Architectural decisions made by Association Boards are now given the liability protection of the business judgment and judicial deference rules.  In short, the business judgment rule protects Board members’ decisions on questions of policy or business judgment when performed in good faith, in a manner the director believes to be in the best interests of the Association and members, and with the care (including reasonable inquiry) of an ordinary, prudent person.  Under this rule, Board decisions are presumed to be a proper exercise of the Board members’ business judgment, which can be rebutted only by proof of fraud, bad faith, overreaching, or an unreasonable failure to investigate material facts.

Under the judicial deference rule, courts extend deference to the Board’s discretionary decisions made within the scope of its authority, upon reasonable investigation, in good faith, and with regard for the best interests of the association and its members.  The seminal case on the judicial deference rule is Lamden v. La Jolla Shores Clubdominium Homeowners Association.  Although the language of the California Supreme Court’s opinion in that case suggested that the rule might be limited to ordinary maintenance decisions, the decisions from the Courts of Appeal since then have clarified that it applies to a broader range of Board decisions. 

In a recent case, Eng v. Opperman, the Court of Appeal extended the judicial deference rule to Board decisions on architectural applications.  In that case, the Board, acting as the Design Review Committee,[1] denied an application to build an ADU and garage based on concerns about traffic and fire safety associated with the proposed new garage.  The owner argued that the architectural standards in the governing documents limited project review to aesthetics, which was not the basis of the Board’s denial of the ADU/garage application.  While the architectural standards contained provisions that seemed to limit the Design Review Committee’s review to aesthetics, the Court observed that the Board was not acting just as the Design Review Committee, but also as the Board.  The powers of the Board were broader than those of the Design Review Committee – e.g., the governing documents gave the Board authority over the safety and welfare of the owners, fire risk management of the common areas, and the adoption of rules pertaining to all aspects of the CC&Rs.  Furthermore, Civil Code section 4765, applicable to decisions by both the Board and Design Review Committee, requires that architectural decisions not violate any building code or other applicable law governing land use or public safety, notwithstanding the governing documents.  The Court concluded that the denial based on traffic and fire safety was within the Board’s authority under the law and the governing documents.

The Court then held that the judicial deference rule applies to the Board’s decision, setting up a presumption that it was made in good faith based on sound business judgment.  Accordingly, the owner had the burden of proving that the Board was guilty of fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.  Because the owner failed to do so, the Court upheld the Board’s decision.

The business judgment and judicial deference rules are phrased in terms of Board decisions, not decisions of architectural/design committees.  The reason is that the authority for making policy decisions in vested in the Board, while the authority of committees in general is to implement those policies.  Perhaps, if the CC&Rs invest authority for making architectural policy decisions in the architectural committee, the judicial deference rule arguably might apply to committee, as well as Board, decisions.

 [1] The Design Review Committee referred all ADU applications to the Board and declined to review them until the Board approved appropriate guidelines.