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 1^st, 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.    

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!

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. 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 process. 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). If no meeting is necessary, consider conducting the vote via written ballot instead. All members receive a ballot with clear instructions as to what they are voting on and a specific date by which all ballots must be returned. All ballots should require a signature or other means of verifying that the response is genuine and unique, and should include the printed name and address or lot number of the homeowner. All homeowners must receive a ballot and the opportunity to vote. Some HOAs even provide the ballot  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!