Recent Cases in Community Association Law

Law Reporter provides a brief review of key court decisions throughout the U.S. each month. These reviews give the reader an idea of the types of legal issues community associations face and how the courts rule on them. Case reviews are for information only and should not be applied to other situations. For further information, full court rulings can usually be found online by copying the case citation into your web browser.

Massachusetts Law Allows Multiple Super-Priority Condominium Liens

Drummer Boy Homes Association, Inc. v. Britton, Case No. SJC-11969, 474 Mass. 17 (Mass. Mar. 29, 2016)

Drummer Boy Homes Association, Inc. (association) governed the Drummer Boy Condominium II in Lexington, Mass. Carolyn and Randy Britton owned a unit in the condominium.

In 2004, the Brittons stopped paying assessments to the association to protest parking rules and fines. In 2007, the association filed suit against the Brittons to recover the delinquent amounts and to enforce its priority lien. The Massachusetts condominium statutes (act) give an association lien super-priority status over the first mortgage for up to six months of common expenses.

The Brittons continued to withhold payments, so the association filed a second suit in February 2008 to recover the unpaid amounts that had accrued since the first suit and to enforce a second six-month priority lien. The association filed a third suit in October 2008 to recover amounts that had accrued since the second suit and to enforce a third six-month priority lien. The three collection actions were consolidated.

In 2009, the trial court ruled that withholding assessment payments was not an acceptable means of resolving a dispute concerning parking policies. It also held that the act limited the association’s priority lien to one six-month period preceding the first suit.

The trial court granted judgment to the association in the amount of $22,742, which represented $9,887 in unpaid assessments for the three six-month periods covered by the consolidated cases plus $12,314 in attorney’s fees and $540 in collection costs. Of this amount, the trial court fixed the amount of the association’s priority lien at $15,054, which covered only the six months immediately before the first action ($2,200) plus all of the attorney’s fees and collection costs.

Both parties appealed to the District Court Appellate Division, which affirmed the trial court’s ruling in 2011. The parties next appealed to the Appeals Court, which affirmed the Appellate Division’s decision. Finally, the parties appealed to the Supreme Judicial Court of Massachusetts (supreme court).

The act’s legislative history indicated the legislature’s strong desire to protect condominium associations in the wake of “a serious public emergency” created by unit owners who were no longer paying their fair share of assessments. The legislature found that condominium buildings were falling into physical and financial disrepair and causing neighborhood blight due to high delinquencies.

In response, the legislature elevated the association’s lien over the first mortgage for six months’ worth of assessments (a super-lien). However, protections for mortgagees were also incorporated into the act. When an owner becomes 60 days delinquent, the act requires the association to send a delinquency notice to the owner and the mortgagee. In addition, the association must provide notice to the first mortgagee of its intent to foreclose the super-lien at least 30 days before filing the collection action.

The association is prevented from enforcing its super-lien if the mortgagee pays the super-lien amount, attorney’s fees and costs and agrees to assume responsibility for all future assessments as long as the mortgage encumbers the unit. The act also requires the association to provide a detailed statement of the super-lien amount when requested by the mortgagee.

The supreme court viewed the statutory scheme as balancing the interests of mortgagees with condominium associations. It also found that to limit the super-priority lien to just one six-month period would render the mortgagee protections inconsequential and would ignore the act’s use of the plural word “liens.”

The supreme court held that a condominium association could file successive legal actions to establish and enforce multiple contemporaneous liens, each with a six-month period of priority over the first mortgage, to recoup unpaid assessments for successive periods.

The judgment of the Appellate Division of the District Court was reversed.

Association’s Foreclosure Sale Must Be Commercially Reasonable

Zyzzx 2 v. Dizon, Case No. 2:13-CV-1307 JCM (PAL) (D. Nev. Mar. 25, 2016)

Monaco Landscape Maintenance Association, Inc. (association) governed the Monaco planned community in Las Vegas, Nev. In 2001, Arlene Dizon purchased a home in Monaco but subsequently became delinquent in assessment payments. In January 2012, the association recorded a notice of default and election to sell Dizon’s property by foreclosure.

Dizon was also in arrears to her lender, Wells Fargo, in the amount of $33,012; the unpaid loan principal was $153,062. In April 2013, Wells Fargo filed a notice of default and election to sell under the mortgage.

On the same day Wells Fargo filed its default notice, the association filed a foreclosure notice announcing a May 2, 2013, auction date. By this time, Dizon owed the association $2,940.

The foreclosure notice indicated that the property would be sold subject to the mortgage. The association also sent Wells Fargo a letter indicating that the association’s foreclosure would not affect the senior mortgage holder’s lien. Further, Monaco’s declaration of covenants, conditions, restrictions, reservations and easements provided that the association’s lien was subordinate to a first security interest recorded before the association’s default notice.

The association conducted a non-judicial foreclosure sale on May 2nd, and the property was sold to LN Management LLC Series 8246 Azure Shores (LNM) for $15,000. The property was valued at $210,863 on the foreclosure deed.

LNM filed suit against Wells Fargo in Nevada state court for quiet title (to definitively establish that LNM owned the property) and declaratory relief (judicial determination of the parties’ legal rights). LNM asserted that the association’s lien had super-priority status under the Nevada Uniform Common-Interest Ownership Act (UCIOA) and that foreclosing the association lien extinguished Wells Fargo’s lower priority mortgage.

Wells Fargo scheduled mortgage foreclosure for October 18, 2013. On October 17, LNM filed an emergency motion asking the state court to stop the foreclosure. The state court denied the motion, reasoning that, if LNM’s interpretation of UCIOA was correct, the result would be absurd: a relatively small association lien would extinguish a significantly larger mortgage lien filed years earlier.

On October 18, LNM formed a new corporation, Zyzzx 2 (Zyzzx), and conveyed the property to Zyzzx. Zyzzx filed for bankruptcy, which triggered an automatic stay (suspension) preventing foreclosure. Zyzzx was then substituted for LNM in the lawsuit.

Wells Fargo removed the case to federal court and filed a motion for summary judgment, asserting that the association’s foreclosure sale was commercially unreasonable and that it was unconstitutional for the UCIOA statute to grant super-priority lien status to the association.

The courts have interpreted UCIOA in the past as imposing a commercially reasonable standard on association foreclosures. Wells Fargo argued that the significant difference between the sales price and the property’s value made the sale commercially unreasonable. Wells Fargo also asserted that the association’s inaccurate representation of its lien as subordinate to the mortgage dissuaded potential purchasers from making reasonable bids, believing the property would still be subject to the mortgage.

The Nevada Supreme Court has held that a low price is not enough to set aside an association foreclosure. There must also be evidence of fraud, unfairness or oppression. However, the Nevada Supreme Court has found that a wide discrepancy between the sales price and the property’s value compels close scrutiny into the sale’s commercial reasonableness.

The federal court held that the sales price to LNM was grossly inadequate since it represented only about seven percent of the property’s value. There was no evidence of fraud or oppression, but close scrutiny of the sale was required to determine whether the sale was sufficiently unfair to warrant being set aside.

The Nevada courts have not clearly articulated what constitutes unfairness, but they have indicated that every aspect of the sale must be commercially reasonable, including the method, manner, time, place, terms, amount of publicity and number of bidders in attendance.

The federal court found that the association’s misrepresentation of the lien status created a sale defect because it dissuaded bidders from offering reasonable prices. This defect, coupled with the disproportionately low sales price, made the foreclosure unfair and commercially unreasonable. Accordingly, the federal court held that the foreclosure sale was void and ordered the case dismissed.

Foreclosing Mortgagee Not Liable for Pre-Foreclosure Collection Costs

Catalina West Homeowners Association, Inc. v. Federal National Mortgage Association, Case No. 3D15-271 (Fla. Dist. Ct. App. Mar. 30, 2016)

Catalina West Homeowners Association, Inc., and Old Cutler Lakes by the Bay Community Association, Inc. (collectively, the associations) governed the Lakes by the Bay community in Miami-Dade County, Fla. Adriana Villamizar and Luis Reyes (the owners) owned a unit in the community. Federal National Mortgage Association (Fannie Mae) purchased the loan that was secured by a mortgage on the unit.

The Reyes defaulted on their loan, and in April 2013 Fannie Mae foreclosed and acquired the unit. In December 2013, the associations provided Fannie Mae with payoff amounts that included regular assessments, late fees, violation charges, costs and attorney’s fees.

Fannie Mae filed suit against the associations alleging they were not entitled to attorney’s fees, costs or other charges that accrued before the foreclosure. Fannie Mae argued that it was not responsible for such fees under the Florida Homeowners’ Association Act’s (act) “safe harbor” provision.

The safe harbor provision states that the mortgagee is only liable for delinquent assessments that accrued during the 12 months before the foreclosure or one percent of the original mortgage, whichever is less.

The associations alleged that another section of the act required them first to apply payments to late fees and interest, then costs and attorney’s fees and only then to assessments.

The trial court entered judgment in Fannie Mae’s favor, finding that it was only liable for the 12 months’ assessments that accrued before the foreclosure, and the associations were not entitled to interest, late fees, attorney’s fees, court costs, collection costs or other charges based on the safe harbor provision.

The associations appealed, arguing that the trial court’s judgment prohibited them from complying with the act’s payment priority provision.

The appeals court found that the safe harbor provision clearly limited Fannie Mae’s liability to 12 months of unpaid assessments and nothing more. Based on the provision’s unambiguous language, it found nothing to indicate the legislature intended a foreclosing mortgagee to be liable for attorney’s fees, collection costs, interest or other charges besides assessments.

The appeals court also determined that the judgment did not prohibit the associations from complying with the payment priority provision since the safe harbor provision only applied to assessments. Thus, when calculating the balance due for a payoff statement, the amounts due for interest and attorney’s fees, costs and similar items would be zero since the associations were not entitled to payments for such items.

The appeals court affirmed the trial court’s judgment in favor of Fannie Mae.

Bankruptcy Discharge Does Not Extinguish Owner’s Personal Liability for Assessments

In re: Montalvo, Case No. 6:10-bk-08338-KSJ, Chapter 13 (Bankr. M.D. Fla. Feb. 25, 2016)

Villa Medici Condominium Association (association) governed the Residences at Villa Medici in Orange County, Fla. Federico Montalvo owned two units in the project. He stopped paying assessments to the association, filed a Chapter 13 bankruptcy petition and surrendered the units to the bankruptcy receiver.

The association, through the receiver, took control of the units and rented at least one of them, collecting $9,290 in rent. The association applied $2,474 of the rent to the oldest assessments, which were due prior to the bankruptcy filing (pre-petition). It applied the remainder to assessments that were due after the bankruptcy filing (post-petition).

Montalvo sought sanctions against the association, arguing that the association violated the bankruptcy discharge and automatic stay (suspension of the case or certain proceedings) by applying the rents collected to discharge pre-petition assessments and by attempting to collect post-petition assessments for which he had no liability. Montalvo argued that he had no liability for post-petition assessments because they emanated from a pre-petition contract between Montalvo and the association, which was discharged by the bankruptcy.

Montalvo’s confirmed Chapter 13 plan provided that he would be responsible for all post-petition ongoing association assessments and property taxes; the bankruptcy automatic stay did not apply to those debts. The discharge order provided that a creditor could enforce a valid lien against Montalvo’s property after the bankruptcy if the lien was not eliminated in the bankruptcy case.

The association responded that it was not collecting a debt from Montalvo but was taking an in rem action (action against property) against the units. It argued that the condominium declaration, which created the assessment obligation, was a covenant that ran with the land that was unaffected by Montalvo’s bankruptcy or the discharge.

After examining Florida law, the bankruptcy court determined that the assessment obligation was a covenant that ran with the land as opposed to a contractual obligation. As such, the assessment obligation remained with the units until liability shifted to a new owner. While Montalvo had surrendered the units to the receiver, he remained the unit owner.

Noting that discharge does not generally modify property rights, the bankruptcy court found no violation by the association in applying the rents to pre-petition assessments as an in rem remedy since the association did not pursue Montalvo personally for such pre-petition amounts.

Moreover, the bankruptcy court held that, as the unit owner, Montalvo was responsible for post-petition assessments until title was transferred. Specifically, the bankruptcy court held that the bankruptcy discharge did not eliminate Montalvo’s personal liability for post-petition assessments, although it did relieve him of personal liability for pre-petition assessments.

Editor’s Observation: Note that the Bankruptcy Court for the Southern District of Florida reached the opposite conclusion in In re: Ramirez, also reported in this issue.

Bankruptcy Discharge Extinguishes Owner’s Personal Liability for Assessments

In re: Ramirez, Case No. 08-29681-JKO, Chapter 13 (Bankr. S.D. Fla. Mar. 5, 2016)

Jose and Ivanna Ramirez owned a unit in an Orlando, Fla., condominium governed by Magnolia Court Condominium Association (association). In 2008, the Ramirezes filed a Chapter 13 bankruptcy petition naming the association as one of their creditors.

In 2009, the bankruptcy court approved the Ramirezes’ bankruptcy plan, which assigned all their existing debts to one of the following categories: debts that would not be paid, debts that would be partially paid and debts that would be fully paid. In April 2014, once the Ramirezes completed all required payments, they received a discharge that extinguished all debts specified in the plan.

After the discharge was granted, the association demanded that the Ramirezes pay the assessments that had accrued after the bankruptcy filing date (post-petition assessments). When the Ramirezes refused to pay, the association filed suit and obtained a monetary judgment against them.

The Ramirezes filed a motion with the bankruptcy court asking to sanction the association for violating the discharge order. The Ramirezes requested $4,875 for attorneys’ fees incurred, $75,000 for deceitful collection activity and $50,000 in punitive damages as a future deterrent.

Under the condominium documents and Florida condominium law, unit owners are personally liable for assessments, which become a lien on the unit, if not paid. Thus, assessments are viewed as a personal obligation as well as a property obligation.

The bankruptcy code’s general provisions (Chapter 5) stipulate that a discharge does not apply to assessments that become due after the bankruptcy order as long as the debtor owns the unit. However, Chapter 13 specifies that, once all required payments have been made, the debtor is discharged of all debts provided for by the plan, except for certain debts made non-dischargeable by specific code sections. The Chapter 5 assessment non-discharge provision is not a listed exception to the Chapter 13 discharge.

Whether personal liability for condominium assessments could be discharged was a question the bankruptcy court found to be unsettled in the Eleventh Circuit. After considering how the Chapter 13 and Chapter 5 provisions worked together (or rather, did not work together), the bankruptcy court held that the Ramirezes’ personal obligation for post-petition assessments was extinguished by the Chapter 13 discharge. However, it held that the property obligation for assessments survived the discharge because it was based on a covenant that runs with the land. As such, the Ramirezes were protected from personal liability for assessments, but the association could still pursue its assessment lien against the Ramirezes’ unit.

Nonetheless, the bankruptcy court declined to impose sanctions against the association for suing the Ramirezes. A bankruptcy court has the power to sanction a party for contemptuous conduct, but due to the unsettled nature of the legal issue, the bankruptcy court found nothing in the association’s actions contemptuous.

Accordingly, the bankruptcy court voided the Florida judgment but did not award any fees or damages to the Ramirezes.

Amenity Maintenance Covenant Stripped from Bankrupt Golf Club

In re: MidSouth Golf, LLC, Case No. 13-07906-8-SWH, Chapter 11 (Bankr. E.D. N.C. Mar. 29, 2016)

In 2000, MidSouth Golf, LLC (MidSouth) purchased a 385-acre recreational club within Fairfield Harbour, a large residential community in New Bern, N.C., governed by Fairfield Harbour Property Owners Association, Inc. (association). The club contained two golf courses, two marinas, tennis courts, swimming pools and clubhouses. The club has been the subject of multiple lawsuits spanning more than a decade. (One lawsuit was discussed in the December 2011 edition of Law Reporter.)

The community consisted of about 3,000 homes, timeshare condominiums and vacant lots; its declarations and covenants were first recorded in 1971 and amended and expanded over the years. One covenant required the property owners to pay amenity fees to the club owner (the amenities covenant), and a second covenant required the club owner to maintain the recreational amenities (the maintenance covenant).

A 1993 amenities covenant allowed the club owner to charge substantially higher fees to the timeshares than to the lots. The timeshare owners sued MidSouth’s predecessor over the fees, which resulted in a 1998 settlement agreement. MidSouth’s purchase agreement for the club referenced the 1993 covenant but not the 1998 settlement agreement.

Years after purchasing the club, MidSouth sought to increase the timeshare amenity fees significantly in accordance with the 1993 covenant, and litigation ensued. In 2007, the North Carolina Court of Appeals (appeals court) held that the amenity covenant was a personal covenant (the property owners’ personal obligation) instead of a real covenant (related to real property) that ran with the land because it did not “touch and concern” the timeshare owners’ properties. Therefore, it was not enforceable against the timeshare owners.

After this decision, many owners stopped paying the amenity fees. MidSouth closed the golf courses due to lack of funds. In 2011, the appeals court held that MidSouth breached the maintenance covenant by closing the golf courses (the enforcement decision).

The appeals court rejected MidSouth’s argument that it was not required to operate the golf courses since it was no longer receiving the fees necessary to maintain them. The trial court ordered MidSouth to pay $1.45 million in damages to the association for the breach. Later that year, the appeals court affirmed that MidSouth could not require payment from individual owners under the 1970s declarations.

Consequently, the owners stopped paying fees, while MidSouth remained obligated to provide the recreational amenities. MidSouth filed a Chapter 11 bankruptcy petition, through which it sought to sell the club property free and clear of the maintenance covenant.

MidSouth indicated that it had spent about $2.5 million since the last appeals court decision to maintain the club on a substantially reduced basis, and many amenities had become inoperable. MidSouth also stated that it did not have the financial resources to maintain the club and no means to collect funds since the amenities covenant was unenforceable.

MidSouth further asserted that the club was not marketable as long as it carried a maintenance obligation with no corresponding right to collect amenity fees. Moreover, MidSouth’s lender would not foreclose on the club mortgage so long as the maintenance covenant remained in place.

A federal court cannot consider claims already decided by a state court or claims inextricably intertwined with an earlier state court judgment. A claim is inextricably intertwined if the only way to get relief is to claim the state court judgment was wrong or if the relief would render the judgment ineffective.

The association argued that stripping the club property of the perpetual maintenance obligation would render the enforcement decision ineffectual. The association asserted that the appeals court had found the maintenance covenant to be a real covenant.

In a lengthy and detailed decision, the bankruptcy court analyzed all of the earlier appeals court decisions as well as bankruptcy law and North Carolina real property law. The bankruptcy court indicated it was bound by the appeals court’s decision that the amenity covenant was only a personal covenant, but it questioned whether the appeals court was right and suggested that the North Carolina Supreme Court would likely reach a different result. However, the bankruptcy court determined that the appeals court had never ruled that the maintenance covenant was a real covenant.

A federal court may disregard decisions of an intermediate state appellate court if it is convinced that the state’s highest court would reach a different conclusion. The bankruptcy court found that the covenants collectively set forth a clear intent to establish a sustainable, mutually beneficial arrangement by which the homeowners get to use the amenities in return for paying an amenity support fee. The bankruptcy court found that removing half of that bargain was simply unsupportable.

The bankruptcy court held that the maintenance covenant was not a real covenant and did not run with the land. Even if it was a real covenant, the bankruptcy court determined that the changed circumstances doctrine applied, which allowed the maintenance covenant to be stripped from the land. Accordingly, the bankruptcy court ordered that MidSouth could sell the club property free of the maintenance covenant under its confirmed Chapter 11 plan.

Unincorporated Association Must Have Organizational Structure and Governance Procedures

Halme v. Walsh, Case No. 47129-9-II (Wash. Ct. App. Mar. 8, 2016)

James and Laura Walsh, Kim and Lori Hasselbalch, and Ronald Halme lived in the Nosko Tract-Phase Two, a nine-lot subdivision in Clark County, Wash. The Walshes owned five lots, and the Hasselbalchs and Halme each owned one lot. Various use restrictions were imposed by covenants, conditions and restrictions (CC&Rs) recorded by the developer.

In 1990, all of the lot owners agreed to build a private road to serve their lots and executed a road maintenance agreement (RMA), which was recorded as a covenant against the property. The RMA required the owners to make annual payments to a maintenance fund. Neither the CC&Rs nor the RMA provided for a homeowners association.

The RMA provided for the owners to elect one owner to manage road maintenance and to call at least two owners’ meetings per year. All decisions regarding the road required a majority vote of the owners, but an 80-percent vote was required to change the annual maintenance contribution.

Conflicts arose between Halme and the other owners. In April 2014, James Walsh called a special owners’ meeting to elect a board of directors, consider and vote on amending the CC&Rs and adopting bylaws. The Walshes and Kim Hasselbalch attended the meeting, adopted bylaws and amendments to the CC&Rs, and elected themselves to the board of directors (board) of Nosko Tract-Phase Two Homeowners Association (association).

The amendments imposed restrictions targeting a number of Halme’s activities that the other owners found objectionable. The board adopted a fine schedule and appeal procedure for violations.

In August 2014, the board informed Halme that his actions violated the amended CC&Rs and that he would be fined if he did not comply. In September 2014, Halme sued James Walsh and Kim Hasselbalch, seeking a determination that the amendments were void and that the association did not legally exist.

Both sides filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted Halme’s motion and denied Walsh’s and Hasselbalch’s motion. Walsh and Hasselbalch conceded that the CC&Rs were not properly amended, but they argued that the other actions, including electing a board and adopting a fining schedule and appeal procedure, were valid under the RMA and/or the Washington Homeowners Association Act (HAA).

The trial court ruled that the RMA did not create a homeowners association or allow for adopting bylaws or electing a board. Walsh and Hasselbalch appealed.

Under the HAA, a homeowners association must be “a corporation, unincorporated association or other legal entity.” The appeals court noted that, while the phrase “or other legal entity” suggested that an unincorporated association must be a legal entity, unincorporated associations generally are not legally entities. So, the HAA must require something more than the average unincorporated association.

An unincorporated association is generally formed by individuals voluntarily deciding to associate themselves under a common name to accomplish a common purpose. While these individuals may be acting without a corporate charter, they nonetheless have agreed upon common corporate methods and procedures.

By contrast, the RMA did not contemplate any type of organization. The RMA required the owners to work together toward the common purpose of road maintenance, but it identified no formal organization that existed separate from the owners. The RMA also provided very little organizational structure. It did not provide for officers, a board, bylaws, policies or other common governance procedures. Accordingly, the appeals court held that no unincorporated association or other legal entity was created for the neighborhood.

Walsh and Hasselbalch argued that a majority of the owners could amend the RMA to provide internal governing procedures. The appeals court disagreed. The RMA provided that the owners could vote on the extent and nature of road maintenance, but the appeals court held that had nothing to do with amending the RMA. In addition, an amendment may not create a new covenant that has no relation to the existing RMA.

Walsh and Hasselbalch argued further that owners could adopt regulations to administer the RMA. The RMA provided that the road was to be subject to regulations established by the owners to safeguard the road from damage or deterioration and to protect the residents from road uses or conditions that would be detrimental to the neighborhood.

The appeals court held that this provision allowed the owners to adopt “conditions” for safeguarding the road and protecting the residents, but it did not allow owners to adopt regulations for administering the RMA.

Finally, the appeals court held that, in the absence of any express procedure in the RMA for its amendment, the only reasonable conclusion was that all owners must consent to an amendment. The appeals court affirmed the trial court’s judgment.

Chickens May Be Kept as Pets

Eldorado Community Improvement Association, Inc. v. Billings, Case No. 33,850 (N.M. Ct. App. Mar. 28, 2016)

Eldorado Community Improvement Association, Inc. (association) governed the Eldorado at Santa Fe Subdivision in Santa Fe, N.M. Susan Billings and several other lot owners (collectively, the owners) kept chickens in their yards. The association filed suit against the owners to enforce the subdivision’s prohibition against keeping animals and poultry.

Many Eldorado homeowners had disagreed for years about the meaning of the restriction, and the owners claimed their chickens fell within a pet exception. The covenants provided:

No animals, birds or poultry shall be kept or maintained on any lot, except recognized household pets which may be kept thereon in reasonable numbers as pets for the pleasure and use of the occupants but not for any commercial use or purpose.

Both sides filed motions for summary judgment (judgment without a trial based on undisputed facts). No one disputed that the number of chickens was reasonable and that they were not kept for commercial purposes. The trial court granted the association’s motion, finding that chickens were not recognized household pets and could not be kept in the subdivision. The owners were ordered to remove the chickens from their properties. They appealed.

After consulting two dictionaries, the appeals court found that pets are domesticated animals kept for pleasure or companionship rather than utility. However, none of the definitions indicated that a pet cannot also have utility. Thus, the appeals court concluded that chickens kept for companionship or pleasure could qualify as pets, but the question was whether chickens qualified as “recognized” household pets. The appeals court found this term to be ambiguous.

New Mexico has four rules for interpreting restrictive covenants. First, if the covenant is ambiguous or unclear, the court must interpret the covenant in favor of the free enjoyment of the property. Second, a covenant must be interpreted strictly and reasonably so as not to create an illogical, unnatural or strained interpretation. Third, a court may not read into the covenants implied restrictions on land use and enjoyment. Fourth, words must be given their ordinary and intended meaning.

It is also recognized that extrinsic evidence (evidence beyond the words of the covenant) is admissible to explain or clarify, but not to vary or contradict, a restrictive covenant’s terms. It was in examining the extrinsic evidence that the appeals court found the trial court placed too much focus.

The restrictive covenant had been in place since 1972, and the association had never recognized chickens as household pets. In fact, the association had historically taken enforcement action against anyone who had chickens on their property. A poultry expert testified that the United States Department of Agriculture regulated poultry and other agricultural animals, but it did not regulate traditional household pets like cats and dogs.

While scientific surveys indicated that most backyard poultry owners maintained chickens as a source of meat or eggs, 42 percent maintained chickens as pets or hobby animals. From this, the trial court concluded that most people did not view chickens as household pets.

The trial court also found an owner vote about chickens significant. Two changes to the poultry restrictive covenant were proposed in 2012—one to prohibit chickens and one to allow chickens. The association argued that 55 percent of the voters opposed allowing chickens.

However, the owners pointed out that neither measure passed due to a lack of voters. A vote of 50 percent plus one was required to amend the covenants. Only 35 percent voted to forbid chickens, and almost 30 percent voted to allow chickens. However, 35 percent of the owners did not vote at all. So, the ambiguous restriction continued unchanged.

The district court held that such extrinsic evidence should not provide the basis for interpreting restrictive covenants because they involve valuable property rights. Instead, the appeals court focused on the language in the covenants. The original 1972 covenants described the subdivision as a pastoral environment. The covenants were amended and restated in 1996, but they continued to describe the subdivision as rural. Among the covenants’ stated purposes was to encourage “individual expression consistent with the historical traditions of the region.”

In sum, the appeals court disagreed that chickens could not be treated as household pets and held that the poultry restriction could not be enforced against the owners. The appeals court stated that, if the subdivision residents wanted a different result, they needed to effectuate the change through the covenant amendment process.

The trial court’s judgment was reversed.