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Issue 124 Article 211
Court of Appeals Decides Covenant Amendment Case
Chris Burti, Vice President and Legal Counsel
Armstrong v. The Ledges Homeowners Association, Inc., COA05-88, filed on October 18, 2005 will likely be viewed as a further signal that the courts of North Carolina will follow the lead of other jurisdictions in expanding the authority of homeowners associations to operate as what might be termed “private governments”. This is a decision by a unanimous panel of the Court of Appeals and, as such, it may be appealed and refined or overruled by the Supreme Court if they choose to consider it. It can be said to broadly expand the power of a homeowner’s association acting through a simple majority of the owners to make and enforce amendments over the objection of a minority of lot owners. A little history lesson is in order for us to gain a bit of perspective in the significance of this decision.
Rosi v. McCoy, 79 N.C. App. 311, (1986), succinctly stated the law concerning the power to amend restrictive covenants as it was construed up to that point. The Court of Appeals in that decision opined that the “…right to change the restrictions on lots within the subdivision refutes the idea of a general plan for residential purposes to be exacted alike from all purchasers, and to be for the benefit of each purchaser. Maples v. Horton, 239 N.C. 394, 80 S.E. 2d 38 (1954); Humphrey v. Beall, 215 N.C. 15, 200 S.E. 918 (1939). See also Annot., 4 A.L.R. 3d 570 (1965). As a result, the restrictions are not enforceable except as personal covenants for the benefit of the developers. Maples, supra.” This would have precluded adjoining lot owners from enforcing the restrictions as written.
The matter was appealed to the Supreme Court in Rosi v. McCoy, 319 N.C. 589, (1987), where that Court affirmed the outcome on other grounds and stated that “the court actually decided a broader question than was necessarily before it… however, the only question before the court was whether the plaintiffs could enforce the original restrictions against the defendants where the defendants had obtained an amendment modifying side setback requirements as to their lot pursuant to paragraph "Fifteenth," the developers still owned lots at that time, the amendment was duly recorded, and the defendants were not in violation of the amendment.”
The Court in a passing reference to Nelle v. Loch Haven Homeowners' Association, Inc., 413 So. 2d 28 (Fla. 1982) and Wright v. Cypress Shores Development Co., 413 So. 2d 1115 (Ala.1982). Implicitly resolved the “conflict between covenants apparently providing for a general scheme or plan and a reservation by the developers of a right to amend these covenants by reading into the covenants an implied requirement of reasonableness and allowing lot owners to enforce restrictions inter se”.
This opinion altered the dynamic by enforcing the developer’s right to amend. It implicitly holds that it couldn’t be challenged as long as the amendment was reasonable, the restrictions permitted amendment, “the developers still owned lots at that time, the amendment was duly recorded, and the defendants were not in violation of the amendment.” The next decision in this line was Crabtree v. Jones, 112 N.C. App. 530, (1993). One of the issues was an argument that since the restrictions contained a provision reserving the right to amend to the developer, the restrictions were not enforceable by other lot owners. This court distinguished Rosi and its predecessor Humphry by simply stating that they “are inapposite”. It relied on the explication of enforceability through privity in Runyon v. Paley, 331 N.C. 293, (1992) to dispose of the argument. Runyon did not in any way involve amendment issues and the covenants reserved no amendment rights. The Crabtree Court simply ignored the doctrine that would have construed the restrictions as personal to the developer. They did so by stating that where there is a “statement in the covenants that the restrictions may be enforced by ‘any lot owner or owners’” then “any other lot owner in the development, is entitled to enforce the restrictive covenants”.
The next major shift in doctrine occurs after the adoption of Chapter 47F, the Planned Community Act. One of the first cases of major significance interpreting the authority granted by the Act, was Wise v. Harrington Grove Community Assoc., Inc.; 357 N.C. 396, (2003). There the Court casually noted that where “the declaration of a homeowners association created prior to 1999 is silent as to whether an association has the power to fine its own members, but provides, as the instant declaration does, for amendment of the declaration provisions, the homeowners association may certainly obtain the power … by following the prescribed amendment procedure and by adding appropriate language to the declaration.” The Wise Court did not even pay lip service to the reasonableness doctrine, leaving open the question of what limitations exist on the power to amend.
Incredibly, the Court of Appeals dramatically expanded this trend in McInerney v. Pinehurst Area Realty, Inc., 162 N.C. App. 285, (2004). There, the Court quoting Wise stated that our “Supreme Court recently recognized that parties to a restrictive covenant ‘may structure the covenants, and any corresponding enforcement mechanism, in virtually any fashion they see fit.’” That panel then ironically used Rosi as support for this overly broad statement. “It is not for the courts to rewrite the parties' agreement should one of the parties, at a later date, desire a change, as this Court pointed out in Rosi v. McCoy, 79 N.C. App. 311, 314, 338 S.E.2d 792, 794 (1986), aff'd in part and modified in part on other grounds, 319 N.C. 589, 356 S.E.2d 568 (1987)”.
In Armstrong, the pertinent facts are as follows. “In September 1994, The Ledges Homeowners Association, Inc. (the “association”) was formed and bylaws were adopted. At the 1995 annual meeting, the association adopted an amendment to the declaration which stated, “The Association shall have a lien on any lot of an Owner who has failed to pay the assessment, for the enforcement of collection [of] the assessment.” The association began billing the residents for various expenses including electrical service to light the subdivision sign at night, the mowing of certain lawns, snow removal, operating expenses, and legal fees. Petitioners William B. and Rae H. Clore purchased their property in 1994.”
The petitioners contended that the trial court erred in failing to hold that the amended declaration adopted by the majority was invalid and such amendment could not impose general assessments on The Ledges lot owners. The Court of Appeals disagreed. It seems curious that in spite of a substantial body of case law dealing with enforceability of amendments, the Court determined that “this issue is one of first impression in North Carolina ”. While one can argue that enforceability and invalidity are different issues, in this context, it would not seem to be substantive as applied to the objecting minority. One case arguably dealing implicitly with the validity and enforceability would be Miles v. Carolina Forest Assoc., 141 N.C. App. 707, (2001).
Citing Montana and Colorado cases the Court of Appeals overruled the petitioner’s assignment of error. The Colorado Supreme Court in Evergreen Highlands Ass'n v. West., 73 P.3d 1 (Colo., 2003), cert. denied, 540 U.S. 1106, affirmed amendments to the existing restrictive covenants adopted nine years after the plaintiff purchased a lot. The amendments, as in Armstrong, required all property owners to be members of the community association and pay assessments to the association. Our Court of Appeals quoted; “the addition of a new covenant falls within the permissible scope of the modification clause of the Evergreen Highlands covenants.”
For further support, the Court then cites Windemere Homeowners' Ass'n v. McCue, 990 P.2d 769, 773 (Mont., 1999), where the Montana Supreme Court upheld amendments to the original restrictive covenants which created a homeowners' association and gave the association the right to assess and collect assessments for the costs of road maintenance. (“We hold that the language of the original declaration of restrictive covenants was broad enough to authorize the subsequent 1997 Amendment by a super-majority of sixty-five percent or more of the property owners.”).
The Court of Appeals then engages in a superficial analysis of the declarant’s intent. It states; “. The developer of the Ledges intended for the association to have the power to amend the restrictive covenants as follows: “that any portion of the restrictive covenants may be released, changed, modified or amended by majority vote of the then property owners within this Subdivision.” The amended declaration fulfills the developer's original intention that the homeowners, by majority vote, may amend the restrictions.” Note the circular reasoning.
To get to point ‘B’ the court states: “Providing for mandatory membership in the association and permitting the association to assess and collect fees from the association's members is not clearly outside the intention of the original restrictive covenants and is generally consistent with the rights and obligations of lot owners of subdivisions subject to restrictive covenants and homeowners' associations.” Implicit in this statement is that these amendments are both intended and reasonable (unless the covenants provide otherwise) as a matter of law. This will come as a great surprise to a substantial number of property owners assured at closing that there were no assessments to be paid on their new home.
The Court then ruled that the petitioners “accepted their deeds with the knowledge that the restrictive covenants may be amended in the future. ‘A grantee, who accepts a deed containing otherwise valid covenants purporting to bind him, thereby becomes bound for the performance of such covenants.’ Cummings v. Dosam, Inc., 273 N.C. 28, 31, 159 S.E.2d 513, 516 (1968). The amendments were adopted and enacted by the requisite property owners in conformity with the express requirements of a uniform plan of development and express powers that are set out in the restrictive covenants that are binding upon petitioners.”
Again the Court has postulated a broad doctrine enforcing amendment privileges without mentioning the limitations imposed by precedent. It is important to note that the limiting doctrines discussed above have never been expressly overruled. When one considers that the demographic of the makeup of association boards most often occurs at the nexus of the most interested and the least disinterested and that competence is rarely a consideration, it is not too surprising when control of the association shifts to parties with an agenda. This, in turn opens the door for demagoguery to produce extreme amendments that serve to change the entire character of a development.
Illustrative examples are adults-only condominiums being converted to allow children as the original purchasers die off and the properties get sold to investors. What then happens to the doctrine of “A grantee, who accepts a deed containing otherwise valid covenants purporting to bind him, thereby becomes bound for the performance of such covenants.”
It will be problematical for attorneys advising association boards. The cases seem to impose no limitations. Attorneys will be confronted with “where does it say we can’t”, citing these recent cases a support for what may be outlandish proposals. It can be anticipated that we will see a case testing the limits in the manufactured housing area. It could easily arise in the context of a majority of owners imposing a prohibition on modular homes after an individual installs one. While that unit would theoretically be grand-fathered analogous to a prior non-conforming use in the land use regulation arena, we have no case precedent to guide us. Clearly, if the unit were destroyed, replacement with a new modular home would be a violation of the amended covenants entitled to enforcement under Armstrong.
With the courts not even paying lip service to reasonableness doctrines in these cases, there is no guidance as to where the limits will be set. This, of course, assumes that the courts will set limits if a particularly egregious set of facts presents itself. Considering that the absence of an assessment liability is often an important consideration for property purchasers, what constitutes an egregious set of facts is obviously an open question.