In a potentially significant ruling, the N.C. Supreme Court has restricted the power of homeowners’ associations to amend their covenants. In a decision Aug. 18, the court held that any revisions must be “reasonable,” given the purpose of the original declaration of covenants.
The ruling came in a case involving an association that gave itself unlimited authority to impose assessments despite the original covenants providing for only limited powers for the association.
In 1988, the Vogel Development Corporation started work on the subdivision The Ledges of Hidden Hills. Situated in Henderson County, the Ledges eventually consisted of 49 lots. The plat does not include common areas or amenities. Vogel established a homeowners’ association before any lots were sold primarily to relieve it from having to administer the subdivision’s architectural control covenants. There was no provision in the original declaration of restrictive covenants for the collection of dues or assessments.
Sometime later, Vogel decided to put in a lighted sign at the entrance to the subcommunity. Not wishing to pay for the electricity indefinitely, the company amended the covenants to have homeowners split the cost via an assessment.
The homeowners’ association adopted bylaws in 1995, and soon amended its covenants to include a provision for placing a lien on properties that did not pay their assessments.
Assessments were $80 to $100 a year. The association was doing more than merely paying for power to light a sign; it also paid for mowing along the roadside of the main street, despite it being private property, and for snow removal, despite all streets in the development being state-maintained.
In June 2003, a property owner, Vivian Armstrong, challenged the propriety of the assessments for items beyond the light, requested a refund, and asked that the matter be placed on the agenda for the association meeting.
In response, the association changed its bylaws, giving it greatly expanded authority.
In October 2003, Robert and Vivian Armstrong and two other homeowners sought a declaratory judgment to, among other things, prevent the association from enforcing its recent bylaw changes.
A month later, the association went further, and amended the association’s covenants to include a general provision allowing assessments for “common expenses” that “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.” Among other changes, the revised declaration prohibited rentals for periods of less than six months.
The Armstrongs and others amended their lawsuit, and asked that the new covenants be declared unenforceable.
In October 2004, Superior Court Judge J. Marlene Hyatt sided with the Ledges. The N.C. Court of Appeals also ruled against the Armstrongs, holding that the declaration could be amended in any manner as long as the majority of homeowners in the subdivision approved.
The Armstrongs asked the Supreme Court to hear the case. Under state law, the high court is not required to take a case if the decision by the three-judge Court of Appeals panel, as it was in this case, is unanimous. The Supreme Court agreed to hear the case, and in its ruling established a new standard for determining the appropriateness of covenant amendments.
“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,” Justice George Wainwright wrote for the court.
The justice also set out a framework for determining whether amendments went too far. The key, he noted, was whether they were “reasonable.”
“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.
“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.”
Applying its newly announced standard to the facts of the case, the Supreme Court determined that the association’s new rules were anything but reasonable. What had been a community with an assessment that should have been $7 per year or so for lighting a sign became a subdivision with a mandatory homeowners’ association with unlimited powers of assessment.
“Here, petitioners purchased their lots without 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,” the court said. “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.”
The Supreme Court also cited with approval a portion of the Nebraska Supreme Court’s holding in a 1994 case called Boyles v. Hausmann: “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.”
The case is Armstrong v. Homeowners Assoc., (640PA05).
Michael Lowrey is associate editor of Carolina Journal.