[1] |
IN THE SUPREME COURT OF NORTH CAROLINA |
[2] |
T.C. Memo. No. 640PA05 |
[3] |
633 S.E.2d 78, 360 N.C. 547, 2006.NC.0001132 |
[4] |
August 18, 2006 |
[5] |
ROBERT LOUIS ARMSTRONG AND WIFE, VIVIAN B.
ARMSTRONG; L.A. MOORE AND WIFE, E. ANN MOORE; AND WILLIAM B. CLORE AND
WIFE, RAE H. CLORE, PETITIONERS
v.
THE LEDGES HOMEOWNERS ASSOCIATION, INC. AND THE OWNERS OF LOTS IN THE
LEDGES OF HIDDEN HILLS SUBDIVISION: VIOLET M. MYERS, C. DONALD
LARSSON/TRUSTEE, MARILYN BARNWELL, CHARLES S. AND CATHRYN A. HARRELL,
THOMAS REIN LUGUS, JACK H. AND ROBERTA M. CRABTREE, DOROTHY LOIS SHIMON,
TRUST, WILLIAM V. AND JOANN K. PHILLIPS, RICHARD AND ELIZABETH C. COOMBES,
GUIDO D. AND EILEEN J. MIGIANO, EUGENE M. AND LUCRETIA B. WAGNER,
JACQUELINE W. EADIE, ELIZABETH H. SCHAD, TRUST, SUNNIE TAYLOR, SUE EDELL
AND T. HILLIARD STATON, ALBERT W. AND URSULA K. JENRETTE, THERESA M.
WUTTKE, JOHN FITZGERALD AND ROBIN RENEE HOLSHUE, ADRIAN R. AND MARILYN B.
ADES, LINDA N. ROSS, J.D. AND EDWINA S. MILLER, RUSSELL L. AND LAUNA L.
SHOEMAKER, PAUL E. AND DEBORAH H. PARKER, WILLIAM SCOTT AND ELIZABETH A.
CHOVAN, DAVID N. AND MELANIE D. HUTTO, TEDD M. AND JEANNIE PEARCE, JIMMIE
J. AND BETTY J. REMLEY, TERRY N. AND MICHELLE L. MCADOO, JOSEPH A. AND
MARGARET K. DINKINS, CARLTON W. AND FRANCES A. DENCE, CLIFTON F. AND DONNA
GRUBBS SAPP, MARVIN G. AND E. JOYCE KATZ, JOY N. PARISIEN, LEWIS EDWIN AND
HELEN BOOKMAN, AND DENNIS R. AND DONDRA C. SETSER, RESPONDENTS |
[6] |
On discretionary review pursuant to N.C.G.S. § 7A-31
of a unanimous decision of the Court of Appeals, ___ N.C. App. ___, 620
S.E.2d 294 (2005), affirming a judgment granting summary judgment for
respondents and denying petitioners' requests for injunctive relief signed
on 20 October 2004 by Judge J. Marlene Hyatt in Superior Court, Henderson
County. Heard in the Supreme Court 20 April 2006. |
[7] |
Kennedy Covington Lobdell & Hickman, by Roy H.
Michaux, Jr., for petitioner-appellants Robert and Vivian Armstrong. |
[8] |
Gray, Layton, Kersh, Solomon, Sigmon, Furr &
Smith, P.A., by Ted F. Mitchell, for respondent-appellee The Ledges
Homeowners Association, Inc., and Dungan & Associates, P.A., by Robert
E. Dungan, for respondent- appellees Owners of Lots in The Ledges of
Hidden Hills. |
[9] |
Jordan Price Wall Gray Jones & Carlton, Pllc, by
Henry W. Jones, Jr., Hope Derby Carmichael, and Brian S. Edlin, and Wyrick
Robbins Yates & Ponton, Llp, by Roger W. Knight, Counsel for Research
Triangle Chapter of the Community Associations Institute, Inc., amicus
curiae. |
[10] |
The opinion of the court was delivered by:
Wainwright, Justice. |
[11] |
This is a declaratory judgment action brought by
subdivision property owners against their homeowners' association. The
dispositive question before the Court is to what extent the homeowners'
association may amend a declaration of restrictive covenants. The parties
agree that a declaration may be amended and that the subdivision in
question is not subject to North Carolina's Planned Community Act, which
is codified in Chapter 47F of the North Carolina General Statutes. There
are no disputed questions of fact. |
[12] |
We hold that amendments to a declaration of
restrictive covenants must be reasonable. 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. Because we
determine that the amendment to the declaration sub judice, which
authorizes broad assessments "for the general purposes of promoting
the safety, welfare, recreation, health, common benefit, and enjoyment of
the residents of Lots in The Ledges as may be more specifically authorized
from time to time by the Board," is unreasonable, we conclude that
the amendment is invalid and unenforceable. Petitioners own lots in The
Ledges of Hidden Hills subdivision (the Ledges) in Henderson County. The
Ledges was developed in 1988 by Vogel Development Corporation (Vogel)
pursuant to a plat recorded in the Henderson County Public Registry.
Forty-nine lots are set out along two main roads that form a Y shape.
There are four cul de sacs. The plat designates the roads as "public
roads," which are maintained by the State, and shows no common areas
or amenities. |
[13] |
Before selling any lots, Vogel recorded a Declaration
of Limitations, Restrictions and Uses (Declaration). The Declaration
contained thirty-six provisions which restricted the lots to single family
residential use; established setbacks, side building lines, minimum square
footage, and architectural controls; and otherwise ensured a sanitary and
aesthetically pleasing neighborhood. The Declaration emphasized that roads
in the Ledges are "dedicated to public use . . . forever" and
that Vogel may "dedicate the roads . . . to the North Carolina
Department of Transportation." Finally, the Declaration provided for
the establishment of a homeowners' association: |
[14] |
The Developer [Vogel] intends to establish a
non-profit corporation known as THE LEDGES OF THE HIDDEN HILLS HOMEOWNERS
[sic] ASSOCIATION, and said Homeowner's [sic] Association, upon the
recording of its Articles of Incorporation in the office of the Register
of Deeds for Henderson County, North Carolina, shall have the right,
together with the lot owners of lots within this Subdivision, either
acting individually or as a group, to administer and enforce the
provisions of this Declaration of Restrictive Covenants as the same now
exists or may hereafter from time to time be amended. |
[15] |
(Emphasis added.) The Declaration did not contain any
provision for the collection of dues or assessments, and it appears that
formation of a homeowners' association was primarily intended to relieve
Vogel from the ongoing responsibility to enforce the architectural control
covenants. |
[16] |
Vogel began conveying lots in the Ledges after
recording the Declaration and plat. Later, Vogel decided to construct a
lighted sign on private property in the Sunlight Ridge Drive right of way.
Sunlight Ridge Drive is the entry road to the Ledges. Because lighting the
sign required ongoing payment of a utility bill, Vogel included the
following additional language in subsequent conveyances: |
[17] |
The grantor herein contemplates the establishment of
a non-profit corporation to be known as The Ledges of Hidden Hills
Homeowners Association, and by acceptance of this deed the grantees agree
to become and shall automatically so become members of said Homeowners
Association when so formed by said grantor; and said grantees agree to
abide by the corporate charter, bylaws, and rules and regulations of said
Homeowners Association and agree to pay prorata [sic] charges and
assessments which may be levied by said Homeowners Association when so
formed. Until the above contemplated Homeowners Association is formed or
in the event the same is not formed, the grantor reserves the right to
assess the above- described lot and the owners thereof an equal pro-rata
[sic] share of the common expense for electrical street lights and
electrical subdivision entrance sign lights and any other commonutility
expense for various lots within the Subdivision. |
[18] |
(Emphasis added.) This language appears in each
petitioner's deed, together with a reference to the previously recorded
Declaration. Because specific language in a deed governs related general
language, we determine that assessments for "common expense" for
"electrical" service are the kind of assessments that the deed
provides "may be levied by the Homeowners Association." See
Smith v. Mitchell, 301 N.C. 58, 67, 269 S.E.2d 608, 614 (1980) (applying
the maxim "the specific controls the general" to construction of
a restrictive deed covenant). Our conclusion is supported by the
deposition of Edward T. Vogel, President of Vogel Development Corporation,
taken during this action. In his deposition, Mr. Vogel agreed that the
assessment provision was added so that Vogel would not be responsible for
paying the electric bill indefinitely. |
[19] |
Articles of Incorporation for the
Ledges Homeowners' Association (Association) were not filed with
the Secretary of State until 20 September 1994. The Articles provide that
the Association is incorporated for the purposes of "upkeep,
maintenance and beautification of the common amenities of [the
Ledges]," "enforcement of the restrictive covenants of [the
Ledges]," and "engag[ing] in any other lawful activities allowed
for non-profit corporations under the laws of the State of North
Carolina." |
[20] |
Sometime before the Association's first annual
meeting in 1995, the Association's three-member Board of Directors adopted
by-laws. These by-laws set forth the Association's powers and duties,
which included the operation, improvement, and maintenance of common
areas; determination of funds needed for operation, administration,
maintenance, and management of the Ledges; collection of assessments and
common expenses; and employment and dismissal of personnel. |
[21] |
Such bylaws are "administrative provisions"
adopted for the "internal governance" of the Association.
Black's Law Dictionary 193 (7th ed. 1999) [hereinafter Black's]. "The
bylaws [of a nonprofit corporation] may contain any provision for
"regulating and managing the affairs of the corporation," but no
bylaw may be "inconsistent with law." N.C.G.S. § 55A-2-06
(2005). As explained below, in a community that is not subject to the
North Carolina Planned Community Act, the powers of a homeowners'
association are contractual and limited to those powers granted to it by
the declaration. Therefore, to be consistent with law, an association's
by-laws must necessarily also be consistent with the declaration. |
[22] |
At the first annual meeting, the by-laws were amended
to provide that the Association would have a lien on the lot of any owner
who failed to pay an assessment. Thereafter, the Association began
assessing lot owners for the bills incurred for lighting the Ledges
entrance sign. Additionally, the Association assessed owners for mowing
the roadside on individual private lots along Sunlight Ridge Drive, for
snow removal from subdivision roads, and for operating and legal expenses.
By affidavit submitted in support of petitioners' motion for summary
judgment, petitioner Vivian Armstrong stated that the annual electrical
bill for the sign is less than sixty cents per lot per month or
approximately seven dollars and twenty cents per year; however, the
Association has billed lot owners total assessments of approximately
eighty to one hundred dollars per year. |
[23] |
On 18 June 2003, Armstrong sent an e-mail to the
President of the Association, Marvin Katz, challenging the validity of
these assessments: |
[24] |
Since purchasing property here, we've received two
invoices from the Ledges homeowner's [sic] association. In good faith, we
relied upon the representation that the money was legitimately owed. We've
recently learned that the nature of the homeowner's [sic] association has
been misrepresented. Therefore, we ask for a full and immediate refund of
$160. |
[25] |
Armstrong requested that the matter be placed on the
agenda of the officers' next meeting. |
[26] |
At a meeting held on 16 July 2003, the board amended
the Association by-laws again, greatly expanding the entity's enumerated
powers and duties. In particular, the amended by-laws provided that the
Association shall have the power to "[i]mpose charges for late
payment of assessments and, after notice and an opportunity to be heard,
levy reasonable fines not to exceed One Hundred Fifty Dollars ($150.00)
per violation (on a daily basis for continuing violations) of the
Restrictive Covenants, Bylaws, and Rules and Regulations of the
Association pursuant to Section 47F-3-107.1 of the North Carolina Planned
Community Act." Several additional amended provisions also referenced
the Planned Community Act.On 1 August 2003, petitioners Robert and Vivian
Armstrong sent a letter to the Association requesting termination of their
membership. On 8 August 2003, petitioners L.A. and E. Ann Moore requested
termination of their Association membership as well. In their letter, the
Moores stated: |
[27] |
We chose this particular property last year for
several reasons. After a thorough search of Western North Carolina and the
Hendersonville/Brevard area, in particular, we decided expressly against
living in a gated community with "all the amenities." Golf
courses, swimming pools and clubhouses are not our choice for daily
living. Walking trails, while enjoyable and convenient, are but another
source of assessment we don't need. |
[28] |
The Ledges appeared to be the answer to our desires,
and until recent events we've been sure of it. The current Covenants are
more restrictive than any other area in which we've resided, but not
unreasonably so. While receptive to OPEN discussion of a small change or
two, we are adamant in our opposition to the expressed plan of The Board
to turn us into a Planned Community. |
[29] |
(Emphasis added.) |
[30] |
On 17 October 2003, petitioners filed a declaratory
judgment action in Superior Court, Henderson County, seeking, among other
relief, a declaration that the Ledges is not a "planned
community" as defined by N.C.G.S. § 47F-1-103 (23) and that the
amended by-laws are unenforceable. Thereafter, on 20 November 2003, the
Ledges' Board of Directors amended the Association by-laws to omit any
reference to North Carolina's Planned Community Act. |
[31] |
On 24 November 2003, a majority of the Association
members adopted "Amended and Restated Restrictive Covenants of the
Ledges of the Hidden Hills" (Amended Declaration). The Amended
Declaration contains substantially different covenants from the originally
recorded Declaration, including a clause requiring Association membership,
a clause restricting rentals to terms of six months or greater, and
clauses conferring powers and duties on the Association which correspond
to the powers and duties previously adopted in the Association's amended
by-laws. |
[32] |
Additionally, the Amended Declaration imposes new
affirmative obligations on lot owners. It contains provisions authorizing
the assessment of fees and the entry of a lien against any property whose
owner has failed to pay assessed fees for a period of ninety days.
According to the Amended Declaration, such fees are to be "assessed
for common expenses" and "shall be used for the general purposes
of promoting the safety, welfare, recreation, health, common benefit, and
enjoyment of the residents of Lots in The Ledges as may be more
specifically authorized from time to time by the Board." Special
assessments may be made if the annual fee is inadequate in any year;
however, surplus funds are to be retained by the Association. Unpaid
assessments bear twelve percent interest per annum. |
[33] |
Petitioners amended their complaint in early December
2003 to reflect the November changes to the Association by-lawsand
original Declaration. Petitioners asserted five claims for relief,
seeking: (1) a declaration that the Ledges is not subject to the Planned
Community Act, (2) a declaration that the amended Association by-laws are
invalid and unenforceable, (3) a declaration that lot owners are not
required to join the Association or otherwise be bound by actions of the
Association, (4) a declaration that the Amended Declaration is invalid and
unenforceable, and (5) a permanent injunction preventing the Association
from enforcing the amended by-laws or recording the Amended Declaration.
In their answer to the amended complaint, respondents admitted that
neither the amended by-laws nor the Amended Declaration subjected the
Ledges to North Carolina's Planned Community Act. *fn1 |
[34] |
Both petitioners and respondents moved for summary
judgment, submitting multiple affidavits and exhibits in support of their
positions. Following a hearing, the trial court granted respondents'
motion for summary judgment, denied petitioners' motion for summary
judgment, and dismissed petitioners' claims with prejudice. In so doing,
the court found that the Amended Declaration was valid and enforceable.
Petitioners then appealed to the North Carolina Court of Appeals.The Court
of Appeals determined that the plain language of the Declaration is
sufficient to support any amendment thereto made by a majority vote of
Association members, noting "the declaration provides, '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.'" Armstrong v. Ledges Homeowners Ass'n, ___ N.C. App.
___, ___, 620 S.E.2d 294, 297 (2005). The court further concluded that |
[35] |
[p]roviding for mandatory membership in the [A]ssociation
and permitting the [A]ssociation to assess and collect fees from the [A]ssociation'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. |
[36] |
Id. at ___, 620 S.E.2d at 298. Accordingly, the Court
of Appeals affirmed the trial court's order of summary judgment in favor
of respondents. |
[37] |
Robert and Vivian Armstrong then filed a petition for
discretionary review in this Court, arguing that the Court of Appeals
erred by determining that the scope of the disputed amendment does not
exceed the authority granted to the Association in the covenants contained
in the original Declaration. Petitioners did not seek discretionary review
of remaining issues resolved by the Court of Appeals. This Court granted
the Armstrongs' petition on 26 January 2006. The word covenant means a
binding agreement or compact benefitting both covenanting parties. See
generally Black's 369; The American Heritage Dictionary of the English
Language 432 (3rd ed. 1992) [hereinafter Heritage]; Random House Webster's
College Dictionary 314 (1991) [hereinafter Webster's]. A covenant
represents a meeting of the minds and results in a relationship that is
not subject to overreaching by one party or sweeping subsequent change. |
[38] |
Covenants accompanying the purchase of real property
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. See Wise v. Harrington Grove Cmty.
Ass'n, 357 N.C. 396, 401, 584 S.E.2d 731, 735-36 (2003) (stating that
courts will enforce a real covenant in the same manner as any other
contract); Karner v. Roy White Flowers, Inc., 351 N.C. 433, 436, 527
S.E.2d 40, 42 (2000) (stating that covenants create incorporeal rights);
Robert G. Natelson, Law of Property Owners Associations §§ 2.1, 2.3.3.1
(1989) (discussing the characteristics of servitudes and contractual
servitudes) [hereinafter Law of Associations]. Real covenants "run
with the land," creating a servitude on the land subject to the
covenant. Runyon v. Paley, 331 N.C. 293, 299-300, 416 S.E.2d 177, 182-83
(1992) (explaining that a restrictive covenant is a real covenant if
"(1) the subject of the covenant touches and concerns the land, (2)
there is privity of estate between the party enforcing the covenant and
the party against whom the covenant is being enforced, and (3) the
original covenanting parties intended the benefits and burdens of the
covenant to run with the land") (emphasis added). An enforceable real
covenant is made in writing, properly recorded, and not violative of
public policy. J. T. Hobby & Son, Inc. v. Family Homes of Wake Cty,
Inc., 302 N.C. 64, 71, 274 S.E.2d 174, 179 (1981) (Real covenants may not
offend "articulated considerations of public policy or concepts of
substantive law."); Cummings v. Dosam, Inc., 273 N.C. 28, 32, 159
S.E.2d 513, 517 (1968) (stating that real covenants must be in writing);
Hege v. Sellers, 241 N.C. 240, 248, 84 S.E.2d 892, 898 (1954) (stating
that real covenants must be recorded). |
[39] |
Real covenants are either restrictive or affirmative.
Classic restrictive covenants include covenants limiting land use to
single family residential purposes and establishing setback and side
building line requirements. Affirmative covenants impose affirmative
duties on landowners, such as an obligation to pay annual or special
assessments for the upkeep of common areas and amenities in a common
interest community. |
[40] |
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, 156 S.E.2d 235, 238 (1967) ("[T]he
fundamental rule is that the intention of the parties governs"
construction of real covenants.). But see Wise, 357 N.C. at 404, 584
S.E.2d at 737(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, 273 N.C. at 32, 159 S.E.2d at
517)); J. T. Hobby & Son, Inc., 302 N.C. at 71, 274 S.E.2d at 179
("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. Owner's Ass'n v. Seifart, 48 N.C. App. 286, 288, 295-96, 269 S.E.2d
178, 179- 80, 183 (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,
460 S.E.2d 197, 199-200 (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, 284 S.E.2d 752, 755 (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, 291 S.E.2d 151
(1982). But see Figure Eight Beach Homeowners' Ass'n v. Parker, 62 N.C.
App. 367, 371, 377, 303 S.E.2d 336, 339, 342 (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, 307 S.E.2d 170 (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, 584S.E.2d at 739-40 (quoting Hege, 241 N.C. at 249, 84
S.E.2d at 899). |
[41] |
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, 584 S.E.2d at 736 ("[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. |
[42] |
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, 584 S.E.2d at 736 ("A court will generally
enforce [real] covenants '"to the same extent that it would lend
judicial sanction to any other valid contractual
relationship."'" (quoting Karner, 351 N.C. at 436, 527 S.E.2d at
42 (citation omitted)); 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. |
[43] |
In the case sub judice, petitioners argue that the
affirmative covenants contained in their deeds authorize only nominal
assessments for the maintenance of a lighted sign at the subdivision
entrance; thus, the Association's subsequent amendment of the Declaration
to authorize broad generalassessments to "promot[e] the safety,
welfare, recreation, health, common benefit, and enjoyment of the
residents of Lots in The Ledges as may be more specifically authorized
from time to time by the Board" is invalid and unenforceable.
Respondents contend that the Declaration of Restrictive Covenants
expressly permits the homeowners' association to amend the covenants;
thus, any amendment that is adopted in accordance with association by-
laws and is neither illegal nor against public policy is valid and
enforceable, regardless of its breadth or subject matter. We hold that a
provision authorizing a homeowners' association to amend 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. *fn2 A disputing party will
necessarily argue that an amendment is reasonable if he believes that it
benefits him and unreasonable if he believes that it harms him. 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. |
[44] |
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 non-rental property into a rental complex, and vice-versa.In
all such cases, a court reviewing the disputed declaration amendment must
consider both the legitimate needs of the homeowners' association and the
legitimate expectations of lot owners. A court may determine that an
amendment is unreasonable, and, therefore, invalid and unenforceable
against existing owners who purchased their property before the amendment
was passed; however, the same court may also find that the amendment is
binding as to subsequent purchasers who buy their property with notice of
a recorded amended declaration. |
[45] |
Here, petitioners purchased lots in a small
residential neighborhood with public roads, no common areas, and no
amenities. The neighborhood consists simply of forty-nine private lots set
out along two main roads and four cul de sacs. Given the nature of this
community, it makes sense that the Declaration itself did not contain any
affirmative covenants authorizing assessments. Neither the Declaration nor
the plat shows any source of common expense. |
[46] |
Although petitioners' deeds contain an additional
covenant requiring lot owners to pay a pro rata share of the utility bills
incurred from lighting the entrance sign, it is clear from the language of
this provision, together with the Declaration, the plat, and the
circumstances surrounding installation of the sign, that the parties did
not intend this provision to confer unlimited powers of assessment on the
Association. The sole purpose of this additional deed covenant was to
ensure that the developer did not remain responsible for lighting the
entrance sign after the lots were conveyed. Paymentof the utility bill is
the single shared obligation contained in petitioners' deeds, and each lot
owner's pro rata share of this expense totals approximately seven dollars
and twenty cents per year. |
[47] |
For these reasons, we determine that the
Association's amendment to the Declaration which authorizes broad
assessments "for the general purposes of promoting the safety,
welfare, recreation, health, common benefit, and enjoyment of the
residents of Lots in The Ledges as may be more specifically authorized
from time to time by the Board" is unreasonable. The amendment grants
the Association practically unlimited power to assess lot owners and is
contrary to the original intent of the contracting parties. Indeed, the
purposes for which the Association has billed additional assessments of
approximately eighty to one hundred dollars per year are unrelated to all
other provisions of the deeds, Declaration, and plat: for example,
assessments for mowing land that the plat clearly designates as private
property and assessments for snow removal from roads that the plat clearly
designates as public. |
[48] |
For the reasons stated above, we conclude that the
disputed amendment is invalid and unenforceable. In so doing, we echo the
rationale of the Supreme Court of Nebraska in Boyles v. Hausmann, 246 Neb.
181, 191, 517 N.W.2d 610, 617 (1994): "The law will 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." Here, petitioners purchased
their lotswithout notice that they would be subjected to additional
restrictions on use of the lots and responsible for additional affirmative
monetary obligations imposed by a homeowners' association. This Court will
not permit the Association to use the Declaration's amendment provision as
a vehicle for imposing a new and different set of covenants, thereby
substituting a new obligation for the original bargain of the covenanting
parties. Accordingly, we reverse the opinion of the North Carolina Court
of Appeals and remand this case to that court for further remand to the
trial court for additional proceedings not inconsistent with this opinion. |
[49] |
REVERSED AND REMANDED. |
[50] |
Justice MARTIN did not participate in the
consideration or decision of this case. |
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Opinion Footnotes |
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[51] |
*fn1 N.C.G.S. §
47F-1-103(23) (2005) defines a planned community as "real estate with
respect to which any person, by virtue of that person's ownership of a
lot, is expressly obligated by a declaration to pay real property taxes,
insurance premiums, or other expenses to maintain, improve, or benefit
other lots or other real estate described in the declaration." The
Planned Community Act does not apply to any community that does not meet
this definition. |
[52] |
*fn2
A number of other states considering amendments to the founding documents
of common interest communities have also applied a reasonableness
standard. See Hutchens v. Bella Vista Vill. Prop. Owners' Ass'n, 82 Ark.
App. 28, 37, 110 S.W.3d 325, 330 (2003) (concluding "the power of . .
. [a] homeowner's [sic] association . . . to make rules, regulations, or
amendments to its declaration or bylaws is limited by a determination of
whether the action is unreasonable, arbitrary, capricious, or
discriminatory"); Holiday Pines Prop. Owners Ass'n v. Wetherington,
596 So. 2d 84, 87 (Fla. Dist. Ct. App. 1992) (per curiam) ("In
determining the enforceability of an amendment to restrictive covenants,
the test is one of reasonableness."); Zito v. Gerken, 225 Ill. App.
3d 79, 81, 587 N.E.2d 1048, 1050 (1992) ("A restrictive covenant
which has been modified, altered or amended will be enforced if it is
clear, unambiguous and reasonable."); Buckingham v. Weston Vill.
Homeowners Ass'n, 1997 ND 237, .10, 571 N.W.2d 842, 844 (A condominium
association's amendment to the declaration or bylaws "must be
reasonable" and "a rule which is unreasonable, arbitrary, or
capricious is invalid."); Worthinglen Condo. Unit Owners' Ass'n v.
Brown, 57 Ohio App. 3d 73, 75-76, 566 N.E.2d 1275, 1277 (1989) (adopting
"the reasonableness test, pursuant to which the validity of
condominium rules is measured by whether the rule is reasonable under the
surrounding circumstances"); Shafer v. Bd. of Trs. of Sandy Hook
Yacht Club Estates, Inc., 76 Wash. App. 267, 273-74, 883 P.2d 1387, 1392
(1994) (a covenant amendment "respecting the use of privately-owned
property is valid, provided that suchpower is exercised in a reasonable
manner consistent with the general plan of the development"), disc.
rev. denied, 127 Wash. 2d 1003, 898 P.2d 308 (1995). |
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