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Issue  173  Article  299
Published:  12/1/2009

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Supreme Court Decides Contra Ledges Case
Chris Burti, Vice President and Senior Legal Counsel

The Supreme Court heard arguments in Southeastern Jurisdictional Administrative Council, Inc. v. Emerson, No. 62A08, in September of 2008 and the opinion was filed on October 9, 2009 in an appeal from an opinion of a divided panel of the Court of Appeals, reported at 188 N.C. App. 93, 655 S.E.2d 719 (2008) out of a case originating in Haywood County.

The opinion holds that because "of the unique Character" of the Lake Junaluska Assembly Development ("the Assembly") "and its longstanding history of covenant-imposed regulations" that its "community regulations that levy annual service charges on properties in the Assembly impose valid affirmative obligations upon the property owners to pay the fees". Interestingly enough, one justice wrote an opinion concurring in the result but limiting its application and two justices joined in a dissenting opinion.

In a footnote, the Supreme Court stated that it elected on its own to take judicial notice of facts about the Assembly that were not present in the record on appeal in "order to give full consideration to ‘the nature and character of the community' at issue here…" as required by Armstrong v. Ledges Homeowners Ass'n, 360 N.C. 547, 548, 633 S.E.2d 78, 81 (2006).

The Court found that "Plaintiff Southeastern Jurisdictional Administrative Council, Inc. ("the Council") is a nonprofit, non-stock corporation that manages, owns, develops, and sells land in Haywood County known as the Lake Junaluska Assembly Development. In addition, the Council maintains and operates the Assembly by providing such services as street lighting, fire and police protection, and maintenance of roads and common areas. The Council is the successor in interest to the Lake Junaluska Assembly; the Lake Junaluska Methodist Assembly; and ultimately the Southern Assembly of the Methodist Church, which was the Assembly's earliest incarnation. The Council operates the Assembly under the auspices of the Southeastern Jurisdictional Conference of the United Methodist Church in the United States of America."

"A brief recitation of the Assembly's history is helpful to an understanding of the issues in this case. The idea for the Assembly first took shape in 1908 during the Laymen's Missionary Conference in Chattanooga, Tennessee, when a resolution was passed calling for the establishment of a Methodist assembly in this region. The Southern Assembly was incorporated on 30 June 1910, and soon thereafter, the commissioners chose a location for the assembly and purchased 1200 acres of land for meeting grounds and private residences. By spring of 1913 construction had commenced, and the Southern Assembly began selling lots for private residential use. The Assembly officially welcomed its first visitors on 25 June 1913, when the Second General Missionary Conference of the Methodist Episcopal Church, South was held on the property. In 1929 the Southern Assembly adopted the name of the adjacent lake and officially became the Lake Junaluska Methodist Assembly. In 1948 ownership was transferred to the Southeastern Jurisdiction of the Church."

"In addition to being a private residential community and a center for religious conferences and retreats, the Assembly is also the administrative headquarters of the Southeastern Jurisdictional Administrative Council, formed in 1988 when the Lake Junaluska Assembly merged with the Jurisdictional Council of the Southeastern Jurisdictional Conference of the Methodist Church. Today, the Assembly comprises the two hundred acre lake and its adjacent amenities, including meeting facilities and event auditoriums, a campground for recreational vehicles, and rental accommodations such as hotels, apartments, and cottages; as well as more than seven hundred private homes. In its declaration of the protective covenants applicable to certain real property in the Assembly, the Council states that it ‘is dedicated to the training, edification and inspiration of people who are interested in and concerned with Christian principles and concepts.' In furtherance of those purposes, the Assembly offers a variety of family oriented activities for its visitors and year-round residents, such as boat rentals, an aquatic center and outdoor pool, tennis courts, an eighteen hole golf course and a miniature golf course, heritage museums, and historic structures and gardens. Through its many annual events, the Assembly has established itself as a center for religious worship and education, and each year more than 150,000 people visit Lake Junaluska for ministry retreats and other events. Since the first owners purchased lots in the Assembly nearly one hundred years ago, the development's residential properties have always been subject to restrictive covenants aimed at preserving the unique religious character and heritage of the Assembly. Dating back to 1913, the covenants describe the Assembly's aims as 'health, rest, recreation, Christian work and fellowship, missionary and school work, and other operations auxiliary and incidental thereto.' Numerous covenants have been incorporated in all deeds to residential properties in the Assembly and are now included in the recorded declaration for the Assembly's more recently developed Hickory Hill subdivision.

The covenants pertinent to this case state:

Second: That said lands shall be held, owned, and occupied subject to the provisions of the charter of the Lake Junaluska Assembly, Inc., and all amendments thereto, heretofore, or hereafter enacted, and to the by-laws and regulations, ordinances and community rules which have been, or hereafter may be, from time to time, adopted by said Lake Junaluska Assembly, Inc., and its successors.

. . . .

Fifth: That it is expressly stipulated and covenanted between [Grantor] and [Grantee and its] heirs and assigns, that the by-laws, regulations, community rules and ordinances heretofore or hereafter adopted by the said Lake Junaluska Assembly, Inc., shall be binding upon all owners and occupants of said lands as fully and to the same extent as if the same were fully set forth in this Deed, and that all owners and occupants of said lands and premises shall be bound thereby.

(Emphasis added.)

In 1996 the Council adopted the Rules and Regulations of the Lake Junaluska Assembly ("the Regulations") pertinent to this action. These Regulations require property owners to comply with rules governing "landscaping and property appearance, types of structures, livestock and animals, mobile homes and recreational vehicles, gasoline powered boats, alcoholic beverages, inappropriate clothing, and the manner and locations in which roller blades, roller skates, skateboards, and bicycles may be used." They imposed an annual service charge (the subject of this litigation), a grounds fee, and a road impact fee.

The defendants are landowners in the Assembly who refused to pay the assessed annual service charges, some of whom purchased property under deeds only containing the original covenants requiring compliance with the Regulations and some of whom purchased property under deeds expressly subject to protective covenants contained in a recorded declaration.

The defendants' responses to the Council's action to collect the unpaid assessments included defenses that alleged "that their deeds did not provide for the assessment of any fee or charge, did not contain a description of the permissible uses of the assessments, and did not describe the property and facilities to be maintained with the money collected. Further, defendants argued plaintiff is not a homeowners' association and thus that defendants' interests were not adequately represented through elections of directors or officers. Finally, defendants argued the expenditures by plaintiff were primarily for upkeep of its own property and development activities."

The trial court concluded "that the restrictions, rules and regulations applicable to Defendants' properties provide adequate standards by which to measure the Defendants' liability and that the property to be served and the services to be provided are described with particularity and are sufficiently definite." and ordered the defendants to pay the service charges and dismissed defendants' counterclaims. A divided panel of the Court of Appeals reversed.

The majority opinion sets out the history of the development dating back to the Assembly's inception and emphasizing the Christian character of the Assembly and its efforts to develop and maintain the development in accord with its principles. While the Court acknowledged its holding in Armstrong v. Ledges Homeowners Ass'n, 633 S.E.2d 78 (N.C. 2006) where it held that the enforceability of covenant amendments is dependent upon whether the amendments are reasonable, it has now parsed from that decision a rule that reasonableness "may be ascertained from the language of the declaration, deeds, and plats, together with other objective circumstances surrounding the parties' bargain, including the nature and character of the community" (emphasis added). The opinion states that the "Assembly stands in stark contrast to the community at issue in Armstrong. Whereas The Ledges community had only existed for about fifteen years when that controversy arose and was a fairly typical subdivision, the Assembly has existed for nearly a century and has spent that entire time purposefully developing its unique, religious community character."

"To that end, the Council and its predecessors have subjected the Assembly's residential lots to a wide variety of detailed restrictions, and they have done so consistently since the first lots were sold. Since the Assembly's establishment, all deeds conveying land within the community have included covenants requiring compliance with the bylaws, rules, and regulations periodically adopted by the Council. Indeed, the covenants incorporated in all defendants' deeds are nearly identical to one another. In purchasing property in the Assembly, defendants presumably desired to take advantage of the Assembly's exceptional community atmosphere, and in order to preserve that atmosphere, they were willing to relinquish significant ownership rights and give the Council substantial control over the community. While the current Regulations were not yet in existence at the time of the original conveyances here, the original intent of the parties was to bind all purchasers of property within the Assembly to any rules the Council deemed necessary to preserve the unique religious character and history of the community. In enacting the Regulations, therefore, the Council was acting in a manner that defendant Huffman and defendants Emerson could reasonably have anticipated."

Arguably, the majority is saying that anytime a court is satisfied that a covenant amendment or an unrecorded rule is reasonable, it should be anticipated by a purchaser of property in a restricted development if the law otherwise provides for amendments or rules. This is poorly considered language in that it will likely produce an inundation of ill-considered amendments of the sort already being seen in practice. An individual homeowner will seldom have the inclination or wherewithal to seek clarification from the appellate division and the owner's association will be able to draw upon the resources of the Association treasury and its ‘taxing' powers under the Planned Community Act as it will surely be interpreted henceforth. Of even greater concern for real property practitioners is that this majority has permitted these amendments to the developmental scheme to be buried in an unrecorded and unpublished "rule" or "regulation" as intimated by the dissenting opinion.

The majority goes on to enunciate a rule essentially proclaiming that if a lot is purchased in a development containing amenities, the purchaser should expect to pay for them regardless of whether the declaration so provides where it states "…regardless of whether their deeds explicitly required them to pay the annual service charges, all defendants in the case sub judice purchased property in the Assembly with knowledge of the development's extensive amenities and were thus aware of many potential sources of common expense. In light of defendants' desire to avail themselves of the Assembly's various facilities and conveniences, and their willingness to subject their property ownership to numerous restrictions aimed at preserving the amenities for residents' continued enjoyment, their "legitimate expectations," (citation omitted), should have included an understanding that the Council might amend those covenants to generate the funds necessary for maintenance of the Assembly."

"In addition to defendants' expectations, we must also consider the legitimate needs of the Council. (citation omitted). In that regard, we note that the purposes for the service charges, which include police protection, street maintenance, and upkeep of common areas, are eminently reasonable community expenses. We are persuaded that it was permissible for the Council to respond to conditions by requiring Assembly residents to contribute financially to the maintenance of their community." Thus, a homeowner's only recourse to any highhanded imposition of fees, charges and unrecorded amendatory regulations will be to challenge their reasonableness in the courts. Where amendment would have been clearly allowed under prior law, the burden of proving reasonableness would clearly have been upon the owner's association. The majority's willingness to read facts into the record to support the opinion and the broad language of the preceding quotes, suggest the possibility of a shift in the burden as well as potentially eliminating any requirement of much of a showing on the issue of authority.

Justice Edmunds authored a concurring opinion where he wrote "separately to emphasize that the unique nature of Lake Junaluska is fundamental to that outcome. In the ordinary case, by contrast, a restrictive covenant purporting to bind all owners and occupants to future regulations that a developer might adopt would not be sufficient to make an assessment implemented decades later by the developer reasonable or enforceable." As this statement is not adopted by the majority, it offers little to assuage the concerns stated above.

Justice Hudson authored a dissenting opinion in which Justice Timmons-Goodson joined. In this dissenting opinion, Justice Hudson concluded that the restrictive covenants at issue did not "contemplate" any affirmative financial responsibility on defendants Emerson and Huffman and thus the "service charge contained in the 1996 Rules and Regulations therefore exceeds the scope of the original bargain." He also concluded that while the applicable restrictive covenants do explicitly provide for assessment of service charges with respect to defendants Patten, "the language is not sufficiently definite to be enforceable under North Carolina law".

The substantive portion of the dissent is sufficiently concise to quote at length with some edits but, without comment for reasons of clarity. We believe that many real property practitioners will share in the views presented in the dissenting opinion and will generally have considered it to be the correct statement of the law on the subject prior to this decision unless their practice is substantially involved in representing owners associations.

"The majority and concurring opinions emphasize "the unique, religious community character" of the Lake Junaluska Assembly Development … as "fundamental" to the holding that the amendments to the restrictive covenants here are reasonable, even going so far as to take judicial notice of facts not in the record to support that position. However, the Southeastern Jurisdictional Administrative Council (SEJAC) has advanced no argument for an exception for religious communities, in either its original complaints against defendants or its briefs to the Court of Appeals and this Court. Moreover, neither the majority or dissenting opinions below discussed such an exception. Rather, this dispute has been presented by all parties as an ordinary dispute between a commercial property developer and its property owners, and I can discern no basis for us to treat it otherwise. Indeed, I have found no statutory or case law that would support an expansive reading of restrictive covenants only here, based on the presumably religious nature of the community. I do not believe it is appropriate for us to reach out and resolve this case on grounds not argued, particularly when doing so requires the Court to consider matters not in the record…"

"Covenants and agreements restricting the free use of property are strictly construed against limitations upon such use. Such restrictions will not be aided or extended by implication or enlarged by construction to affect lands not specifically described, or to grant rights to persons in whose favor it is not clearly shown such restrictions are to apply. Doubt will be resolved in favor of the unrestricted use of property, . . . and that construction should be embraced which least restricts the free use of the land. Such construction in favor of the unrestricted use, however, must be reasonable. The strict rule of construction as to restrictions should not be applied in such a way as to defeat the plain and obvious purposes of a restriction. (citation omitted), (emphasis added in the opinion) (citation and internal quotation marks omitted in the opinion).

…"Likewise, in Armstrong we recently held that an amendment to 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." (citation omitted).

…"Given that the restrictive covenants contain absolutely no reference to even the possibility of assessments or fees to be paid by property owners, I disagree that defendants Emerson and Huffman "should have anticipated" this action by the Assembly. Likewise, in light of our holding in Armstrong and our case law directing that such covenants be strictly construed against limitations on use of property, I cannot agree with the majority that this amendment is reasonable and within the scope of the original restrictive covenants agreed to by the parties. Indeed, this amendment appears to be precisely the type of ‘overreaching by one party or sweeping subsequent change' that we cautioned against in Armstrong. (citation omitted). I believe that the majority's holding here today dilutes beyond usefulness the reasonableness standard that we articulated in Long and Armstrong."

"The entire passage from Armstrong explaining how "reasonableness" may be determined is informative: ‘However, the court may ascertain reasonableness 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. Finally, a homeowners' association cannot unreasonably restrict property rental by implementing a garnishment or "taking" of rents (which is essentially an assessment); although it may be reasonable to restrict the frequency of rentals to prevent rented property from becoming like a motel. Correspondingly, restrictions are generally enforceable when clearly set forth in the original declaration.' (citation omitted)"

"We made these observations in the context of our concern that, with homeowners' associations in general, "[t]he law . . . not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the covenant agreement permitted a majority to make changes in existing covenants." … (citation and internal quotation marks omitted) ."

"Here, that concern is even greater, as SEJAC is the corporate property developer; there is no homeowners' association or other representative vehicle through which defendants and other property owners could vote to approve or strike down amendments to the original covenants. "[R]etaining significant control over minute aspects of the Assembly" is not equivalent to charging property owners monthly assessments, sometimes totaling thousands of dollars a year, that were not contemplated, and therefore, not agreed to, in the original contracts signed by the parties."

The majority opinion distinguishes the facts here from those in Armstrong by focusing on the ‘unique, religious community character' of the Assembly, as opposed to the "fairly typical subdivision" at issue in Armstrong. Our analysis in Armstrong was based not only on the nature of the community in question, but also in large part on the expectations of the property owners themselves as to future financial obligations at the time they purchased their lots… The majority's holding allows the Assembly to infringe on the individual property rights of defendants Huffman and Emerson by amending the original covenants in a manner that impermissibly "substitute[s] a new obligation for the original bargain of the covenanting parties." (citation omitted). Further, it runs contrary to our longstanding case law directing such covenants to be strictly construed. I would find the amendments to be invalid and unenforceable."

"Defendants Patten are differently situated than defendants Emerson and Huffman, as the Pattens purchased their lot in 1996, at which point the covenants included the following language: "Each owner shall pay annually a SERVICE CHARGE in an amount fixed by the SEJ Administrative Council for garbage and trash collection, police protection, fire protection, street maintenance, street lighting, and upkeep of common areas." Thus, defendants Patten had notice that they owed an ongoing financial obligation to the Assembly for those services."

"Turning to the second and third prongs, I find that the language in the covenants gives no guidance on the property or facilities that will be maintained with the assessment funds. …More troubling, SEJAC in its response to interrogatories, and Mr. Young in his deposition, conceded that the service charge assessed to defendants Patten is also used for administrative costs (including payroll, pension and retirement benefits, and attorney's fees), which are not purposes mentioned explicitly or by implication in the covenants."

"As the majority opinion itself observes, ‘the proceeds of the service charges must actually be used to fund the specific purposes stated in the restrictions." Here, by SEJAC's own admission, they are not. Moreover, the deed contains no language limiting the property or facilities to which the service charge may be applied, again giving SEJAC unfettered discretion to continue to expand the streets, lighting, and other areas that might be maintained using the service charges."…

In a footnote, Justice Hudson further comments: "I note that the majority opinion does not address defendants' argument that the 1996 Rules and Regulations are not an enforceable amendment to the covenants because they are contained in a private document that has not been recorded. See Armstrong, 360 N.C. at 555, 633 S.E.2d at 85 ("An enforceable real covenant is made in writing, properly recorded, and not violative of public policy." (citations omitted)); Hege v. Sellers, 241 N.C. 240, 248, 84 S.E.2d 892, 898 (1954) (stating that real covenants must be recorded). Because I would find the service charges to be unenforceable regardless, I have not discussed this point."

It can safely be predicted that the issues presented in this case will soon be presented to the courts in the context of the "fairly typical subdivision" and we would hope that if one of these cases is taken to the appellate level, that the position of the dissenting opinion will be adopted and the concurring opinion will be confirmed.

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