February 2007
In This Issue:
North Carolina Law Imposes Limitations on Amending Declaration
Owner's Right to Possession and Ownership of Unit Does Not Trump Board's Authority to Treat Termite Infestation
Release Signed by Unit Owner at Closing Is Valid
Court Has Authority to Change Voting Requirement for Amendment Approval
Amendment Restricting Leasing Units Is Partially Valid
Declaration Provision Requires Owners to Soundproof Floor
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North Carolina Law Imposes Limitations on Amending Declaration

Armstrong v. The Ledges Homeowners Association Inc., 360 N.C. 547, 633 S.E.2d 78 (2006)

Covenants Enforcement: The North Carolina Supreme Court imposed a "reasonableness" standard for all amendments to a declaration of restrictive covenants to be valid.

The Ledges, a 49-lot subdivision originally developed in 1988, is located near Hendersonville, a popular retirement community. The original declaration that was recorded prior to any of the lots being sold contained 36 provisions that restricted the lots to single-family residential use, established setbacks and side building lines, provided a minimum-square-footage requirement, and provided architectural controls that ensured an aesthetically pleasing neighborhood.
Specifically, the declaration provided that the roads are "dedicated to public use…forever" and that the developer may "[d]edicate the roads…to the North Carolina Department of Transportation." The declaration did not provide for the collection of dues or assessments but did provide for the formation of the Hidden Hills Homeowners Association ("association"). Shortly after recording the declaration, the developer started to convey the lots. Later, the developer installed a lighted sign on private property and amended the declaration to include language that would make the association responsible for the utility bills.
The problem was that the language incorporated in the declaration by the amendment made the association responsible for more than simply the utility bill for the new sign. Rather, the amendment declaration stated that the developer reserved the right to assess lots and their owners an equal, pro-rata share of the common expense for street lights and entrance-sign lights as well as any other common utility expense for various lots. The language appeared on each of the deeds and referenced the previously recorded declaration.
The association's articles of incorporation were not filed until Sept. 20, 1994. At some point prior to the association's first annual meeting, which occurred in 1995, the board of directors adopted bylaws that set out the association's powers and duties. At the first annual meeting, the bylaws were amended to provide the association the authority to file a lien on the lot of any owner who failed to pay an assessment. Shortly thereafter, the association started assessing lot owners for the utility bills for lighting the new sign. The association also levied assessments for mowing the roadside on individual private lots, for snow removal from subdivision roads, and for other operational and legal expenses. Vivian Armstrong challenged the assessment, questioning the $80 to $100 per year in light of the fact that each lot's share of the electricity to light the sign amounted to $7.20 per year, and requested that the matter be put on the agenda for the next officer's meeting.
At a meeting on July 16, 2003, the board again expanded the association's powers by amending the bylaws to authorize the association to charge fees for late payment of assessments and to levy fines for violations of the covenants, pursuant to the North Carolina Planned Community Act ("Act"). In an Aug. 1, 2003, letter to the association, the Armstrongs requested termination of their membership in the association. They were soon joined by other owners, and on Oct. 17, 2003, the group (collectively, "Armstrongs") sued the association and other owners, seeking a declaration that the community was not a "planned community" as defined by the Act and that the amended bylaws were unenforceable. After a majority of association members amended the bylaws again to include a clause requiring association membership to restrict rentals to terms of six months or greater, the Armstrongs and the others amended their complaint to include these changes.
The trial court ruled in favor of the developer, stating that the amended declaration was valid and enforceable. The Armstrongs appealed, and the appeals court agreed with the trial court, stating that the plain language of the declaration was sufficient to support any amendment by a majority vote of association members.
The Armstrongs appealed the case to the North Carolina Supreme Court and argued that the affirmative covenants in their deeds authorize only nominal assessments for the maintenance of the lighted entrance sign. They asked the court to strike as invalid and unenforceable the provisions in the declaration that authorized assessments to "promote the safety, welfare, recreation, health, common benefit, and enjoyment of the residents of Lots in the the Ledges as may be more specifically authorized from time to time by the [b]oard" as invalid and unenforceable. The association responded that the covenants expressly permit the association to amend the covenants; therefore, any amendment adopted in accordance with the bylaws and neither illegal nor against public policy is valid and enforceable.
In response, the Supreme Court adopted a limitation for all amendments to a declaration. Specifically, the court adopted a new rule that requires an amendment to a declaration to be reasonable in light of the contracting parties' original intent. The court stated that the reasonable requirement was currently being used in Arkansas, Florida, Illinois, North Dakota, Ohio, and Wyoming. The court also provided a balancing test that stated that for an amendment to be valid then one could 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.
In this case, the court stated that since the Armstrongs purchased lots in a small residential neighborhood with public roads, no common areas, and no amenities, it logically followed that no affirmative common expenses were given. As a result, the court ruled that the disputed amendment was invalid and unenforceable. The court stated that the language that authorized broad assessments "for the general purposes of promoting 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" was unreasonable. The amendment, the court argued, granted the association unlimited power to assess lot owners and is contrary to the original intent of the contracting parties.
In reversing and remanding the case, the Supreme Court stated that it would 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."

Editor's observation: Once again, the North Carolina Supreme Court illustrates its bias on the subject of planned communities and adopts a rule that imposes an unrealistic standard to the reality of an evolving world and needs. The "reasonableness" standard in this context does not fit, is unduly burdensome, and does not protect the interests of those who expect the association to be able to meet issues that arise over time.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited. 

Owner's Right to Possession and Ownership of Unit Does Not Trump Board's Authority to Treat Termite Infestation

Association of Apartment Owners of Ahuimanu Gardens v. Flint, No. 26826, Haw. Supreme Ct., Dec. 2, 2005

Powers of the Association: In an unreported case, the Hawaii Supreme Court ruled that a board's duty to maintain the common elements of a condominium outweighs unit owners' rights to exclusive ownership and possession.

In an appeal to the Hawaii Supreme Court, Elizabeth Flint, who owned a unit at Ahuimanu Gardens, contended that the circuit court erred when it granted summary judgment to the Association of Apartment Owners of Ahuimanu Gardens ("association"). Flint argued that her right to possession of her unit under Hawaii law trumped the association board's power to treat a termite infestation in the common area by tent fumigation of the entire building.  
Citing a Hawaii statute, the Supreme Court noted that an association's bylaws determine the board's authority. The court also determined that the board had the power and the duty to maintain the common elements and that that power outweighed Flint's right to exclusive ownership and possession of her unit. The court cited Association of Owners of Kukui Plaza v. City and County of Honolulu, (7 Haw. App. 60, 742 P.2d 974 1987), in noting that "the uniqueness of the condominium concept of ownership has caused the law to recognize that each owner must give up some degree of freedom of choice he might otherwise enjoy in separate, privately owned property." The association's bylaws state:

The Board of Directors shall have the powers and duties necessary for the administration of the affairs of the Association and may do all such acts and things as are not by law or by these Bylaws directed to be exercised and done by the owners. Without limiting the generality of the foregoing, the Board of Directors shall have the following powers and duties....

The court stated that just because there was not a provision in the bylaws that explicitly authorized it to require a unit owner to vacate temporarily her unit, it was not fatal to the board's right to do so. In support of that statement, the court cited Beachwood Villas Condominium v. Poor 448 So. 2d 1143 1984 (CALR October 1984), which noted, "It would be impossible to list all restrictive uses in a declaration of condominium."
Finally, the Supreme Court noted that the board's decision to treat the termite infestation by tent fumigation was made in good faith and was reasonable. Therefore, the court upheld the circuit court's grant of summary judgment.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Release Signed by Unit Owner at Closing Is Valid

Bhushan v. Loma Alta Towers Owner's Association Inc., 148 Fed. Appx. 882 (2005)

Powers of the Association: A release agreement offered by an association and signed by a unit owner at the closing of the sale of his unit is valid because the unit owner was in no position to challenge the release.

From 1991 until September 2001, Jyoti Bhushan owned a unit in Loma Alta Towers, a condominium in Daphne, Alabama. After a storm, Bhushan's balcony flooded, and water leaked from his unit onto the common area, causing damage and threatening harm to other parts of the building. When the damage occurred, Loma Alta Towers Owner's Association Inc. ("association") tried to contact Bhushan but was unable to do so because Bhushan had moved. The association hired Affinity Clean and Restoration Inc. ("Affinity") to remediate the damage, promising that it would pay for the service if Bhushan did not. Bhushan refused to pay the $2,203.21 bill, contending that the flooding and damage were the association's fault.
The association placed a lien on Bhushan's unit, knowing that the unit was for sale, and conditioned its payment of Affinity's bill on Bhushan's agreeing to release the association from all his claims. The association presented its proposed release to Bhushan just before the sale of his unit was to close. In fact, the association gave the closing agent a cashier's check for the amount of Affinity's bill and told the agent not to hand over the check to Affinity unless Bhushan signed the release. Bhushan first balked at signing the release, then proposed his version of a release, which the association rejected.  Bhushan then signed the original release after modifying it. One modification was his attempt to incorporate by reference his version of the release. The closing agent released the check, and the sale was closed.
Soon after he sold his unit, Bhushan sued the association for violation of the Fair Housing Act, fraud, breach of contract, and rescission. Bhushan based the breach-of-contract claim on the theory that the association's failure to repair common areas caused the flooding. The association counterclaimed for fees and costs, and the parties agreed that a magistrate judge would preside over the case. The magistrate judge dismissed all of Bhushan's claims. The association and Bhushan reached a settlement related to payment of costs and fees, but shortly thereafter, the association asked the court to reinstate the case because Bhushan refused to sign the settlement agreement. The case was reinstated, and the magistrate awarded the association $58,906.15, based on Bhushan's violating his agreement to release the association. Bhushan appealed.
On appeal, Bhushan argued that the release was not valid because the words he added were merely a counter offer and because he signed it under economic duress, and that the court erroneously imposed a "tender" requirement on his contract and duress claims. The appeals court was not persuaded and affirmed the magistrate's decision. The court stated that Bhushan received the benefit of the association's check to Affinity because he was able to sell his unit without paying for the repairs caused by the flooding. The court determined that Bhushan was in no position to challenge the release.
In addressing Bhushan's duress claim, the court noted the elements of economic duress: (1) wrongful acts or threats; (2) financial distress caused by the wrongful acts or threats; and (3) the absence of any reasonable alternative to the terms presented by the wrongdoer. Unless unlawful or unconscionable pressure is applied by the other party to induce the entering into a contract, there is not economic compulsion amounting to duress. The court was dubious that any prong of the test, but found it necessary to only address the third prong, i.e. "the absence of any reasonable alternative to the terms presented by the wrongdoer." The court agreed with the magistrate judge that Bhushan "had a readily viable and reasonable alternative to the terms presented by the association." He simply could have paid Affinity's bill out of the proceeds from the sale of his unit (more than $112,000), assuming no other funds were available to him, and then pursue the defendants for the very claims he released when he signed the release.
The court also disagreed with Bhushan's contention that the magistrate judge erroneously imposed a tender requirement on his claims for breach of contract and duress. Bhushan argued that tender requirements applied only to fraud claims and were inapplicable to claims for breach of contract or duress. The court doubted this was true as a matter of law but noted that whatever the scope of the tender requirement, the more general principle that a party receiving the benefit of a bargain cannot seek to escape its contractual obligations was not limited to fraud or duress claims.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Court Has Authority to Change Voting Requirement for Amendment Approval

Peak Investments v. South Peak Homeowners Association Inc., 140 Cal. App. 4th 1363, 44 Cal. Rptr. 3d 892 (2006)

Powers of the Association/Documents: A declaration amendment provision that required more than 50 percent of the votes refers to a majority of the total votes in a homeowners' association and not merely the majority of the owners' votes that were cast.

Peak Investments and Norman and Rita Lesman (collectively, "Lesmans") owned Lot 43 in South Peak, a planned community of custom homes in Laguna Niguel, California. South Peak is governed by a declaration of covenants, conditions, and restrictions that was recorded in April 1984. The declaration was amended in 1986 to change the building-height and setback provisions for each lot. That amendment listed Lot 43 as having a minimum 20-foot setback, while all other lots had a 25-foot minimum setback. In 1990, the declaration was amended again to remove the 35-foot height cap. In that amendment, an attachment changed Lot 43's minimum setback to 25 feet. The Lesmans purchased Lot 43 in 2001 and wanted to build a larger home than the setback requirements allowed.
The Lesmans contacted Edward Coss, the attorney who drafted the 1990 amendment. In May 2002, Coss wrote the association's board of directors, explaining that the change to Lot 43's setback as noted in the 1990 amendment had been a typographical error, and he enclosed a proposed amendment to the declaration that would correct the error. The board never executed the amendment. In July 2004, the Lesmans proposed an amendment to change the setback for their lot to 20 feet, and caused a special meeting of the homeowners to be called to vote on the proposed amendment.
On July 29, 2004, with 17 homeowners physically present, 32 ballots were cast, 21 in favor of the amendment and 11 against. Because an amendment to the declaration requires a two-thirds vote, the proposed amendment failed. The Lesmans then sued the South Peak Homeowners Association ("association"), asking the court to reduce the percentage necessary to amend the declaration because the declaration required a "supermajority" to amend and not enough members attended the special meeting.  The Lesmans also asked the court to confirm the amendment as validly approved. The trial court ruled in favor of the Lesmans, finding that more than 50 percent of the voters had voted in favor of the amendment, and the association appealed.
California Civil Code Section 1356 states that a homeowner association, or any member of an association, may petition the superior court for a reduction in the percentage of affirmative votes required to amend a declaration if the approval of more than 50 percent of the total votes in the association is required. The association contended that Section 1356 requires an affirmative vote by more than 50 percent of all owners, whether they attended the meeting or not. Stating that the phrase "owners having more than 50 percent of the votes" from Section 1356 was unqualified by language that would indicate that "the votes" are those votes cast at a meeting, the court determined that "the votes" meant total votes in the association. Citing language in other sections of the Davis-Stirling Common Interest Development Act (of which Section 1356 is a part) that carefully delineates the number of owners' votes required for approval, the court stated that the California legislature made a conscious decision to provide that a simple majority of all owners would be the minimum required to amend the declaration. 
The court also relied on Section 6.12 of the Restatement (Third) of Property, Servitudes, which includes a provision that addresses the judiciary's power to excuse compliance with governing documents' requirements:

[a] court may excuse compliance with any of the following provisions in a governing document if it finds that the provision unreasonably interferes with the community's ability to manage the common property, administer the servitude regime, or carry out any other function set forth in the declaration, and that compliance is not necessary to protect the legitimate interests of the members or lenders holding security interests... (4) a provision requiring approval of more than two-thirds of the voting power to adopt an amendment.

The appeals court therefore ruled that the trial court erred in finding that the statutory requirement that "owners having more than 50 percent of the votes in the association" voted in favor of the amendment. However, the court noted that the Lesmans may have been merely attempting to correct a scrivener's error and that its opinion should not be understood as hampering their efforts to do so.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Amendment Restricting Leasing Units Is Partially Valid

Vales v. Kings Hill Condominium Association, 211 Ariz. 561, 125 P.3d 381 (2005)

Use Restrictions: An Arizona appeals court redacted a portion of a declaration amendment restricting leasing of units and remanded the case for determination of whether a unit owner was precluded from leasing her unit under a contingency in the amendment provision.

A declaration of restrictions, establishment of board of management and lien rights was recorded in December 1969 for Kings Hill Condominium Association ("association"). Janet Vales purchased a unit from her uncle's trust in August 1999. She never occupied the unit as her personal residence but instead leased the property through a rental company. In March 2000, the association proposed a "no-rental" amendment to the declaration prohibiting the rental or lease of units but grandfathering current leases until March 26, 2000, or upon the first to occur of the following events: sale, death, or cessation of rental or lease of the unit for more than three consecutive months. 
The amendment was approved by a majority of the unit owners and recorded in May 2000, with additional language providing that no owners would be allowed to lease their unit for any period of time extending more than three years after the amendment was recorded or June 1, 2003, whichever came first. Vales continued to lease her unit and attempted to secure new tenants when her unit was vacated at the end of March 2003. Although a lease agreement with two prospective tenants was executed, Vales suffered a $6,600 loss when the tenants cancelled the agreement upon learning that the association intended to enforce the no-rental amendment. 
On May 20, 2003, Vales sued the association, seeking declaratory relief and monetary damages for breach of contract and intentional interference with contract. The association answered that the declaration's requirements for amendment were met and that Vales' complaint was time-barred. The trial court ruled that the amendment to the declaration was properly enacted, that it was enacted in conformity with an older Arizona statute that did not require the unanimous consent currently required to amend a declaration, and that a one-year statute of limitation was applicable. The trial court granted summary judgment to the association. Vales filed a motion for a new trial, which the trial court denied, and Vales appealed.
On appeal, Vales argued that the trial court erred in finding her claim time-barred by the one-year statute of limitation while holding a unanimity requirement in the same provision inapplicable. The appeals court first analyzed whether the trial court correctly determined that passage of the amendment required only majority approval pursuant to the declaration rather than unanimous approval under current law. Stating that Arizona's current Condominium Act ("Act") governed the declaration only to the extent that the Act did not conflict with the declaration and the older statute, the court upheld the trial court's ruling that the association's no-rental amendment was subject to approval only by a majority of the owners. 
However, because the amendment was not subject to the Act's voting percentage requirements but was passed pursuant to the declaration's majority-vote provision, the court determined that the one-year limitation period applicable to amendments adopted pursuant to the Act was inapplicable. Examining Vales' claims pursuant to general statutes of limitation, the court found that her complaint was not time-barred and that the trial court had erred in dismissing her complaint on limitation grounds.
The court then considered whether the trial court appropriately granted summary judgment to the association on the basis that the no-rental amendment was adopted pursuant to the declaration. Vales argued that because the language of the amendment as recorded differed from the language of the amendment as approved by the owners, the entire amendment was void. The association, on the other hand, maintained that the failure to resubmit the altered amendment to the owners for approval was a mistake but that such mistake should not invalidate the entire amendment. The court determined that the three-year limitation added to the amendment was a substantial alteration and that, as such, its insertion should be disregarded. 
Moreover, because of the ambiguous language of the amendment (terminating the right of owners to rent or lease after March 26, 2000, or permitting owners to rent or lease until the occurrence of one of three events), the court ruled that because the amendment was not even approved until April 2, 2000 (after the March 26, 2000, deadline), the March 26, 2000, date was unenforceable. Additionally, the court concluded that the clear intent of the owners was to phase out the right of owners to lease their units, and that the owners would have adopted the amendment regardless of the date restriction. 
The court consequently struck the portion of the amendment referring to a termination date of March 26, 2000. Holding that Vales was entitled to lease her unit unless precluded from doing so under the third contingency (ceasing to rent or lease the unit for more than three consecutive months), which was unclear from the record, the court stated that the association was not entitled to judgment as a matter of law. The court accordingly vacated the trial court's grant of summary judgment and remanded the case.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Declaration Provision Requires Owners to Soundproof Floor

Huberman v. Lutz, No. D045693, Cal. App. Ct., Nov. 29, 2005

Use Restrictions/Covenants Enforcement: In an unpublished opinion, a California appeals court determined that a provision in a declaration that exempted the developer from soundproofing flooring in two units does not exempt future owners of those units.

Haseko/La Jolla developed Seacrest Villas, a condominium development, in 1990 and recorded the declaration of covenants, conditions, and restrictions for the project in 1991. The project consisted of 10 units. The developer initially sold Unit 10, an upstairs unit, to the Youngs. Benjamin and Gisela Huberman later bought Unit 10 from the Youngs. At the time of that sale, Scott Lutz and Lori Coleman owned Unit 8, directly below Unit 10.
Although Section 5.22 of the declaration provided that the floors in Units 9 and 10 "shall be covered by either (i) cushion floor tile or carpeting over a heavy duty foam pad...or (ii) equivalent sound-reducing materials," the developer had installed marble or granite flooring in the kitchen and breakfast area of Unit 10. The declaration also included provisions that units were not to be used in any manner that would annoy others with unreasonable noise and that gave the association's board authority to review and approve plans for altering exterior features. The design-review provision exempts repainting with the original colors and improving and altering interiors of units as long as there is no structural impairment of common areas. However, that design-review provision did not apply to initial construction by the developer.
During the time the Hubermans owned Unit 10, they changed part of the unit's flooring but not the marble/granite portion. Lutz and Coleman complained about the noise emanating from Unit 10 and demanded of the Hubermans and their real-estate agent that soundproofing be added to the floor in that unit. In response to the complaints, the Hubermans sued Lutz and Coleman, asking the court to interpret Section 5.22 of the declaration and to award them attorney's fees and other appropriate relief.  Lutz and Coleman responded by filing a cross-complaint, also asking for an interpretation of Section 5.22, and adding injunctive relief, negligent infliction of emotional distress, and injunctive relief as causes of action. Evidence was submitted that the association had previously sued the developer for construction defects related to the flooring, which the Hubermans argued showed that the association had tried to remedy the inadequate-soundproofing problem.
The trial court ruled in favor of the Hubermans and interpreted Section 5.22 to mean that the each owner has the right, but not the obligation, to maintain or repair floors and to substitute different surfaces. The court noted that the "provided, however," language in Section 5.22 created a "condition precedent" (or triggering event) for there to be a duty of an owner to install soundproofing materials. Only when the flooring was changed could other owners enforce the soundproofing requirement. Lutz and Coleman appealed.
The appeals court first set out the rules for interpreting declarations of covenants, conditions, and restrictions, noting that such declarations "should be read...with a view toward enforcing the reasonable intent of the parties" and that courts must view the provisions in light of the entire document and not employ a single-paragraph approach. The court then addressed conditions precedent and relied on the definition that a condition precedent "is an act that must be performed or an uncertain event that must happen before the promisor's duty of performance arises."
In applying the general rule and the conditions precedent rule, the court read the language of Section 5.22 in the context of Article 5 ("Use Restrictions") and looked at other pertinent provisions in the declaration. Whereas the trial court viewed the "provided, however" language to indicate that no soundproofing was required until the Hubermans changed the flooring in their unit, the appeals court disagreed. The appeals court stated that when Section 5.22 is read as a whole and in the context of other provisions that protect other owners from noise and nuisance, the "provided, however" language created a qualification that the floors in Units 9 and 10 must at all times be covered with a soundproofing material.
The court then looked at whether the Hubermans were exempted from the soundproofing requirement because they purchased the unit from the Youngs, who purchased it directly from the developer. Citing California case law, the court determined that the Hubermans were not excused from the original obligation to soundproof their floors. Therefore, the court reversed the trial court's decision and remanded the case, directing the trial court to grant Lutz and Coleman's motion for summary judgment and to conduct further appropriate proceedings.

©2007 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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