Thursday, August 28, 2014

Changes... to Your HOA's Restrictive Covenants

The North Carolina Court of Appeals recently rendered an opinion reiterating that all amendments to the restrictive covenants (“CCRs”) governing a planned community must be reasonable.  As background, the existing law is that amendments to the CCRs must be reasonable in light of the developer’s original intent for the subdivision.  This rule arose in the context of an HOA in the western part of the state, Ledges of Hidden Hills, where the members adopted amendments to the CCRs that imposed obligations on all owners to pay annual assessments, whereas previously, only minimal payments were required of owners.  The North Carolina Supreme Court struck down the amendments, stating that amendments must be reasonable and consistent with the expectations of homeowners who purchased in reliance on the CCRs.  The case is available here.

By way of background, several years after the Ledges case, the NC Supreme Court took up the CCR amendment-reasonableness question again in Southeastern Jurisdictional Administrative Council versus Emerson (available here).  In Emerson, a religious-themed subdivision, created in the early 1900s, adopted an amendment to its CCRs to require service charges from homeowners to fund certain amenities.  This subdivision was not governed by the Planned Community Act and there was no homeowners’ association, making the case somewhat different than Ledges, although the underlying themes are applicable to modern HOAs.  Unlike the Ledges case, the Supreme Court determined that the amendment requiring service charges was reasonable and consistent with the intention of the parties when they purchased properties in the subdivision.  Specifically, a purchaser “could have reasonably anticipated” that service charges would be imposed to pay for the numerous amenities in the subdivision.  Notably, one of the justices gave a strong dissenting opinion, basically arguing that the court waffled in its decisions because Emerson was inconsistent with the earlier Ledges case.  Whether the Emerson case is just an outlier without much impact on the broader HOA community remains to be seen, because its outcome has not been routinely followed by courts. 

On July 1st, the appellate court decided Wallach v. Linville Owners Ass’n, Inc. (available here), relying in large part upon the reasonableness standard from the Ledges case.  In Wallach, the court was confronted with an amendment to the CCRs that greatly increased assessments levied against lots owned by builders.  As an enticement to builders, the original CCRs required builders only to pay 25% of annual assessments, and these assessments were deferred until the home was sold to a buyer.  The members decided to amend the CCRs to require builders to not only pay the full assessment amount (100%) going forward, they had to pay all deferred assessments within 30 days of the amendment.  Several builders and vacant lot owners filed a lawsuit to declare the amendment invalid.
The court held that the amendments were unreasonable and invalid because they were a complete reversal of the developer’s intent in the original CCRs.  When builders purchased lots, the reduced assessments were “essential to the original bargain” that enticed builders to purchase lots in the first place.  The members could not later amend the CCRs to the detriment of builders who purchased with the expectation of reduced assessments, which would violate the original intent of the developer when the CCRs were filed.

Although Wallach is consistent with the Ledges rule, its guidance to HOAs may be limited. After the Wallach lawsuit was filed, the legislature amended the Planned Community Act that governs most HOAs, stating that in many cases, amendments to CCRs are “presumed” valid. The import of this presumption is that anyone who seeks to invalidate an amendment to the CCRs faces a higher burden than faced by the builders in Wallach.  It also remains to be seen whether any of the parties appeals Wallach and whether other courts rely upon its interpretation of the Ledges case.      
In the long run, does our advice to clients change as a result of Wallach?  Not really.  We already caution clients that amendments to the CCRs should be reasonable.    

Friday, June 20, 2014

Spring Showers Bring Summer Weeds - How to Achieve Homeowner Compliance in Your HOA


Now that summer is here, many HOAs and their members are dusting off the grill, repairing the lawn mower and opening the pool to the summer crowds.  Spring and summer bring new life to HOAs but also bring new problems in making sure members keep lots up to the HOA’s standards. 
How does the HOA deal with that neighbor whose grass is always 6 inches too high or whose yard is always below the standards required by the HOA?  This is an all too common problem and one that creates many headaches among HOA boards of directors. 

First of all, be sure that your HOA has written standards or guidelines describing clearly what it expects as far as yard and home maintenance.  Doing so makes violations much easier to enforce and helps insulate the board from charges of favoritism or discrimination.

When a homeowner is in violation and has been given notice but still has failed to comply, then what?  The board can impose fines against the offending homeowner, but sometimes this can be too heavy-handed.  Some boards want a lighter approach.
An option to consider is suspending community privileges or services.  The statutes allow a board to suspend a member’s privileges or services (no pool access plus 90-degree heat equals a strong incentive for the homeowner to mow that grass). 



The law says that the CCRs that govern the community can set forth a procedure for suspending community privileges or services. The CCRs should be reviewed to determine what procedures must be followed and which community privileges or services can be suspended.  If the CCRs are silent about the procedure, the statutes say that the homeowner must be given written notice and an opportunity to appear at a hearing before privileges or services can be suspended.  The details can be found here
One question we sometimes receive is whether access to the community is a privilege that can be restricted, typically in a gated subdivision.  The answer is no.  The HOA cannot restrict any homeowner from accessing his or her lot.  If an HOA does suspend privileges or services, it must be careful not to deactivate a key card or fob that controls the gates to the community, if it is gated.

We are also asked if, in communities where the HOA provides the household water supply, water can be turned off to noncompliant homeowners.  The answer is yes, but we encourage providing substantial written notice and only doing so where are all other avenues have been exhausted.


Some HOAs are successful in encouraging members to keep up their lots by creating contests and the like.  An example is publishing a monthly “best yard” feature on the website or in a newsletter.  We recommend that any winner be compensated by a yard sign, bragging rights and pride, or at most a small gift card.  Generally, monetary prizes or reductions in dues should be avoided.  These types of contests can also lead to greater involvement in the HOA, which pays off in higher compliance levels and more volunteers for committee and board positions.

Of course, if these options prove unpersuasive, assessing fines and filing liens or other legal action may be the next steps.
Please use the comments below to share with us your success stories in getting your homeowners involved in their communities – and don’t forget the sunscreen this summer!

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the compliance process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Tuesday, February 4, 2014

Maximizing Votes at an HOA Meeting or Election

Many HOAs and condominium associations have annual meetings coming up this time of year, or special meetings to amend their covenants, conditions and restrictions ("CCRs") or bylaws. What is the best way to collect the votes your HOA needs to elect a board or get that important change to the CCRs or bylaws passed?

1. Have you fostered a sense of community in your HOA? Consider a barbecue, pot-luck luncheon or kids' movie night at or before your meeting. Not only does this remind people that there are good people in the neighborhood and that it is fun to get to know your neighbors, but it also reinforces that the HOA is not just there to demand payment of dues and that you put your trash can away. A social event says, "Our HOA is made up of hard-working, well-meaning people who are trying to support the neighborhood - don't you want to get involved as well?" And if I learned anything in law school, it's that the presence of food is guaranteed to double the turnout of any meeting.

2. Schedule the meeting well in advance and at a day, time and location that is convenient to homeowners. This may go without saying, but board members are often retired or self-employed, and therefore may have more flexible schedules than other homeowners. Give some thought to making the meeting convenient and accessible to those with less-flexible schedules. You may even wish to provide child care if your neighborhood is one with many small children.

3. We advocate sending out a meeting notice by mail which includes a proxy and a ballot. While you should always hold an actual meeting for elections and whenever an amendment to the CCRs is proposed, you can gather a lot of votes ahead of time by using the proxy and ballot processes. Many HOAs already use proxies, which are simply limited powers of attorney allowing a person attending a meeting to cast votes on behalf of others who are unable to attend. All proxies should be in writing, signed, include the printed name and address or lot number of the homeowner granting the proxy, and state a date by which the proxy expires. These should be collected by the Secretary at the meeting and carefully counted and tracked. (We recommend having at least three people, at least one of whom is not a board member, counting votes at any annual or special meeting.) By law, a proxy can be given to any person, even a non-member of the HOA. While it is wiser to limit only HOA members to serving as proxies, most HOA's CCRs and bylaws do not do so.

4. The North Carolina Non-Profit Corporations Act specifically allows voting by written ballot as well "unless prohibited or limited by the articles of incorporation or bylaws" (most don't). This is where you can really secure some additional votes. Simply provide in your meeting notice, or in a separate document, a description of the proposed amendments, or a list of those running for the board, and allow homeowners to vote in writing. Again, the ballot should be in writing, signed, and include the printed name and address or lot number of the homeowner, and it also must include a date by which it must be returned to the HOA in order to be counted. All homeowners must receive a ballot and the opportunity to vote. Some HOAs even provide the ballot and proxy on a postage-paid postcard or include a postage-paid return envelope to help make sure they get back to the HOA in time to be counted. You may also consider organizing block captains to go door-to-door to collect ballots and/or proxies for big votes.

Good luck with your upcoming membership meetings!

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the meeting process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Sunday, September 15, 2013

About the New Required Notice of Voluntary Prelitigation Mediation for HOA and Condominium Disputes

About the New Required Notice of Voluntary Prelitigation Mediation for HOA and Condominium Disputes

All HOAs and condominium associations in North Carolina now have the legal duty to inform all members at least yearly that they have the right to request voluntary mediation of any dispute with the association, except for disputes regarding payment of dues or assessments. Either party can decline to engage in mediation. This requirement took effect on July 1, 2013 pursuant to new statute 7A-38.3F, passed as Session Law 2013-127. You can read the text of the law here: SL 2013-127.

I have opined in a prior post on my blog that this new law was silly and unnecessary because it is completely voluntary, and I stick by that opinion. Anyone can agree to voluntary mediation or arbitration of any legal dispute already, so this law did not add anything new. My law practice certainly encourages these voluntary "alternative dispute resolution", or ADR, processes, and they can be very helpful in resolving legitimate disputes, especially business disputes. Remember, the law specifically states that either party can decline to participate in mediation for any reason, so the law has exactly zero teeth to it.

Anyway, your association now needs to notify its members of this new opportunity to request mediation of any legal dispute, other than a dispute involving the payment of dues. How should it do so? The law states that the notice must be posted on your HOA website, if you have one. If your HOA does not have a website - and it should, this is 2013 after all - the notice must be provided "at the same time and in the same manner as the names and addresses of all officers and board members of the association are published", which is already required by the Planned Community Act and the Condominium Act. (Your HOA is already doing this, right? It should be.) So this usually means within the annual meeting notice for HOAs which do not have a website. The main point is that the notice must be published in writing at least once per year.

So how should the notice be worded? Here is my recommended wording, which you are welcome to use verbatim: "Pursuant to N.C.G.S. Section 7A-38.3F, the association is required to notify its members yearly that members and the association may request voluntary mediation of any dispute with the association arising under the North Carolina [Planned Community Act][Condominium Act] (use whichever is appropriate for your association), or under the association's declaration, bylaws, or rules and regulations, other than a dispute relating solely to the failure to pay dues or assessments. Either party can decline to engage in mediation for any reason. The procedure for requesting mediation is set forth in the statute."

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company in understanding or implementing this new requirement, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Sunday, July 21, 2013

2013 Changes to North Carolina HOA Laws

The General Assembly has made some important, and some not-so-important, changes to HOA law in its 2013 session. With the session now nearing its end, let’s review the changes that have been enacted into law. It does not appear that any other changes to HOA laws will be enacted this year.

Be aware that if you use the N.C. General Assembly's website to look up the North Carolina statutes, they always run one legislative session behind. So, the current statutes on the website do not reflect all the changes discussed here. It will most likely be next year before the statutes on the General Assembly website are updated. 

Changes to the Foreclosure Process

House Bill 331, which was enacted as Session Law 2013-202 on June 26, is the most important bill affecting HOAs this year. It makes a few significant changes to HOA foreclosure procedure by re-writing section 3-116 of both the Planned Community Act and the Condominium Act. The changes take effect on October 1. This bill was primarily drafted and supported by the community associations subcommittee of the Real Property Section of the North Carolina Bar Association, of which I am a member, so while I was not a great supporter of the bill because I had not encountered the issues it seeks to remedy, I did have some input into the drafting of the bill, and the changes it makes are in general positive.

The changes are primarily designed to conform the HOA foreclosure process to the standard power-of-sale foreclosure process used for deeds of trust. Some clerks of court and title companies had raised concerns with the legality of the process HOAs had been using since it seemed to skip some steps required in typical non-HOA foreclosures.

The most important change is that a trustee must now be appointed to handle the foreclosure process, just as in typical non-HOA foreclosures. But don’t panic! The trustee can be the HOA attorney as long as the homeowner does not “contest” the foreclosure proceeding. If the homeowner does contest the proceeding, then an independent trustee (i.e., a separate attorney) must be appointed – but the homeowner is responsible for all the fees and expenses of the trustee.

While the $1200 cap on attorneys’ fees for an “uncontested’ foreclosure remains in place, the bill does clarify that this cap does not apply to any other legal proceedings to collect amounts due from a homeowner, or to processing payment plans and the like. We have run into this issue recently with the Mecklenburg Co. clerk of court.

In addition to some other rewordings and reorganizations of section 3-116, H.B. 331 makes one further change which is very much to the benefit of HOAs. It provides that a lender who takes title to a lot or unit by foreclosure is subject to assessments after the upset bid period passes, regardless of when the lender records the deed into itself or the foreclosure purchaser. While this does not address the issue of lenders who put off the foreclosure process, at least it does address those who foreclose but delay in recording their deed, which is certainly a step in the right direction.

Read the bill here.



Voluntary Pre-Litigation Mediation

On June 19, the General Assembly passed the dumbest of its 2013 HOA legislation, House Bill 278, enacted as Session Law 2013-127. It went into effect on July 1 and provides for a completely voluntary process by which HOAs and homeowners can agree to mediate legal disputes – which they could have done anyway without this pointless bill. The bill is codified in new statute 7A-38.3F. Chapter 7A is the chapter of our laws dealing with judicial matters – so be aware that while this is an HOA law, it is found in Chapter 7A and not in Chapter 47F (the Planned Community Act) or 47C (the Condominium Act).

The bill provides that HOAs and homeowners can agree to mediate a dispute, although neither is required to and either can decline to do so. If they do agree to do so, then the mediation is handled in the same way as any other mediation, which can result in a legally-binding settlement – again, if both parties agree.

Rep. Deborah Ross (D-Wake)The new law does not apply to disputes regarding payment of assessments, so I guess those now cannot be mediated even though they could have been before. Or maybe they still can be. Who knows? As is typical of the other anti-HOA legislation proposed by Rep. Deborah Ross of Wake County, who thankfully resigned from the General Assembly on June 1, such as her prior proposals to eliminate HOA foreclosures altogether, this bill is poorly-written and not well thought out in pretty much all respects. The mediation was originally proposed to be mandatory, so we can be thankful that we were at least able to make it voluntary during the legislative process.

The only really important thing to know about this bill is that the HOA is required to inform homeowners of its existence at least once per year. Typically this should appear on the HOA’s website, or on its annual meeting or budget ratification meeting notice if the HOA does not have a website. Since HOAs are required to publicize the names and addresses of the board members and officers annually in the same way anyway, this should not add much to HOAs’ administrative burdens.

Read the bill here.

Validity of Amendments and Access Through Common Areas

Senate Bill 228, enacted as Session Law 2013-34, was passed on April 24 and takes effect on October 1. It makes some fairly technical adjustments to sections 3-107 of the Planned Community Act and the Condominium Act, and to sections 1-102, 1-104, 2-103 and 2-117 of the Planned Community Act. The changes 1) confirm HOA authority as found in their articles of incorporation, bylaws and CCRs; 2) confirm that amendments to CCRs made in accordance with the articles of incorporation, bylaws and CCRs (which had been placed into some doubt by some recent appeals court decisions) are presumed valid; and 3) require lot and unit owners to provide access through their lot/unit to the HOA and other owners if needed for repairs or maintenance to common areas or other units. This bill was supported by our HOA subcommittee. It should not affect the day-to-day operations of HOAs but does help clarify some legal issues.

Read the bill here.

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company in understanding or implementing these changes, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Sunday, March 31, 2013

When Homeowners Attack

I spoke at a “board member boot camp” Tuesday night to give legal tips to new homeowners association board members, and briefly touched on security and safety issues for board members. Luckily, I said, homeowner violence against HOA board members is very rare, and I am not aware of any in our area since I’ve been practicing law. Then on Friday, a Harrisburg, N.C. man apparently killed two HOA board members and himself in a dispute over tree removal. Read the article here: http://www.hickoryrecord.com/independent_tribune/news/article_de356028-98d2-11e2-a47e-0019bb30f31a.html

There are no life-and-death HOA decisions. While it is a reality that HOAs are communities, and as with any community, there are occasional disagreements and occasionally members who may be mentally unbalanced, HOA disagreements need not become disagreeable. How can HOAs contend with these realities while still enforcing their rules and regulations? Here are ten tips:

1. Foster a sense of community. Disagreements are much less likely to escalate in HOAs with a strong sense of community. HOA-sponsored cookouts, movie nights, and even clean-out-your-garage days (where the HOA hires a junk removal company and members can take large unneeded items to the curb) help neighbors get to know each other and build up a level of trust.

2. Be open and communicative. HOAs should over-communicate and over-meet. When members feel aware of what is going on and have had a chance to participate in the decision-making process, they are less likely to take personal offense at a decision with which they disagree.

3. Be willing to compromise. Again, there are no life-and-death HOA decisions. HOA board members should be reasonable in their demands and prepared to compromise when conflict arises.

4. Don’t perpetuate a culture of conflict. At times a board member with a take-charge, take-no-prisoners attitude may be elected. While such traits can be great in business, such a person may not be best suited for a leadership role with an HOA. Strong personalities can be lighting rods for conflict, especially when the member on the other side of a conflict also has a strong personality. Boards should have a culture of reasonableness and understanding. If a dispute appears to be escalating, the board should consider changing the individual board member(s) involved to try to defuse what oftentimes is largely a personality clash.

5. Rely on experienced advisors. Only the smallest HOAs should do without professional management. Professional HOA managers and lawyers have the experience to recognize and defuse potentially dangerous situations.

6. HOAs are not police forces. HOAs are created to maintain property values and common properties – not to be a police force for the neighborhood or to resolve conflicts among neighbors. Board members should remove themselves from volatile situations. If there are concerns about personal safety or laws being broken, law enforcement should be called without hesitation.

7. Be prepared. For meetings involving controversial subjects, it is always worth the cost to have an on- or off-duty police officer present in uniform. Smart HOAs appoint safety committees whose members may receive training in recognizing dangerous situations.

8. Don’t go it alone. A board member should never go alone to meet with a homeowners if conflict could arise. There is strength and safety in numbers.
9. Meet at neutral territory. Meetings involving controversial matters should be held in public places where there is a natural inclination for people to be better behaved – not at the disgruntled member’s home, for example.

10. Keep records of adversarial or violent interactions. Usually, although not always, there are past clues foretelling an individual’s future violence. The HOA should keep records of any violent or threatening interactions with members; these records could be useful in police investigations later or if a restraining order needs to be obtained.

The tragedy of homeowner violence is made even worse if good board members become reluctant to serve for fear of their personal safety. I certainly hope it does not come to that, and that I can continue to tell my HOAs that violence against HOA board members is a rarity.

UPDATE (4-2-2013): I was contacted yesterday by a lawyer who is a friend of mine and an officer of the HOA where the incident occurred. She assured me that this was not, in fact, an HOA-related incident, but apparently simply a dispute among neighbors that had nothing to do with anything HOA-related. Nonetheless, the above tips are good advice for all HOAs.

Sunday, December 16, 2012

Transfer Fees

Transfer fees can be a welcome way for an HOA to cover its administrative costs when a property changes hands, and for a condo association especialy, to cover repair costs for hallways and stairwells caused by owners moving furniture in and out. In addition, they can help an HOA recover some of its losses on foreclosed properties.

The North Carolina General Assembly enacted Chapter 39A, entitled "Transfer Fee Covenants Prohibited", on July 1, 2010. By its terms, this act prohibits the enforcement of any covenant purporting to require the payment of a transfer fee to any third party when a lot or condo unit is sold. The intent was to address the scheme that savvy real estate developers had invented of putting perpetual transfer fees payable to themselves in the recorded restrictive covenants of new neighborhoods, and then assigning this future income stream to investors in order to initially fund the development itself.

The prohibition does not apply to reasonable initial capital contributions payable when a lot or unit is initially sold by the developer, nor to reasonable fees for statements of current account status charged by HOAs in connection with real estate closings. Here's a link to the statute itself: http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_39A.html

The statute provides that it is effective on July 1, 2010 and that no covenants recorded after that date can contain an enforceable transfer fee provision, and that no lien can be filed to enforce any transfer fee. Therefore it is apparently legal to enforce a transfer fee created prior to that date, just not via lien.

I and a number of other HOA attorneys believe that the intent of the act was to address only the assignment-of-future-income-stream scheme by prohibiting transfer fees to third parties, not to HOAs, although by a strict reading the act seems to apply to everyone including HOAs. In any event, the HOA Subcommittee of the N.C. Bar Association Real Property Section, of which I am a member, has proposed legislation for the upcoming session of the General Assembly which will clarify that Chapter 39A does not apply to transfer fees payable to HOAs, whether initially or upon subsequent conveyances. The real estate brokerage or home building industries may oppose this, although I hope not. We on the HOA Subcommittee see it as purely a clarification of a law which, while generally good, suffers from the same lack of attention to detail that we see all to often in real estate-related statutes. Look for this bill in 2013 and be sure to support it.