipulate that non-reconstruction decisions need lender approval. Lenders require assurance that a unit and common areas will continue to serve as loan collateral. If an association decides not to rebuild, it could affect the lenders’ ability to recover their loans. Consequently, lenders may object and veto any decision by an association to avoid rebuilding. If the requisite number of lenders do not approve non-reconstruction decisions, then the association must rebuild. If the lenders do approve, then the association can move on to the next hurdle.
Partition and Division or Sale of a Condominium Project
Partition is a court-ordered physical division or sale of a condominium project. Most CC&Rs allow any owner or the association to initiate a partition action if the association decides not to rebuild. However, both the Davis Stirling Common Interest Development Act and case law prohibit voluntary or nonjudicial partitioning of the common area. This means that the association is prohibited from voluntarily selling or otherwise partitioning the common area without court approval. Courts will only grant a partition in very specific and limited circumstances.
If 75% or more of the development is destroyed (and a majority or more of the owners approve), the court may grant a judicial partition by sale, and each owner would receive the proceeds of the sale in proportion to their interest in the common area. After a sale of the entire development, the homeowner’s association can be dissolved subject to
and according to the procedures stated in the association’s CC&Rs and relevant Civil and Corporations Code sections. The association CC&Rs usually require membership, local government, and lender approval to dissolve. In addition, the association’s assets must be sold, its debts and liabilities paid, and the association must provide notice of the proposed dissolution to the IRS and its creditors.
If less than 75% of a condominium development is destroyed, neither the association nor the owners can petition for partition until three years after the destruction. During those 3 years, the association cannot dissolve, and the owners of the affected units remain members of the association and retain ownership of their airspace units.
Despite the destruction of their units and common area, the affected owners are still obliged to pay their mortgages, monthly assessments, special assessments, and property taxes. However, the affected owners may be eligible for temporary mortgage and tax relief. For more information about these relief programs, owners should contact their mortgage providers and the Los Angeles County Assessor’s Office, and/or the Ventura County Assessor’s Office at https://assessor.countyofventura.org or by calling (805) 654-2181.
If a partition by division of the property is granted by the court, the damaged common area may be excluded from the boundaries of the undamaged portion of the development. As a result, the damaged common area and units will no longer be part of the association. The association would then need to amend its CC&Rs and condominium plans to reflect these changes.
Associations experiencing partial or total common area destruction due to fire, flood, or other natural disasters should consult legal counsel for guidance in interpreting CC&Rs and relevant Civil and Corporations Code sections.
