By Duncan R. McPherson
By Duncan R. McPherson
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This article discusses issues that should be considered in the drafting of governing documents for common interest communities. A problem in discussing common interest communities is the lack of uniform terminology to describe both the various types of common interest communities and the documentation used to create these communities. There are regional and state variations in customary terminology and differences in the definitions in the laws that govern common interest communities in each state. The only consistent terminology relates to condominiums, which are, everywhere, a creature of statute. Even with condominiums, there are substantial differences in local practice and related terminology.
The term "common interest community" is used by the Uniform Common Interest Ownership Act (UCIOA), which is the most modern of the Uniform Acts in this field, to describe this type of community or subdivision. These communities may also be called "common interest developments" (California), "common interest subdivisions" or other names. As used in UCIOA, the term includes "planned communities," which are called "planned developments" in California and "homeowner associations" in other areas. Moreover, multi-family housing can, depending on the jurisdiction, be subdivided either as condominiums, planned communities (often called "townhouses"), cooperatives or as less well-known types of projects.
The focus of this article is on residential housing, but the laws related to common interest communities can also govern commercial developments and mixed residential and commercial developments.
The primary document governing a common interest community is typically the recorded declaration, also sometimes referred to as "covenants, conditions and restrictions," "CC&Rs," "the restrictions" or "master deed." In older communities the document containing the bulk of the governing terms of the community was often the association bylaws. The primary governing document in almost all cases is a recorded document, and the intent of the document is to govern the community by having its provisions run with the title of the property within the community. The legal theories under which the declaration is enforced are beyond the scope of this article and vary from jurisdiction to jurisdiction. In states adopting uniform acts or other statutes governing these communities, the statutory law forms the legal basis of the declaration provisions running with the title of the property. This part of the documentation of the community is part of the real estate law. The real estate law portion of common interest communities exists somewhat uneasily with the corporate law that generally governs the actions of the association. The association operates or manages the community and often owns some or all of the common areas of the community.
Common interest communities and their governing documents are subject in many states to statutory requirements that directly deal with common interest communities and their associations. In some jurisdictions, the statutes cover only condominiums or other select types of communities. In other jurisdictions, all types of common interest communities are covered by a single law such as UCIOA or other non-uniform state laws such as the California Davis-Stirling Common Interest Development Act, California Civil Code § 1350, et seq. Because there is much disparity in the way these communities are regulated by state law, the content of the documentation varies, depending on the practices imposed by the various state laws.
The Parties Represented
As in certain other types of documents such as wills and trusts, the lawyer drafting a declaration for a new community will be preparing a document to affect persons not represented in person when the declaration is drafted. In the case of a new community, the client will almost always be the developer or a consultant to the developer. Depending on the size or complexity of the project, the experience of the developer and the importance of the project to the developer, the developer may or may not want to have significant input into the documentation for the community. If the development is large, unique or important to the developer, it is likely to want substantial input.
The primary concern of most developers is to have maximum flexibility in the build-out of the project. That flexibility includes the maximum time to complete the project, timing and extent of common area facilities and the ability to change the mix of the types of housing and other components of the community. There is nothing mysterious about the reasons for wanting to retain this flexibility. Large projects often are built out over several economic cycles and over changes in the housing product types that the public desires.
It is important for the drafter of community documentation to remember, in dealing with the concerns of the developer, that the documentation will exist for many years after the developer is out of the project. It must adequately serve the needs of the eventual owners who will live in the community and of the association that administers the project. Needs of a number of other parties not present when the documentation is drafted must be considered.
In California, it has become common early in the drafting process to involve the manager who will manage the association during the build-out. That manager will review and comment on the declaration, the proposed association budget and the nature and construction of the common areas to try to reduce the operating problems that are often not otherwise addressed by the documentation. The developer will often co-exist in a community for many years with its buyers and with an association that, at some point, will be free of developer control. It is important that the system of governance provided for in the documentation work and not create problems.
There are several parties that must be satisfied when the documents are drafted and whose requirements may control over the desires of the developer. Those parties are the state or local agencies, which have legally enforceable requirements for the community and its associations, the federal Office of Interstate Land Sales Registration, the developer's lenders and the secondary mortgage market. In some states, such as California, the state regulatory agency has many specific requirements for community documentation and restrictions on the developer over annexations, assessments, voting, developer control, common areas and the like. Those state requirements will impose a restraint and a sameness within the jurisdiction on all community documentation.
Declaration Subjects and Common Provisions
Declarations vary because of the laws and regulatory requirements of the various jurisdictions, the types of projects, the requirements of developers and the drafting styles of lawyers. Even with these variations, there are certain basic subjects and issues that should be covered by the declaration or by other community documentation:
- the description of the community and the areas that can be added and withdrawn from the community;
- the process by which areas can be added and withdrawn from the community;
- the improvements and common areas of the community and what improvements can be added or removed;
- the type of common interest development, such as a "planned development," condominium or any combination of types;
- the persons subject to the declaration, including owners, occupants, tenants and invitees, as well as the developer and other builders;
- the nature of the interests that will be sold to the public, such as lots, condominiums or cooperative units;
- easements or rights of use that are granted to the owners, the association, the developer and other builders or government agencies;
- the special rights and obligations of the developer and of other builders that acquire property from the developer;
- the organization and operation of the association or of multiple associations and their powers, including rule-making authority;
- membership in the association and voting rights;
- the association's assessment powers and its rights to collect assessments, including the power to lien and foreclose;
- the allocation of maintenance responsibilities;
- use restrictions and the disciplinary authority of the association;
- architectural requirements and restrictions and the method of architectural review and approval;
- insurance requirements of the association(s) and, in the case of a multi-family project, of the owners;
- damage, destruction and eminent domain provisions;
- provisions for the protection of mortgagees;
- compliance with regulatory requirements (which, of course, can affect any or all of the other provisions);
- amendment and termination provisions;
- provisions related to special features within the community, such as open space areas, lakes, golf courses, wetlands, private roads and gates or any number of other special situations; and
- provisions related to requirements of local jurisdictions, such as rights to farm, rights of the local jurisdiction to be notified, veto rights of local jurisdictions over changes to certain provisions of the declaration, and disclosures to local jurisdictions of adjacent existing or proposed public improvements, such as airports, highways, canals and other improvements that may be considered either undesirable or dangerous.
One of the interesting things about the contents of declarations is that most of the attention, including media attention, is given to just a few provisions. These provisions are the use controls, the architectural controls, rights of an association to discipline members and the right of an association to foreclose on the separate interests of owners to enforce the payment of assessments and other debts.
Other items that often have major consequences, such as the insurance provisions and provisions relating to damage and destruction, are often not given the importance they should have either by the drafter of the document or by the members or manager until events happen that put the provisions into play.
Declaration Provisions Requiring Special Consideration
A number of provisions in declarations raise special issues and require special attention. Consider who is subject to the declaration. The simple days when owners of houses or condominium units were individuals are gone. Now individuals, trusts, family partnerships and family LLCs, as well as business entities, own lots, houses and other interests within communities. The documents need to spell out in each case who is the member, who is entitled to vote and who can use common area facilities. These provisions may also affect who can serve on the governing body of the association.
Common situations also arise where for tax or other purposes the technical owner of the property is the parent or child of the occupant. It is important that the document deal with these situations. Treating the occupant and beneficial owner as a tenant is not always a satisfactory solution. It is fairly simple to draft provisions that make the natural person who has actual control over the entity that is the record owner the owner for voting, service on the governing board and other purposes. Thus, the settlor of a revocable trust or the owners of a family partnership or LLC probably should be treated as the owners of the interest and not as tenants.
Similar issues arise when an association possesses desirable recreational facilities and an owner attempts to rent his or her house or unit while continuing to use the recreational facilities, thus increasing the burden on those facilities. The simple answer is to allow use of the recreational facilities only by the actual occupants of the house or unit.
Other issues arise when a person claims to be an owner because of some off-record right such as a community property right, marital right or some equitable right, such as an unrecorded contract right. Generally, the best method of dealing with these situations is to exclude such rights from ownership, at least until there is a formal adjudication of such rights. The association should not be placed in a position of having to make determinations between competing interests.
Consider the control of the association over tenants and other occupants of the community who are not owners. The common question is whether these persons, including the children of an owner, can be disciplined by the association or whether the association can deal only with the owner-member. The situation with tenants should be easier than with persons who just occupy the community as the dependents of owners. Tenants have an estate in the real property and could be subject to the disciplinary powers of the association. Often the provisions of the declaration actually operate to restrict the power of an association to impose discipline on a tenant, since they limit the disciplining authority to owners or members.
Coupled with this basic issue is the question of whether an association can or should have the power to evict a tenant for breach of the declaration or an association rule. The power to evict or otherwise deal with a tenant, including the obligation of the association to collect rent to pay delinquent assessments not paid by the owner, may depend on requiring that leases provide for such authority. The power may also depend on the state's unlawful detainer statute. The desire of an association to have increased powers to deal with tenants is often moderated by a concern that the association will be drawn into disputes that should be dealt with by the owner-landlord.
Issues concerning the relationship between associations within a single master planned community arise commonly in the context of the priority of enforcement regarding use and architectural control, the priority of assessment liens and the voting rights of members of "sub" associations. The UCIOA deals with the priority of lien enforcement, but this issue is not dealt with by statute in most jurisdictions. Each of these relationships must be carefully thought through to fully understand how it works.
The relationship among the residential components of a community and its association and the commercial elements needs to be addressed. These commercial elements might include a shopping center, business and professional offices; or they might be a golf course or other recreational facility that is operated not as common area but as a separate commercial enterprise. The allocation of common expenses and the party responsible for the maintenance of each area, such as private streets, need to be identified. Easements for public services, drainage and golf course operations need to be in place. Access easements for the entry through gated entries and over private streets must be identified. Any necessary limitations of liability or agreements to tolerate what might otherwise be nuisances must be put in place when residential housing is placed next to golf courses or adjacent to commercial elements having noise, visual problems or the intrusion of golf balls or water overspray.
The drafter should be specific about insurance and liability allocation issues within multi-family housing projects. These issues are very complex and need to be carefully thought out for each type of project. They are often perceived as more of a problem when there are significant numbers of tenants. The basic issue is whether all damage caused by sources outside a unit should be the responsibility of the association. An association's insurance can be adversely affected if the association is responsible through its insurance for the negligence or deliberate acts of unit owners or their tenants. Often insurance can be more efficiently used if the unit owners are required to carry appropriate property and liability insurance and if the documents carefully allocate the cost of deductibles, amounts in excess of the association's coverage and occasions when the association is responsible for damage.
Often associations attempt to limit the right that owners have to the association's insurance coverage without having the declaration or a policy that legally allocates the responsibility. This ad hoc method is not the correct method to manage insurance. If the association has insurance that covers a claim and the documents do not otherwise allocate the risk, the owner will have the right to access the insurance, notwithstanding the association's attempt to control the making of claims.
Some major issues concern the nature of an owner's liability for a judgment. This issue can arise in two ways. The first situation occurs when there is tenancy in common ownership in the common areas and an injury or death is caused by a defect in maintenance of the common areas. This issue is covered by § 3-111 of UCIOA, which makes it clear that no individual unit owner is liable for the condition or use of the common area and that all suits must be brought against the association. This solves the immediate problem of individual liability and leaves the initial defense to the association and its insurer.
The second issue is an owner's liability for judgments against the association. Again, the issue is covered by UCIOA in § 3-117, which provides that a judgment against an association is a lien against each of the lots or units but not a lien on the common area. The individual lots or units can obtain releases of their portions of the judgment and the lien against their lots or units by an individual pro rata payment. This provision has the virtue of bringing into play the stop-loss portion of the individual owner's insurance, especially in a condominium where such insurance is common. See Orten & Zacharia, Allocation of Damages for Tort Liability in Common Interest Communities, 31 Real Prop., Prob. & Tr. J. 648 (Winter 1997).
A related liability issue that has recently become a concern in California arises from litigation in which an association had a judgment rendered against it for several million dollars for defaming a contractor hired to perform repairs on the project. The defamation arose from comments made by directors of the association. The association had no insurance to cover this type of judgment. There is no statute similar to UCIOA § 3-117 in California. The issues were whether the association could be forced to assess its members to pay for the judgment and whether the judgment creditor could reach all of the assessments collected for common area maintenance in order to pay for the judgment.
The case raises a number of interesting questions. Should members of an incorporated association be required to pay for any portion of a judgment against an association when the judgment does not concern the operation and maintenance of the project? Is the right to assess an asset of the association? Can an association be forced to levy assessments to satisfy a judgment? Should a judgment creditor be allowed to levy on assessment income intended for maintenance of a project to satisfy a judgment?
There are no "right" answers to these questions, but unless the matter is answered in a particular jurisdiction by statute, it may be wise to try to limit the ability of the governing body to assess for judgment liens and to draft provisions stating what happens to a judgment lien if the association becomes insolvent. It may be prudent in non-UCIOA jurisdictions to make it clear that only by vote of the members may assessments be levied to pay for non-maintenance type debts. A recent California statute will shield assessments required for "essential services" from execution. California Civil Code § 1366(c).
Damage and destruction provisions are perhaps some of the most unappreciated provisions in the declaration. Often they are drafted based on old forms without much appreciation for the difficulties in using the language in specific situations. Lawyers have now had a great deal of practical experience with major damage and destruction based on hurricanes in Florida and earthquakes and earthslides in California. These events have shown that these provisions must be flexible and must deal with specific problems, such as persons abandoning units, the inability to rebuild the same project and the inability to obtain votes of the owners for any particular action. Some of the problems in this area can be solved only by legislation that would allow more flexibility for changes in condominium unit boundaries, which now commonly require a unanimous vote of the owners.
Maximum flexibility for all sorts of future changes must be provided. The declarations, once they go of record, generally remain substantially unchanged for years because they are notoriously hard to amend. Unless flexibility is built into the structure of the document, statutory changes and changing social perceptions can outdate the use restrictions and sometimes even the architectural requirements of the declaration. The federal prohibition of adults-only communities and restrictions on senior housing communities, as well as federal restrictions on limitations of antennae, are examples of changes by statute. Similar changes have occurred at the state level in many states. Examples of changes in social perceptions include the high incidence of unmarried couples of both sexes iving together in family groups, which years ago would not have been considered families for the purposes of single-family occupancy. A similar change has occurred in standard family transportation. Truck-like vehicles are now common.
These changes have shown that restrictions in declarations are susceptible of being outdated. Many lawyers have concluded that the traditional use and architectural restrictions should be deleted in whole or in part from the declaration. Instead, they should be included in rules adopted by the governing body of the association, since these rules can be more easily amended when legal or social circumstances dictate. The original version of UCIOA § 3-102 required that use restrictions be included in the declaration. This has now been changed to allow the use restrictions to be placed in rules unless the declaration prohibits such a practice. Where there is no specific legislation about the enforcement of rules, there is always the concern about whether the courts will enforce the rules in the same manner as they would enforce the declaration. Because of this concern, it is important to include in the declaration specific provisions about the rules that can be adopted and to mention without limitation areas that may be covered by the rules.
It is also good practice to provide how the rules may be enforced and to provide that the rules may be enforced in the same manner as the declaration. Since rules can be changed easily, it is also a good idea to provide exactly what effect a changed rule will have on preexisting uses. These considerations are especially important for changes in architectural provisions, maintenance of vehicles on the lots or other items that could cause significant cost or inconvenience to the owners.
Declarations are exceedingly hard to amend. It is often difficult in large scale communities effectively to hold votes on any issue. This problem is more acute in communities made up of owners of second properties, or in resort communities. Delegate voting and other voting methods, such as the casting of votes by the governing bodies of sub-associations, should be considered. In California, these methods have been used to allow voting on issues such as assessment increases (which in California require a membership vote to exceed certain limitations) and to allow the amendment of the declaration.
The key to drafting declarations and other common interest community documents is to understand the issues, the position of the parties using the documentation and the constantly changing political and social environment in which these communities operate.
Duncan R. McPherson is a principal with Neumiller & Beardslee in Stockton, California, and co-chair of the Real Property Division's Development, Operation and Management of Community Associations (H-1) Committee.