Many new housing developments have homeowners associations. Developers, however, often write the original rules and maintain effective control of these associations until the subcommunities are complete. In a June 21 ruling, the N.C. Court of Appeals upheld the legality of such provisions, even when they make it more difficult to sue the developer for his actions or omissions.

In 1989 Crescent Resources, a subsidiary of Duke Power, began work on the Peninsula, a subcommunity on Lake Norman near Charlotte. The company established a homeowners association, the Peninsula Property Owners Association, for the development, over which it maintained control until all lots had been sold.

Shortly after the actual property owners assumed control of the PPOA in 1999, they became aware they had entered into an agreement while under Crescent’s control for streetlights with Duke Power. Under the terms of the lease, the PPOA would have had to pay an additional $1.5 million. The homeowners association instead terminated the lease and bought the lights outright from Duke for $1.2 million.

The PPOA later sued Crescent for constructive fraud and unfair and deceptive trade practices. The case never came to trial, though, as a Superior Court Judge Robert Bell ruled the PPOA did not have the authority to sue. The homeowners’ association’s bylaws require that two-thirds of all property owners must approve of a lawsuit against Crescent. The two-thirds provision only applies to lawsuits against Crescent or complaints to government agencies about Crescent’s actions or omissions. The PPOA never attempted to obtain member approval before suing.

Upon appeal, the PPOA argued that North Carolina statutes and public policy allow the lawsuit. The Court of Appeals did not agree, finding that Peninsula property owners had due notice of the provisions and contract. Peninsula sales contracts included an acknowledgment that buyers had reviewed the budget, which included the street lighting lease expenses.

“The PPOA’s members also received ample opportunity to review the two-thirds voting requirement in the Declaration and the Bylaws prior to purchasing real property within the Peninsula,” wrote Judge John Tyson for the court.

“Both the Declaration and the Bylaws include provisions permitting review and inspection of the PPOA’s books, records, and papers during ’reasonable business hours’… All members were further provided access to all financial records pertaining to the PPOA’s operating budget, including the lease payments to Duke Power, which were provided every year during annual meetings. In addition, all prospective purchasers and lot owners were provided record notice, as both the Bylaws and the Declaration were filed with and are available in the county register of deeds office.

“The trial court did not err in dismissing the PPOA’s complaint for lack of subject matter jurisdiction. The PPOA fails to prove it has standing. Our review of the record and applicable law indicates the two-thirds vote provision requiring member approval prior to litigation against Crescent is valid. The PPOA and its members were on notice of this requirement. The PPOA never attempted to obtain nor received the required member approval vote prior to filing this or the previous action. Without the required vote, the PPOA lacked the authority to commence legal proceedings against Crescent and does not possess standing.”

The case is Peninsula Prop. Owners Ass’n v. Crescent Res., LLC, (04-796).
http://www.aoc.state.nc.us/www/public/coa/opinions/2005/040796-1.htm

Michael Lowrey is associate editor of Carolina Journal.