Newsletter and Legal Memorandum

The Newsletter and Legal Memorandum - Statewide Title, Inc.

Found At:
Issue  302
Published:  5/1/2024

Mileview LLC v. The Reserve II (COA 23-603 - Unpublished) 2/20/2024
Reasonableness of HOA amendment

Chris Burti, Vice President and Senior Legal Counsel

Mileview LLC v. The Reserve II at Sugar Mountain Condo. Owner's Ass'n., is an unpublished opinion of the North Carolina Court of Appeals dealing with a determination of the reasonableness of an amendment by a condo owner's association limiting short term rentals. As such, it is not controlling legal authority and while citation is generally disfavored, it may be permitted by the appellate courts and is treated here because this opinion may be considered illuminating and provides excellent guidance.

Without initial citation, the opinion leads off with a declaration of the doctrine established in Armstrong et al. v. Ledges Homeowners Association, Inc. et al., 360 N.C. 547, 633 S.E.2d 78 (2006):

Our Supreme Court has held that an amendment to a covenant in a homeowner's associations' declaration must be reasonable to be valid. To be reasonable, an amendment must preserve the original nature of the bargain by remaining faithful to the purpose of the original declaration.

The Court concluded that the trial court correctly ruled that an amendment to a condo declaration prohibiting short-term rentals was unreasonable because the declaration "expressly contemplated the units being rented and contained no other prohibitions consistent with those in the amendment." The opinion also deals with procedural issues of an award of attorney fees while an appeal is pending, that we will not treat here.

The plaintiff in this case filed a complaint seeking a TRO, preliminary injunction and declaratory judgment alleging that the defendant condominium association, wrongfully amended the declaration by stating:

2. Amendments. Section 5.3 of the Declaration is hereby amended to add the following subpart (f) immediately following the existing subpart (e):
"(f) From [1 November] of each calendar year through [31 March] of each calendar year, the Short-Term Rental of Units is prohibited. The Term "Short-Term Rental" means any lease (including subleases, licenses, and other possessory interests, whether oral or written) of one or more Units (or a portion thereof), for which the intended occupancy of the Unit is for a period or periods of less than thirty (30) days, irrespective of the stated term of the lease (including subleases, licenses, and other possessory interests, whether oral or written)."

Relying mainly on Armstrong the trial court determined that the amendment was unreasonable and granted summary judgment for the plaintiffs. The trial court's order stated:

THE COURT, based upon a review of the pleadings together with the attachments, affidavits as contained within the court file, Plaintiff's Exhibit 1 as tendered at the hearing, arguments of counsel and applicable law concludes that there are no genuine issues of material fact and that Plaintiffs are entitled to judgment as a matter of law. This Court concludes that the North Carolina Supreme Court's holding in Armstrong v. Ledges Homeowners Association, Inc., 360 N.C. 547 (2006) is controlling in this matter, and that having applied the factors set forth in that opinion this Court concludes that the purported Amendment to Declaration of Condominium for The Reserve II at Sugar Mountain Condominium ... is not reasonable.

As did the trial court, the Court of Appeals concurred that Armstrong sets out the applicable standards for determining whether an amendment to a declaration is reasonable. The Armstrong opinion concisely sets out the rules of construction for North Carolina covenants. The Court of Appeals quoted the opinion extensively and as it provides excellent guidance we include the quote in full here:

Because covenants originate in contract, the primary purpose of a court when interpreting a covenant is to give effect to the original intent 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. Long v. Branham, 271 N.C. 264, 268[] . . . (1967) ("[T]he fundamental rule is that the intention of the parties governs" construction of real covenants.). But see [Wise v. Harrington Grove Cmty. Ass'n, Inc., 357 N.C. 396, 404 (2003)] (When a covenant infringes on common law property rights, "'[a]ny doubt or ambiguity will be resolved against the validity of the restriction.'" (quoting [Cummings v. Dosam, Inc., 273 N.C. 28, 32 (1968)]); [J.T. Hobby & Son, Inc. v. Fam. Homes of Wake Cnty., Inc., 302 N.C. 64, 71 (1981)] ("The rule of strict construction is grounded in sound considerations of public policy: It is in the best interests of society that the free and unrestricted use and enjoyment of land be encouraged to its fullest extent."). Moreover, the North Carolina Court of Appeals has held that affirmative covenants are unenforceable "unless the obligation [is] imposed in clear and unambiguous language which is sufficiently definite to guide the courts in its application." Beech Mountain Prop. Owners' Ass'n v. Seifart, 48 N.C. App. 286, 288, 295-96[] . . . (1980) (concluding that covenants requiring an assessment for "'road maintenance and maintenance of the trails and recreational areas,'" "'road maintenance, recreational fees, and other charges assessed by the Association,'" and "'all dues, fees, charges, and assessments made by that organization, but not limited to charges for road maintenance, fire protection, and security services'" were not sufficiently definite and certain to be enforceable); see also Allen v. Sea Gate Ass'n, 119 N.C. App. 761, 764-65[] . . . (1995) (holding that a covenant requiring an assessment "'for the maintenance, upkeep and operations of the various areas and facilities by Sea Gate Association, Inc.'" was void because there was no standard by which a court could assess how the Association chooses the properties to maintain); Snug Harbor Prop. Owners Ass'n v. Curran, 55 N.C. App. 199, 203-04[] . . . (1981) (holding that covenants requiring owners to pay an annual fee for the "'[m]aintenance and improvement of Snug Harbor and its appearance, sanitation, easements, recreation areas and parks'" and "'[f]or the maintenance of the recreation area and park'" were not enforceable because there was "no standard by which the maintenance [was] to be judged"), disc. rev. denied, 305 N.C. 302[] . . . (1982). But see Figure Eight Beach Homeowners' Ass'n v. Parker, 62 N.C. App. 367, 371, 377[] . . . (concluding that a covenant authorizing an assessment for "'[m]aintaining, operating and improving the bridges; protection of the property from erosion; collecting and disposing of garbage, ashes, rubbish and the like; maintenance and improvement of the streets, roads, drives, rights of way, community land and facilities, tennis courts, marsh and waterways; employing watchmen; enforcing these restrictions; and, in addition, doing any other things necessary or desirable in the opinion of the Company to keep the property in neat and good order and to provide for the health, welfare and safety of owners and residents of Figure Eight Island'" was enforceable because the purpose of the assessment was described with sufficient particularity), disc. rev. denied, 309 N.C. 320[] . . . (1983). The existence of definite and certain assessment provisions in a declaration does not imply that subsequent additional assessments were contemplated by the parties, and courts are "'not inclined'" to read covenants into deeds when the parties have left them out. See Wise, 357 N.C. at 407[.]

Developers of subdivisions and other common interest communities establish and maintain the character of a community, in part, by recording a declaration listing multiple covenants to which all community residents agree to abide. See generally Law of Associations, § 2.4 (discussing servitudes and the subdivision declaration). Lot owners take their property subject to the recorded declaration, as well as any additional covenants contained in their deeds. Because covenants impose continuing obligations on the lot owners, the recorded declaration usually provides for the creation of a homeowners' association to enforce the declaration of covenants and manage land for the common benefit of all lot owners, thereby preserving the character of the community and neighborhood property values. Id. § 3.1 (discussing distinguishing characteristics of the property owners' association). In a community that is not subject to the North Carolina Planned Community Act, the powers of a homeowners' association are contractual and are limited to those powers granted to it by the declaration. Wise, 357 N.C. at 401[] . . . ("[U]nder the common law, developers and lot purchasers were free to create almost any permutation of homeowners association the parties desired."). Cf. N.C.G.S. § 47F-3-102 (2005) (enumerating the powers of a planned community's homeowners association); id. § 47F- 1-102, N.C. cmt. (2005) (naming powers that may apply retroactively to planned communities created before the effective date of the Act). Although individual lot owners may voluntarily undertake additional responsibilities that are not set forth in the declaration, or undertake additional responsibilities by mistake, lot owners are not contractually bound to perform or continue to perform such tasks.

Declarations of covenants that are intended to govern communities over long periods of time are necessarily unable to resolve every question or community concern that may arise during the term of years. See 2 James A. Webster, Jr., Webster's Real Estate Law in North Carolina § 18-10, at 858 (Patrick K. Hetrick & James B. McLaughlin, Jr., eds., 5th ed.1999) (noting that a homeowners' association often takes over service and maintenance responsibilities from the developer in a planned transfer to ensure continuation of these operations in the future). This is especially true for luxury communities in which residents enjoy multiple common areas, private roads, gates, and other amenities, many of which are staffed and maintained by third parties. See Patrick K. Hetrick, Wise v. Harrington Grove Community Association, Inc.: A Pickwickian Critique: The North Carolina Planned Community Act Revisited, 27 Campbell L. Rev. 139, 171-73 (2005) (comparing the administrative and legal needs of a modest subdivided hypothetical neighborhood, "Homeplace Acres," with those of a hypothetical "upscale residential land development," "Sweet Auburn Acres"). For this reason, most declarations contain specific provisions authorizing the homeowners' association to amend the covenants contained therein. The term amend means to improve, make right, remedy, correct an error, or repair. See generally Black's at 80; Heritage at 44; Webster's at 59. Amendment provisions are enforceable; however, 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. See Wise, 357 N.C. at 401[] . . . ("A court will generally enforce [real] covenants '"to the same extent that it would lend judicial sanction to any other valid contractual relationship."'") . . . ; see also 2 Restatement (Third) of Property: Servitudes § 6 Introductory Note at 71 (2000) ("The law should facilitate the operation of common interest communities at the same time as it protects their long-term attractiveness by protecting the legitimate expectations of their members.") (emphasis added). In the same way that the powers of a homeowners' association are limited to those powers granted to it by the original declaration, an amendment should not exceed the purpose of the original declaration. Armstrong v. Ledges Homeowners Ass'n, Inc., 360 N.C. 547, 555-58 (2006).

The Supreme Court in Armstrong presented an extended hypothetical to demonstrate the principles that it outlined in its opinion and that the Court of Appeals found strikingly(emphasis added) similar to this appeal. This Court recognized that the example was dicta in the Supreme Court opinion, but apparently considered its guidance apt. It may be supposed that this reliance on dicta is what led the Court of Appeals render this opinion as unpublished. When evaluating the reasonableness of a covenant amendment:

... one "must determine whether the amendment 'preserv[es] the original nature of the[] bargain' by remaining faithful to the 'purpose of the original declaration." to make this determination, we "ascertain [the] reasonableness [of the amendment] from the language of the original declaration of covenants, deeds, and plats, together with other objective circumstances surrounding the parties' bargain, including the nature and character of the community.'"

For example, it may be relevant that a particular geographic area is known for its resort, retirement, or seasonal "snowbird" population. Thus, it may not be reasonable to retroactively prohibit rentals in a mountain community during ski season or in a beach community during the summer. Similarly, it may not be reasonable to continually raise assessments in a retirement community where residents live primarily on a fixed income.

. . . .

Correspondingly, restrictions are generally enforceable when clearly set forth in the original declaration. Thus, rentals may be prohibited by the original declaration. In this way, the declaration may prevent a simple majority of association members from turning established nonrental property into a rental complex, and vice-versa.

This hypothetical, while not controlling, makes plain that our Supreme Court intended our review of an amendment's reasonableness to place great emphasis on the character of the community and read the obligations and restrictions in the original declaration narrowly.

In looking to specific provisions of the covenant at issue, the Court observed that it expressly contemplates that units would be rented and coupled with the uncontroverted facts in the record that short-term rentals were commonplace at the complex, it concluded the trial court correctly ruled that the amendment was unreasonable.

Armstrong is increasingly being recognized as the analysis blueprint to determine if covenant amendments should be considered unenforceable. These amendment raise other issues not addressed by our North Carolina appellate courts. Unquestionably, covenants are incorporeal hereditaments. They are property rights and protected by the Fourteenth Amendment to the U.S. Constitution. Property owner's associations have been likened to private governments. Rental limitation are essentially restrictions on alienation and newly imposed restrictions imposed by less than all property owners can be likened to a taking without compensation and, arguably, violative of Constitution. To the extent that the Legislature is not empowered to make takings without due process and compensation, it is not empowered to grant such authority to 'private governments'.

To the extent that the Legislature has imposed 1-year statutes of repose on challenging property owners' association amendments, they may not be effective to forestall Constitutional challenges and may be questioned as to whether they are unreasonably short. Title insurers will take exception to the recorded convents/declarations, but will be unlikely to afford coverage with respect to their enforceability or unenforceability, at least absent a judicial determination by a court of competent jurisdiction

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