[BROKERDIRT] DD 10/3/06 Can an Association with no assessment or maintenance authority recreate itself by amendment?

Daily Development for Tuesday, October 3, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

SERVITUDES; DECLARATIONS; AMENDMENT:    Amendments of a declaration, even when the declaration expressly permits amendment, must be reasonable based upon circumstances surrounding original creation of the declaration and other factors.  Court limits reach of expansion of association’s assessment authority.

Armstrong v. The Ledges Homeowner’s Assoc., 633 S.E. 2d 78 (N.Car. 2006)

Developer created a subdivision in 1988.  The original scheme called for lots located along an arterial road with some cul-de-sacs attached.  There originally were no common areas or amenities.

 The Declaration contained extensive restrictions, including architectural control and other use limitations.  It dedicated the roads to public use (the Developer later transferred them to the State Department of Transportation, and provided for the creation of a homeowner’s association.  The association, at the outset, had no maintenance responsibilities and no assessment authority.  The Declaration stated the function of the Association to be  “to administer and enforce the provisions of this Declaration of Restrictive Covenants as the same no exists or may hereafter from time to time be amended.   Another provision of the Declaration provided that “any portion of the restrictive covenants may be released, changed, modified or amended by majority vote of the ten property owners within this subdivision.” 

During the course of development the Developer determined to add a light at the entrance to the Subdivision, and added to subsequent deeds a requirement that the owners pay their pro rata share of the cost of operating the light to the developer and, when formed, to the association.  The plaintiffs in this action took their lots with this language in their deeds, but some lot owners did not.  No mention of the duty of the association to pay for lighting or to assess for lighting appeared in the Declaration.

The Association’s Article weren’t filed  until 2004, and at that time the filed Articles did provide that its function was broader than simply enforcement of restrictive covenants.  The Articles provided that the Association had the function of upkeep, maintenance and beautification of the “amenities” at the development and “engaging in any other lawful activities of non profits.”

It appears, however, that the Association already was engaged in activity at that time, and a the three member board of directors had already determined that they wanted more amenities and greater powers for the Association.  First, they voted to amend the bylaws to provide the authority to the association to establish assessments and carry out maintenance and operation of common areas.  At the first meeting, in 1995, the bylaws were amended to provide an lien right to collect assessments.  Shortly thereafter, assessments went out for mowing the grass along the roadside (on private property), snow removal (from public roads), legal and administrative expenses. 

All along, since before the first meeting, plaintiffs had made clear by letters to the Association that they objected to the reformation of the Ledges into a “planned unit community.”  They said that they chose The Ledges specifically for the lack of amenities, and did not expect that it would immediately be reformed into something more like other gated and coddled residential subdivisions in the area. In fact, the Association Board appeared to be of the view that it was operating under the Planned Community Act of the state, although that Act had not been adopted at the time The Ledges was developed.. 

The Board apparently had a majority of the meeting attenders on its side, and ultimately a majority voted to amend the Declaration to vest in the Association broad powers of operation and maintenance, assessment and lien collection.  The Trial Court and North Carolina Court of Appeals concluded that the association had the power to amend as it saw fit, and the granting of summary judgment to the Association as to the validity of the amendments was appealed to the North Carolina Supreme court.

Held: Reversed.  “Because covenants originate in contract, the primary purose of a curt when interpreting a covenant is to give effect to the original intend of the parties; however, covenants are strictly construed in favor of the free use of land whenever strict construction does not contradict the plain and obvious purpose of the contracting parties. 

The court took note of the fact that many communities are amenity loaded luxury developments, and that extensive power to amend the function of the Association powers and functions over time ought to be expected as the continued needs of the community for broad services continues to change.  Thus, community declarations commonly have amendment provisions.  The court noted, however, “that such provisions give rise to a serious question about the permissible scope of amendment, which results from a conflict between the legitimate desire of a homeowners’ association to respond to new and unanticipated circumstances and the need to protect minority or dissenting homeowners by preserving the original nature of their bargain.”

Here, the court concluded that the broad authorization of assessments to “promot[e] the safety, welfare, recreation, health, common benefit, and enjoyment of the residents of Lots in The Ledges . . . “ contained in the amendment was invalid, even though validly adopted according to the amendment provisions the Declaration contained. 

“We hold that a provision authorizing a homeonwner’s association to amend a declaration of covenants does not permit amendments of unlimited scope; rather, every amendment must be reasonable in light of the contracting parties’ original intent.”

The court, in fact, appeared to go even further, as it established an independent filter of “reasonableness” in its review of such amendments.  Original intent appeared to be only part of the inquiry. 

“The court may ascertain reasonableness from the language of hte original declaration of covenants, deeds and plats, together with other objective circumstances surrounding the parties’ bargain, including the nature and character of the community.”

Interestingly, the court seized upon rental restrictions as an example (these are a hotly debated issue in the “amendment wars.”  It stated that if the declaration prohibits, rentals, a majority ought not be able to permit them by amending the declaration and vice versa. 

Here, of course, the original concept of the community appeared to be a “no frills, no amenities” situation.  Although the plaintiffs did take deeds permitting assessments for the cost of maintaining the community’s entrance light, the court ruled that the language permitting such assessments was distinctly limited in character and did not change the overall nature of the original scheme.  Although the holding was simply to strike down the general permissive language of the amendment, the court went on to note that it had in mind that the grass mowing on the land of private individuals and the snow removal on public roads likely were beyond the original conception of the community, and remanded for a broader consideration of the disagreements between the association and the objecting minority. 

Comment 1: This is an important new battle in the ongoing war between associations and their minority members to control what some would call “communaziism” and others would call “reasonable planning and management for a happy future.”  The editor has already weighed in in favor of some limitation on the broadest reading of amending provisions.  He believes that there often is an “founders intent” argument about what the basic nature of the community in question is, and that changes should not be made in such original conception without unanimous consent.  It is a real estate community after all, and property rights are valued and recognized there.

Here, the Community Associations Institute filed  an amicus brief, the editor assumes on the side of the association, and he anticipates having to dodge brickbats from the communitarian advocates who argue that the protection of individual rights in these communities is an antiquated notion - that everyone moving into a commonly restricted community should understand that it is, in fact, a community, and that they should abide by the reasonably formulated plans of the community to conform to changing times.  That’s OK.  He’s been brickbatted before.  Plenty.

Comment 2: Several recent cases would permit broad amendments pursuant to broad permissions.  Evergreen Highlands Assoc. v. West, 73 P. 3d 1 (Colo. 2003) (the DIRT DD for 6/19/03) held that an association has power to add new provisions to declaration pursuant to a general power to amend, including provisions authorizing, for the first time, mandatory assessments.  But the facts of that case were more compelling, as it is probable that the “original intent” of the development was for a funded, full service association. 

Thus there is still an open question as to what kinds of amendments the Colorado court was prepared to allow.  Would it, for instance, allow the creation of a new association with the power to pave a road and impose significant assessments to pay for that road when there never was any association with maintenance authority or responsibility in the original assessment?    Another recent case Windemere Homeowner's Assoc. v. McCue, 990 P.2d 769 (Mont. 1999) (the DD for 10/25/00), does just that.  The editor believes that there is a Texas case to the same effect, but right now he can’t find it. 

Comment 3: For a case consistent with the conservative approach espoused in this case, see eland Property Owners Ass'n v. Larson, 459 N.E.2d 1164, 1167 (Ill.App.Ct.1984), which held that a provision permitting an amendment to "change the said covenants in whole or in part" did not permit the conferring of an assessment right on an existing association.

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