Two Case Studies by Stephen C. Sellers
Wallach v. Linville Owners Association, Inc. July 1, 2014
The NC Court of Appeals has confirmed that satisfying all of the procedural steps necessary to pass an amendment isn’t always enough to make it enforceable in court. In Wallach v. Linville Owners Association, Inc., the Wallachs sued the Linville Owners Association arguing that an amendment to the assessment provisions in the community’s recorded Declaration was unreasonable and unenforceable because it was inconsistent with the “original intent of the Declaration.”
The Wallachs and another plaintiff were builders who together owned three of the forty-four lots in the Linville community. The original assessment provisions in the recorded Declaration provided that “the builder of the initial improvements on a Lot” would be liable for 25% of assessments levied against each of the builder’s lots and that payment of the discounted amount would be deferred until each lot was ultimately sold to a homebuyer.
In November 2011, the Association approved and recorded an amendment to the assessment provisions which erased the benefits previously enjoyed by builders and subjected all builder-owned lots to the full rate of assessment after the date of the amendment. In addition, any sums that had already accrued against those lots at the original discounted rate became immediately due and payable under the new amendment. The Wallachs argued that this “complete reversal” flew in the face of the original intent of the recorded Declaration, and that it was unreasonable and unenforceable on that basis. The NC Court of Appeals agreed.
In striking the assessment amendment, the Court of Appeals relied heavily on Armstrong v. Ledges Homeowners Association, a 2006 case in which the NC Supreme Court had this to say about an Association’s authority to alter or add-to restrictions contained in its original recorded documents:
[A] provision authorizing a homeowners’ association to amend a declaration of covenants does not permit amendments of unlimited scope; rather, every amendment must be reasonable in light of the contracting parties’ original intent (emphasis added).
The Supreme Court then went on to clarify that the “reasonableness” of an amendment is determined by considering the language of the original restrictions together with “other objective circumstances surrounding the parties’ bargain, including the nature and character of the community.”
Applying the rules established by the Supreme Court in Armstrong, the Wallach court determined that the language of the original Linville Declaration revealed a clear intent by the Declarant to provide builders with a range of very specific benefits designed to encourage them to purchase lots from the Declarant far earlier than they might otherwise have done. The Court of Appeals ultimately determined that the assessment amendment passed in 2011 fundamentally undercut that original intent by erasing benefits that were specifically intended to – and did! – induce builders like the Wallachs to purchase lots in the Linville community.
Erkes vs. Kasparek September 17, 1990
This case is old but still often cited for the proposition that there are limits on the power to amend restrictive covenants in South Carolina. The case was successfully argued in the Court of Appeals by S. Jackson Kimball before he became the Master-in Equity for York County.
In 1955, the developers of a tract of land in York County placed restrictive covenants on the use and development of that land and began to sell lots. In 1960 and again in 1963, the developers amended the restrictive covenants to establish a minimum cost for dwellings placed on the lots and minimum set back lines, respectively. Twenty-four years later, residents of the subdivision recorded a third set of amendments which, among other things, established a minimum lot size for the subdivision.
The developer challenged the validity of the 1987 amendments, claiming that they went far beyond their permissible legal scope. Initially, the Court found that the establishment of minimum lot sizes in 1987 contradicted the clear right reserved by the developer to subdivide the land. More importantly, the Court expressly found that the provisions in the restrictions which allowed them to be changed or amended could not be used to impose additional restrictions on the undeveloped land.
Specifically, the Court stated:
The restrictive covenants state that “any of the conditions, restrictions, and covenants contained may be changed, or amended . . .” The residents cannot place new restrictions on the land under the guise of amendment. Restrictions on the use of property are strictly construed, with all doubts resolved in favor of the free use of the property. . . In the first and second sets of amendments, the developers amended existing restrictions contained in the restrictive covenants. They did not add new restrictions. The restrictive covenants do not contain any restriction establishing lot size. Therefore, the purported amendment by the residents cannot restrict lot size on the unsubdivided land under the terms of the restrictive covenants.
WHAT DOES ALL OF THIS MEAN?
First, it means that simply getting the number of “yes” votes that are required to pass an amendment may not be enough to guarantee its enforceability in court. Courts are making it increasingly clear in cases like Armstrong, Wallach and Erkes that associations do not have the power to fundamentally change, enlarge, strike or supplement existing restrictions in ways that undercut the reasonable expectations of purchasers who signed on the dotted line in reliance upon the documents as they existed at that time.
Second, if you are considering an amendment, it should go no further than is necessary to accomplish your objective. In addition, the language used must be carefully crafted to avoid running afoul of the limitations that our courts have articulated in these important cases. Please don’t hesitate to contact our office to discuss your amendment plans, and the strategies we have developed to help insure your amendment will stand the test of time and survive attack from those who may be adversely affected by it.
Please feel free to call or email Stephen Sellers with any questions about this post.