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Issue  196  Article  330
Published:  3/1/2012

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Right to Amend Restrictive Covenants
Chris Burti, Vice President and Senior Legal Counsel

The opinion of the Court of Appeals as expressed in the recently released decision of Taddei v Vill. Creek Prop. Owners Ass'n, Inc., COA11-650 (February 21, 2012) addresses the effectiveness of a procedurally correct modification of a declaration of residential restrictive convents. Also at issue in the case was whether the property owners' association (POA) President's personal interest in the outcome created an actionable conflict of interest, however as the analysis of the question really offers less critical insights for real property practitioners than for those representing property owners' associations, we will leave a discussion of this aspect of the case for another time. As there was no evidence of concealment or misrepresentation, the Court of Appeals, as would be expected, affirmed the trial court's findings that the plaintiffs were not entitled to relief in that regard.

The case is helpful in that it offers a certain amount of guidance to property owners' associations contemplating amendments to their declarations of covenants and restrictions and to those practitioners evaluating the effectiveness of adopted amendments. The broad language of certain prior opinions coupled with the rather broad language of the Planned Community Act, North Carolina General Statutes Chapter 47F, seemed to invite an interpretation of the law in North Carolina suggesting that a requisite majority could adopt virtually any changes to a declaration and enforce them against the remainder of the lot owners. This would have been a radical departure from traditional doctrine which held that reserving amendment powers that were too made covenants personal to the developer and unenforceable by the successors in title, see: Maples v. Horton, 239 N.C. 394, 80 S.E.2d 38 (N.C. 1954).  This doctrine began to be eased in 1987 by the opinion in Rosi v. McCoy, 319 N.C. 589, 356 S.E.2d 568 (N.C. 1987). The North Carolina Supreme Court, in the opinion released in the case of Armstrong v. The Ledges Homeowners Association, Inc., 360 N.C. 547, 633 S.E.2d 78 (2006), reimposed the reasonableness standard. The opinion sets out an unambiguous rule that "amendments to a declaration of restrictive covenants must be reasonable."

The Supreme Court in Armstrong outlines the doctrine traditionally controlling construction and interpretation of restrictive covenants in North Carolina. The doctrine holds that covenants are "contracts which create private incorporeal rights, meaning non-possessory rights held by the seller, a third-party, or a group of people, to use or limit the use of the purchased property." The Court recites a litany of modern cases in the opinion for support in that regard, many of which set out the rubrics typically cited in modern covenant interpretation cases. The Court, with appropriate citations, notes that 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." (emphasis in the original)

The Court of Appeals in this opinion follows the Armstrong mandate when analyzing the reasonableness of the amendments, but adds an additional layer of analysis with regard to the procedures followed in adopting the amendments as well.

The plaintiffs filed this appeal from a judgment granting summary judgment in favor of the Village Creek Property Owners Association, Inc. ("VCPOA") and the VCPOA President ("collectively defendants"). The plaintiffs contended the development's covenants as amended and enacted by the lot owners of Village Creek were invalid; that lot resubdivision is not permissible in the development; and that they had proffered sufficient evidence of a breach of fiduciary duty by the president of the POA and, therefore, summary judgment.

Village Creek is a residential subdivision located in Chowan County, North Carolina, developed in 1986 and originally consisting of 45 lots. A Declaration containing restrictive covenants was recorded in 1986 and was subsequently amended.  VCPOA was incorporated in 1987 pursuant to the declaration. The POA president and a neighbor subsequently purchased an intervening lot between their respective lots and resubdivided it in order to combine each half with their respective lots.

The plaintiffs moved to the development in 2002 and subsequently learned that multiple lot owners were only required to pay assessments on a per-unit-owned single lot ownership basis and not on a per-lot-owned basis. They filed a lawsuit against the VCPOA and the multiple lot owners, which resulted in entry of a Consent Judgment stating that the Covenants required that assessments be paid on a per-lot-owned basis. Subsequently, the VCPOA Board of Directors sent a letter to lot owners stating that they had a right to amend the declaration. The Board advised that the required assessment method pursuant to the Consent Judgment was "unfair in terms of value received

by the homeowners relative to the expense actually incurred on their behalf by the Association." And that the declaration prohibited the subdivision of lots, but that subdividing had occurred in the past. The VCPOA Board of Directors recommended that the Covenants be amended to "retain the prohibition of building homes on anything less than a full lot," while simultaneously "validat[ing] the legitimacy of previously-combined lots or portions of lots and permit combination of lots or portions of lots in the future . . . ."

The plaintiffs accused the VCPOA of violating the terms of the Consent Judgment and warned that they would challenge any amendments enacted without 100% property owner approval. A majority of lot owners consented to and approved the amending the declaration at a special meeting over the plaintiffs' objections. The covenants, as amended, required assessments to be levied on lots as originally platted and permitted recombination going forward. The plaintiffs filed a complaint alleging: (1) breach of contract against VCPOA; (2) a derivative proceeding against VCPOA; and (3) breach of fiduciary duty against the defendant President resulting in an order for summary judgment in favor of plaintiffs and defendants in part respectively.

The trial judge determined that the amended covenants were properly adopted; that the provisions changing the manner of making assessments were not reasonable, and were invalid; that "the provisions for changes, divisions, or combination of lots" were reasonable and valid and the trial court ruled in favor of defendants as to all other issues. The defendants did not appeal.

The Court of Appeals observed that the declaration states that the "covenants and restrictions shall be binding upon the owners and the lands of Village Creek for a period of twenty (20) years from the date of recording of this instrument. They shall be extended automatically for successive periods of ten (10) years unless, prior to the expiration of any term, an instrument executed by the majority of the then owners of lots in Village Creek has been recorded with the Chowan County Register of Deeds revoking or modifying this instrument.

The Court sets out the prototypical litany of the rubrics of covenant construction doctrine: "Generally, restrictive covenants are contractual in nature and a deed incorporating covenants "implies the existence of a valid contract with binding restrictions." Moss Creek Homeowners Ass'n, Inc. v. Bissette, 202 N.C. App. 222, 228, 689 S.E.2d 180, 184 (2010). Restrictive covenants should be strictly construed and any ambiguities should be resolved in favor of the unrestrained use of land. Id. at 228, 689 S.E.2d at 184-85. Nonetheless, effect must be given to the intention of the parties and strict construction may not be used to defeat the plain and obvious meaning of a restriction. Id. at 228, 689 S.E.2d at 185."

The Court applies that doctrine by stating that the "plain and unambiguous language in Paragraph 3 of the Covenants states that prior to the expiration of any term, the restrictions in the Covenants may be modified if a majority of lot owners file an instrument with the Chowan County Register of Deeds modifying the Covenants. Here, the Covenants were amended pursuant to the procedure set out in Paragraph 3 prior to the expiration of the first 20-year term and were to be effective at the beginning of the next term. The Amended Covenants, dated 15 March 2007, were signed by a majority of Village Creek lot owners, which satisfies the requirement for modification in Paragraph 3 of the Covenants. These Amended Covenants were then filed with the Chowan County Register of Deeds on 4 April 2007, satisfying the other modification requirement in Paragraph 3." The unanimous opinion, affirming the trial court, holds that the amendment was properly adopted procedurally, was valid and reasonable.

As the Rosi Court (supra) observed, "the law already recognizes the right of owners of lots subject to restrictive covenants to change or vacate the covenants if all consent. (Citations omitted). This opinion sets out a clear standard that can be relied upon in order for a developer or POA to effectively amend restrictive covenants with less than all of the lot owners consenting. If there is a reservation of a right to amend in the covenants in a pre Planned Community Act development or if the amendment involves a development covered by the Act, if the procedure for amendment as set for the in the applicable covenants or under the Act are scrupulously followed, if the amendment was made by a party with proper authority under the law and if the amendment is reasonable, the amendment should be considered enforceable.

Of less clarity is the issue of to what extent amendments can be altered from the original scheme of development and still be considered reasonable by the courts. Armstrong and Rosi, supra, would suggest that it would not be prudent to make changes that materially increase the burden of the restrictions upon the lot owners. One would suppose that imposing rent restrictions or prohibiting previously approved uses of the property would be viewed by the courts as unreasonable in that they would run counter to the long held doctrines that restrictive covenants are in derogation of the free and unfettered use of land, they are to be strictly construed in favor of the unrestricted use of property, Shuford v. Oil Co., 243 N.C. 636, 91 S.E.2d 903 (1956) and that any ambiguities in interpretation must be resolved in favor of the free alienation of land, Hobby & Son v. Family Homes, 302 N.C. 64, 274 S.E.2d 174 (1981).

Changes that go too far in liberalizing the restrictions in the covenants should not be expected to be favored by the courts as well. Our Supreme Court has stated: "[T]he principle upon which these restrictive burdens on the use of lands within a real estate subdivision are enforceable is that they are servitudes imposed on the various lots or parcels for the benefit of the area affected.... These servitudes ... are usually imposed by restrictive covenants between the developer and the initial purchasers and become seated in the chain of title ... thus fixing it so each lot in a legal sense owes to all the rest of the lots in the subdivision the burden of observing the covenant, and each of the rest of the lots is invested with the benefits imposed by the burdens. ...Therefore, where land within a given area is developed in accordance with a general plan or uniform scheme of restriction, ordinarily any one purchasing in reliance on such restriction may sue and enforce the restriction against any other lot owner taking with record notice, and this is so regardless of when each purchased; and similarly, a prior taker may sue a latter taker." Craven County v. Trust Co., 237 N.C. 502, 512-13, 75 S.E.2d 620, 628 (1953). Thus, easing restrictions excessively could easily be determined by a court have a deleterious effect on properties built in conformity with the stricter provisions if challenged.

In conclusion, the opinion by the Court of Appeals adds some certainty to the process of evaluating the enforceability of amendments to restrictive covenants, but questions remain as to what extent the courts will determine material changes to be reasonable.

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