Daily Development for
Monday, July 7, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

ASSOCIATIONS; DISCRETIONARY DECISIONS; ARCHITECTURAL CONTROLS: Although association decisions will be upheld if they are reasonable and in good faith, question of reasonableness depends upon whether adequate decision making practices were used, and court will review decision where association cannot show basis for its conclusion in the record.

Riss v. Angel, 934 P.2d. 669 (Wash. 1997)

This decision of the intermediate court of appeals in this case was reported as the DD for November 5, 1996 (on the website).

The Supreme Court of Washington here affirms the Court of Appeals in most particulars in a very significant ruling challenging the independence of homes association decision making. The net result of the ruling is that the directors of the unincorporated association, and apparently most of its members, will be held jointly and severally liable for what likely are substantial attorneys' fees and damages (over $200,000 prior to this appeal) incurred by one homeowner in the association who was refused permission to build a new home replacing his existing residence.

The association Board had rejected the homeowner's plans and imposed requirements that effectively restricted the homeowner to a new home that was in fact smaller than the one it replaced. The homeowner sought an appeal, and the homeowner members of the association voted to affirm the Board.

The Declaration provided that the association board could "disapprove the design, finishing or painting of any construction that is not suitable or desirable for any reason, aesthetic or otherwise." The court of appeals had read this language restrictively, concluding that the association was limited to application of more specific minimum requirements set forth elsewhere in the Declaration. The Supreme Court, however, reversed this aspect of the decision below. Citing recent developments in other jurisdictions and in Washington, it stated that the traditional rule that restrictive covenants should be read narrowly so as to promote free useage of land was an outdated concept.

The court's analysis here is significant enough to quote at length (with lengthy citations omitted):

The court's primary objective in interpreting restrictive covenants is to determine the intent of the parties. In determining intent, language is given its ordinary and common meaning. The relevant intent, or purposes, is that of those establishing the covenants. Historically, Washington courts have also held that restrictive covenants, being in derogation of the common law right to use land for all lawful purposes, will not be extended to any use not clearly expressed, and doubts must be resolved in favor of the free use of land.

"The Court of Appeals in this case applied the rule of strict construction against the drafter, reasoning that the homeowners are the drafters because they amended the covenants in 1990. Washington courts have begun to question whether rules of strict construction should be applied where the meaning of a subdivision's protective covenants are at issue and the dispute is among homeowners. Construction against the grantor who presumably prepared [a] deed is quite a different matter from construction of covenants intended to restrict and protect all the lots of a plat and future owners who buy and build in reliance thereon. . . . . The premise that protective covenants restrict the alienation of land and, therefore, should be strictly construed may not be correct. . . . While restrictive covenants were once disfavored by the courts, upholding the common law right of free use of privately owned land, modern courts have recognized the necessity of enforcing such restrictions to protect the public and private property owners from the increased pressures of urbanization. . . . As indicated, in Washington the intent, or purpose, of the covenants, rather than free use of the land, is the paramount consideration in construingrestrictive covenants. Moreover, both this court and the Court of Appeals have refused to apply principles of strict construction so as to defeat the plain and obvious meaning of restrictive covenants. . .

The time has come to expressly acknowledge that where construction of restrictive covenants is necessitated by a dispute not involving the maker of the covenants, but rather among homeowners in a subdivision governed by the restrictive covenants, rules of strict construction against the grantor or in favor of the free use of land are inapplicable. The court's goal is to ascertain and give effect to those purposes intended by the covenants. Ambiguity as to the intent of those establishing the covenants may be resolved by considering evidence of the surrounding circumstances. The court will place "special emphasis on arriving at an interpretation that protects the homeowners' collective interests.""

The court held that a general covenant providing association discretion to review construction or remodelling based upon aesthetic concerns or other such general standards are enforceable, and will not be limited solely to enforcement of express standards that may be set forth elsewhere in the operative document where there is no indication that this was the intent of the scheme created in that document. (Although the association may be limited to the extent that it cannot imposed requirements that are more restrictive in the specific areas addressed by such express standards).

The consent to construction covenant here provided that the Board would consider "harmony with other dwellings . . . the effect on outlook of adjoining or neighboring property and any and all other factorswhich in their opinion shall affect the desirability or suitability of such proposed structure, improvement or alterations." The court held that this permitted the association to limit the size and bulk of proposed construction, even though such construction might meet the minimum 1400 square foot standard required in the Declaration.

The court further assumed, lacking any finding below, that the decision of the association in this case was not exercised in bad faith.

Where the court parted company with the association, however, was on the question of the reasonableness of the discretionary decision.

In evaluating the reasonableness of the associaton's decision, the court carefully studied the record made by the association in reaching it's decision. It pointed out that other courts have found decisions unreasonable where there was no evidence in the record as to external design of any other structures in the subdivision aside from the applicant's residence and the record showed merely conclusory statements . . . that the proposed residence was not harmonious with surrounding structures.

The court emphasized the fact that the proposed "guidelines" limiting the owner in making any new proposalf: (a) reduced a roofline where no views were endangered significantly by the proposed roofline; (b) reduced the size of the new home to a size less than the existing home it would replace and (c ) reduced the width for the proposed house to conform to the shapes of other homes.

There is some uncertainty, however, as to whether the court concluded that these considerations rendered the association's decision "unreasonable" in and of itself, or whether the decision was unreasonable because the association Board did not undertake a reasonable evaluative process before reaching it's conclusions.

The court criticized the Board for not consulting an architect prior to reaching its conclusions, which apparently were based largely upon some rather amateurish fact finding by the Board President. The court also emphasized inaccurate statements made by Board members in attempts to "lobby" association members when the homeowner sought review by the association as a whole. In fact, there is some indication that the real defect in the associaiton's conduct here was not its decision, but its process. Again, a relatively extended quote seems in order:

"[I]n reviewing a homeowners association's decision under a consent to construction covenant, the court is obliged to determine whether that decision was properly made. See Robert G. Natelson, Law of Property Owners Associations 5.2,at 173 (1989) ("as with questions of substantive validity, a court may examine the fact-finding and other procedures undertaken by association officials in the course of judicial determination of whether the association's [ad hoc decision on architectural plans] is reasonable"). The trial court here found the homeowners' decision was unreasonable and arbitrary because their decision was made without comparing the proposed home with other homes in the neighborhood and "without a thorough investigation and upon inaccurate information." . . . These conclusions were based in part on testimony of Plaintiffs' expert who made a comparison study between Plaintiffs' proposed structure and other homes in the . . . development. This evidence tends to show that had the association made valid comparisons of its own, its decision might have been different. Coupled with the lack of record evidence showing any legitimate comparisons with existing homes under the standard "harmony with other dwellings," Plaintiffs' evidence supported their claim of arbitrary, unreasonable decisionmaking. Further, evidence of the circumstances surrounding the decision, such as the two Board members' misleading campaigns against Plaintiffs' proposed residence, also tends to show unreasonable decisionmaking. Thus, contrary to the homeowners' argument, the evidence was not admissible as a basis for the court to substitute its judgment for that of the homeowners association, but for the purpose of determining whether its decision was reasonable."

The court rejected the argument that the "business judgment rule" should preclude liability of the Board or the association members. Without clearly stating that the rule would apply in Washington, the court emphasized that in any event the rule should not protect those who fail to take reasonable care in making their decisions.

Comment 1: The implications of this case are far reaching, as the court is acknowledging a basis for liability for discretionary decisions not only imposed upon directors but (at least with regard to unincorporated associations) with regard to association members themselves. The liability aspects of the decision will be addressed in tomorrow's DD. Here it is sufficient to note that the danger of liability will (or should) affect significantly association conduct.

Comment 2: Note that it probably is not sufficient to associations simply to "lie down" for any proposed architectural change, since homeowners opposing the change also would be able to make a challenge and, presumably recover damages and, where appropriate, attorney's fees if they succeed in overturning the permission.

Comment 3: Thus, if associations, by virtue of their responsibility under the Declaration, must review architectural changes (or make other discretionary judgments concerning behavior of homeowners) it now appears that they must be very cautious in developing a proper record and undertaking a decision making process that will impress a court as "reasonable" upon review. Undoubtedly, advocates of association interests will point out that the volunteer members of these boards may lack the expertise and staff to make such analysis. How much will courts take these limitations into account? Apparently only time will tell.

Comment 4: The case at issue, of course, appears to involve some rather heavy handed result oriented decision making. But keep in mind that we are looking only at a selectively reported record. And there is no allegation of bad faith. In fact, it is likely that the process this association's decision was not that much different from decisions regularly undertaken by many architectural review committees nationwide. And even if the association's action here was questionable, the problem is that associations in the future will never know how courts will regard their own conduct. Thus, to avoid liability, they will have to hire more lawyers and experts, and acquire more insurance.

Comment 5: The bottom line may be that to avoid the expense of such decisions, associations may amend their declarations to get out of the discretionary review business entirely. Is this really such a bad idea?

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