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Issue  237  Article  378
Published:  6/1/2017

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Kimler v. The Crossings at Sugar Hill (15-1301) 8/2/2016
HOA Authority to Amend Declarations under the PCA

Chris Burti, Vice President and Senior Legal Counsel

This opinion resulted from an attempt by the homeowners' association ("HOA") of a residential subdivision developed in the 1990's by the "Developer" to adopt a clarifying amendment to the recorded declarations/covenants (the "Declaration"). The civil action challenged whether the HOA acted within its authority in so doing.

The Declaration originally provided that any individual purchasing more than one contiguous lot from the Developer would be obligated to pay dues only on a single lot so long as the "exempt" lot was not sold or occupied by a dwelling or camping unit. For the first fifteen years the HOA billed for a single lot, not only those lot owners purchasing multiple contiguous lots from the Developer , but also several other lot owners who did not purchase all their lots from the Developer . In 2012, the HOA began billing the latter group on a per-lot basis, some of whom strongly objected. These objections prompted the HOA to enact an Amendment to the Declaration to clarify that it was authorized to bill those who owned multiple contiguous lots not purchased from the Developer on a per-lot basis (rather than only for a single lot), as it should have been doing all along. The trial court concluded that the Sugar Hill HOA acted within its authority in enacting this Amendment. For the following reasons, we affirm.

The Declaration provided that the HOA would be set up with "the power to enforce" the collection of dues and compliance with covenants and restrictions, but did not contain any provision conferring the authority to amend the Declaration upon the HOA. The Declaration further provided that the HOA would be initially controlled by the Developer until either the Developer decided to turn governing power over to the lot owners or when 75% of the lots were sold, at which time control of the HOA would automatically vest in the lot owners. In 1997, the Developer recorded a document that turned control of the HOA over to the lot owners and also did not contain any provision transferring the Developer's authority to amend the Declaration to the HOA.

The 1999 Planned Community Act ("PCA"), which the Court of Appeals deemed applies to this planned community, includes provisions that permit covered communities to amend the declaration by the vote of 67% of the owners (with certain exceptions inapplicable here). In 2012, the HOA passed the Amendment in dispute with 71% of lot-owner approval. The Amendment stated that "only those owners of contiguous lots who purchased their contiguous lots directly from the Developer would be allowed to pay dues on a single lot, while those multiple-lot owners who did not purchase all their contiguous lots from the Developer would be required to pay dues for each lot owned."

The analysis in the opinion goes on to state:

N.C. Gen. Stat § 47F-2-103(a) states that "[t]o the extent not inconsistent with the provisions of this Chapter, the declaration, bylaws, and articles of incorporation form the basis for the legal authority for the planned community to act as provided in [those documents], and [those documents] are enforceable by their terms." The interpretation of the Declaration in the present case is one for the courts, and not for a jury, see Runyon v. Paley, 331 N.C. 293, 305, 416 S.E.2d 177, 186 (1992), and therefore is reviewable de novo on appeal.

Here, the Declaration provides that it may be amended by the Developer. The Declaration does not provide that it may be amended by the Sugar Hill HOA, but only that the Declaration may expire in 2021 by vote of the Sugar Hill HOA. However, we must read N.C. Gen. Stat. § 47F-2-103 in conjunction with N.C. Gen. Stat. § 47F-2-117, which provides for the process by which a declaration may be amended. Specifically, subsection (a) provides, in pertinent part, as follows:

Except in cases of amendments that may be executed by a declarant under the terms of the declaration ..., the declaration may be amended only by affirmative vote or written agreement signed by lot owners of lots to which at least sixty-seven percent (67%) of the votes in the association are allocated, or any larger majority the declaration specifies or by the declarant if necessary for the exercise of any development right. N.C. Gen. Stat. § 47F-2-117(a) (2015).

For those planned communities to which this statutory provision applies, even if not authorized by the declaration, an owners' association may amend the declaration by a sixty-seven percent (67%) vote and a declarant may amend the declaration if necessary to exercise a development right. This grant of authority to an owners' association to amend the declaration applies to the Sugar Hill HOA in the present case, though the HOA was formed prior to 1999, because there is nothing in the Declaration or articles of incorporation which "expressly provides to the contrary." N.C. Gen. Stat. § 47F-1-102(c) (2015) (emphasis added) (providing for the application of N.C. Gen. Stat. § 47F-2-117 to pre-1999 formed planned communities). Specifically, there is nothing in the Declaration which expressly states that the Sugar Hill HOA is not authorized to amend the Declaration. (footnotes omitted)

The Court of Appeals recognized that a HOA's authority to amend a subdivision declaration is not unlimited. Citing Armstrong v. Ledges Homeowners Ass'n, 360 N.C. 547(2006) the opinion observes that the North Carolina Supreme Court has held that an owners' association's authority to amend a declaration is limited to those amendments deemed reasonable. "Reasonableness may be ascertained from the language of the declaration, deeds, and plats, together with the other objective circumstances surrounding the parties' bargain, including the nature and character of the community." Id.

Relying on the doctrine of construction set out in Runyon v. Paley, 331 N.C. 293, requiring a court to construe the terms of the Declaration based on the intent of the parties, the Court of Appeals concluded that the intent of the original declaration was to provide that only those owners buying contiguous lots from the Developer would be initially obligated to pay dues based on one of the lots and that the other lots would be exempt until sold or occupied by a living or camping unit. The Court additionally determined that it was not intended that the exemption be lost simply because the Developer failed to state in the conveyance which lots were to be exempt and the lot initially occupied by the buyer would be the lot assessed.

The Court of Appeals resolve the issues being argued by concluding that "the intent of the 2012 Amendment was largely to clarify paragraph 8(c) as originally written, but without the requirement that the deed from the Developer recite which lot(s) would be exempt." They further determined that this change is not unreasonable based on the reasoning in the Supreme Court's decision in Armstrong. Accordingly, the 2012 Amendment is deemed valid and enforceable and the HOA is not barred by estoppel or laches from collecting dues on a per-lot basis from owners of multiple contiguous lots that were not conveyed by the Developer.

The Court's careful consideration of the limitations on amendment by an HOA imposed by the North Carolina Supreme Court is an important lesson for attorneys advising Associations and owners.

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