The
North Carolina Court of Appeals delivered a lump of coal to one homeowners
association this winter. In McVicker vs. Bogue Sound Yacht Club, Inc.,
available here, which came out on December
20th, the Court of Appeals ruled
that a homeowners association had exceeded its authority when it attempted to
collect a construction bond from an owner, and again when it fined that same
owner for failing to timely deposit the impermissible construction bond.
The
facts appear to be relatively straightforward. The homeowners, not
realizing that they had to obtain prior approval, hired a contractor to clear
their lot of brush and other debris. As the clearing was underway, the
association notified the owners that the clearing required prior approval from
the architectural review committee.
CASE DETAILS
At
issue was one of the policies enacted by the board of directors which required
any owner, as a condition to the architectural review committee’s consideration
of any architectural plan, to submit a $250 construction bond. The
construction bond was intended to offset the costs of any damage to the
community’s common areas. The bond was
not provided for in the association’s restrictive covenants, but was apparently
adopted by the board as a part of its architectural approval process. Such
bonds or deposits are not necessarily unusual; we know of some high-end
associations which charge as much as $10,000 as a deposit to ensure compliance
during the construction process.
After
a violation hearing, the board of directors in this case required the homeowners to submit an architectural
plan describing what they intended to do with the property and to deposit the
construction bond, or face a fine of $100.00 per day. The homeowners
submitted their plans late, which the board retroactively approved. The
owners did deposit the construction bond, albeit late and “under protest”, at
the time they submitted the plans. The board levied fines for fourteen
days, totaling $1,400.00 for the failure to submit the construction bond within
the required time period, although the board later reduced the fine to
$1,050.00. The owners argued that the board had neither the authority to
require a bond nor the authority to impose a fine for a failure to deposit the
bond, since the bond requirement was
only a policy adopted by the board, not a requirement explicitly set forth in
the restrictive covenants.OUTCOMES
Although
the amounts of money at stake are fairly trivial, it appears that neither the
board of directors nor the owners were willing to back off of their respective
positions. The homeowners lost in the trial court, however they appealed.
On appeal, the appellate court noted that the association was without
proper corporate authority to impose a construction bond in the first place.
The court reviewed the association’s declaration of covenants, conditions
and restrictions, and noted that there was no explicit provision which would
authorize the collection of a construction bond.
The court cited
the long-standing North Carolina law which states that a restrictive covenant
is to be narrowly construed, and a homeowners association cannot expand that
authority beyond the limits set forth in the restrictive covenant. The
association also argued that since it had blanket authority to govern the
upkeep of the common areas, that its authority could be extended to require a
construction bond since the purpose of
the bond was ostensibly to protect the common areas.
The court
disagreed on this point as well: restrictive covenants that are “clearly
expressed may not be enlarged by implication or extended . . .”.
Similarly, since the association could not charge the construction bond
in the first place, it could not fine the owners because they failed to timely
deposit the construction bond.
Notably,
there was a dissenting opinion which argued that the appellate court exceeded
its scope of review, because the bond was ultimately refunded, rendering the
question moot, and also that the homeowners
had asked only whether the association followed proper procedures to impose the fine, not whether the association
had the authority to demand the bond.
The presence of a dissent means that the case may be further heard by the North Carolina
Supreme Court, if it believes the case
warrants further review.
The Bottom Line
a homeowners association is bound
by the explicit authority granted to it in the governing documents, and that authority may not be expanded without amending the declaration. The
proper remedy in this situation was to amend the governing documents to grant
the authority to charge the
construction bond. Boards of
directors may, and should, adopt policies and procedures to flesh out their
restrictive covenants and ensure that decisions are made in fair, uniform and
even-handed ways, but in doing so they must take care not to add substantive
requirements for which there is no authority in the document itself.
If
you have questions about the scope of authority in your community’s governing
documents, please contact us to discuss in further detail.
