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Homeowner association covenant changes must honor original intent

court houseA homeowners association’s ability to make changes to a declaration of covenants might be a little trickier following a recent decision by the North Carolina Court of Appeals.

The court found invalid a covenant amendment that stripped three neighborhood builders of benefits that likely led them to purchase lots because the amendment “contravenes the original intent.”

The case, Wallach v. Linville Owners Association Inc., was appealed from the Wake County Superior Court. At issue was a declaration first recorded in 2003 – and supplemented in 2005 – for 44 lots in the Linville Subdivision, a gated community in north Raleigh. Within the declaration was a provision allowing builders to pay 25 percent of the total assessments and defer those payments until a home was built and sold or leased.

According to plaintiff’s attorney Nelson Harris of Harris & Hilton in Raleigh, this enticed builders to buy lots and construct homes “as quickly as the market could absorb them.” Then the Great Recession hit.

“The price point (in Linville) is very high; $1.2 (million), $2.5 (million),” Harris said. “When the recession came, the market kind of evaporated and there were just no sales of homes in that price range.”

With 41 lots occupied by homeowners, plaintiffs Ann and David Wallach, Philip Miller and Steen Construction Co. were forced to hold on to the lots and wait for the market to improve, Harris said.

But in 2011, the association — claiming those owners failed to build promptly, per an agreement with developers — filed amendments requiring payment of full assessments and eliminating the reduced rate for builders. The plaintiffs responded by filing a complaint against the association and all other lot owners, seeking declaratory judgment that the amendments were invalid and unenforceable.

In September 2012, the lot owners filed a lis pendens in Wake County Superior Court and a subsequent motion to substitute owners who acquired title after the action commenced, but failed to add owners Jordan and Heather Staal, who acquired title in October.

In November 2012, the lot owners asked for summary judgment, claiming the amendments “were not reasonable, exceeded the purpose of the original declaration, and were inconsistent with the original intent of the declaration.” The association responded by seeking to quash the plaintiffs’ lis pendens as unnecessary and to dismiss the complaint for failure to join owners Jordan and Heather Staal, who acquired title in October and whom it deemed a necessary party.

The trial court denied the association’s motion to dismiss, prompting the association to file a response and counterclaim seeking to collect unpaid assessments and foreclose on claims of lien filed and served on plaintiffs’ lots to secure payment of assessment and attorneys’ fees.

In February 2013, the association filed a motion for summary judgment, followed by a plaintiffs’ response claiming they owed no past due assessments because the amendments were invalid.

In March, the trial court found that the amendment was in fact valid and enforceable, but did not dismiss the plaintiffs’ claim. The same week, another judge ruled in favor of the association regarding fees, ordering the Wallachs to pay more than $5,000 in unpaid assessments and Steen Construction to pay $2,345. The trial court further ordered that the lots be sold to satisfy the debt and that plaintiffs pay $5,000 in attorneys’ fees.

Both parties appealed.

The Court of Appeals found that the association’s motion to dismiss for failure to join necessary parties was properly denied, finding the Staals proper, but not necessary, parties.

It further found that the amendments “contravene the original intent of the declaration,” citing the 2006 decision in Armstrong v. Ledges Homeowners Association Inc., which states 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.”

To hold otherwise, the court said, “would permit homeowners’ associations to amend similar provisions whenever they acquire the requisite number of votes for approval, regardless of the original intent.”

The plaintiffs in this case, the court said, bought their lots with no expectation of being subjected to additional “affirmative monetary obligations imposed by a homeowners’ association.”

The association argued that unlike the community in Armstrong, Linville is a private community with private roads, common areas and amenities, all of which are paid for by the association. It further argued that the intent of the original assessment provisions was to provide a rate that could adequately meet the association’s needs, and that it never expected builders to own unimproved lots and be exempt from the full assessment rate for extended periods of time.

The developer expected all lots to be built on by 2011, and the association said builder agreements required builders to build “promptly.” Harris said the builders agreements were between the developer and plaintiffs, not the association and plaintiffs. He added that in light of market conditions, plaintiffs built as promptly as they could.

The appeals court refused to determine what constitutes “promptly” as a matter of law.

The court found that this case differed from Armstrong in another way: The association’s amendment didn’t establish new assessments for the entire community, but rather eliminated benefits for builders that likely persuaded them to buy in the first place.

“In a complete reversal, the Assessment Amendment eliminated the benefits that were essential to the original bargain with builders like plaintiffs,” the court wrote. “Moreover…the costs that the Association claims it cannot now afford because three out of the fourty-four lots in Linville Subdivision do not pay the full assessment rate are costs that should have been anticipated to begin with.”

The court also vacated the trial court’s judgment regarding attorneys’ fees.

Slaughter

Slaughter

Real estate attorney Jim Slaughter of Rossabi Black Slaughter in Greensboro wasn’t involved in this case but wrote a blog on the appeals court’s decision. He said associations are encouraged to act reasonably, but wondered about the “changing original intent” argument.

“After all, amendments sometimes seem somewhat contrary to original intent due to changed circumstances and association membership,” he wrote. “Would such amendments fail based on Wallach for ‘eliminating a benefit’ and being contrary to the ‘contracting parties’ original intent?’”

That remains to be seen, but given the precedential value of Wallach, he offered two pieces of advice to associations: (1) Be reasonable, and (2) Consider whether the amendment is so contrary to the original intent of the parties to the declaration that it will not stand up to scrutiny under the Wallach decision.

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