Many associations want to know if they receive a settlement from construction defect litigation how will the affect their reserve study. This all depends on what components are included in the construction defect settlement. If the components are common area components that are included in their reserve study this could affect their reserve study and reserve funding plans. For example, let’s say an association received funds to replace their roofs or their common area streets. Once these components are replaced they lives would be reset in their reserve study and this would increase their percent funded and may decrease the necessary reserve contribution. On the other hand, if an association received funds to replace interior unit components such as appliances this would not affect their reserve study.
Associations should not take their settlement funds and deposit them into their reserve account. They should have a separate account for the construction defect funds. The construction defect funds are supposed to be used only for the construction defect components. Once all the defect components are repaired or replaced the HOA may be able to use the funds at their discretion. Associations should always consult with their legal counsel before spending defect funds on anything that is not included in their defect settlement.
California Civil Code Section 6100 Notice of Settlement Agreement States:
(a) As soon as is reasonably practicable after the association and the builder have entered into a settlement agreement or the matter has otherwise been resolved regarding alleged defects in the common areas, alleged defects in the separate interests that the association is obligated to maintain or repair, or alleged defects in the separate interests that arise out of, or are integrally related to, defects in the common areas or separate interests that the association is obligated to maintain or repair, where the defects giving rise to the dispute have not been corrected, the association shall, in writing, inform only the members of the association whose names appear on the records of the association that the matter has been resolved, by settlement agreement or other means, and disclose all of the following:
(1) A general description of the defects that the association reasonably believes, as of the date of the disclosure, will be corrected or replaced.
(2) A good faith estimate, as of the date of the disclosure, of when the association believes that the defects identified in paragraph (1) will be corrected or replaced. The association may state that the estimate may be modified.
(3) The status of the claims for defects in the design or construction of the common interest development that were not identified in paragraph (1) whether expressed in a preliminary list of defects sent to each member of the association or otherwise claimed and disclosed to the members of the association.