Section of Real Property, Probate, and Trust Law
Drafting Homeowner Association Documents That Work
By Roger D. Winston and Gabrielle Osman Sigel
P roperly drafted documents are intended to reflect the intention of the parties and withstand the changes of time. Many documents governing homeowners associations fail to meet these goals because they are ambiguous or inconsistent or do not contain the flexibility needed to address changes in the law, association interests, or technological advances. One of the principal methods to avoid creating a poorly drafted document is to take time to ponder the possible future of an association. It takes this type of foresight to create instruments that legally and functionally meet the needs of an association now as well as in years to come.
This article discusses drafting tools that will help create thoughtful and articulate documents. It also reviews pertinent cases in which poorly drafted documents created significant issues requiring resolution by the courts.
The Mind of a Successful Drafter
A drafter who fails to consider how varied situations will affect a document and fails to make the desires and wants of the parties a priority cannot be successful. Intent of the parties drives the format of a document and, ultimately, should be reflected in the final product. A successful drafter must contemplate not only the circumstances of today, but also changes that may occur in the future. Too often documents do not reflect the intent of the parties. This problem is compounded if the documents are so rigid that they are not able to conform to changes in such variables as the law, architectural designs, and technology.
Documents should be drafted with enough flexibility to respond to changes with efficiency and effectiveness while also meeting legal requirements. In this context, the distinctions between recorded documents and community codes should be noted. Although the recorded documents (i.e., declaration of covenants, restrictions, and easements) are generally inflexible, community codes can be amended from time to time. Creating documents that will give consistency from year to year, but have enough flexibility to meet association needs for the long run, is an important goal.
Drafting Lessons Learned from Case Law
Avoiding Ambiguity in Documents
It may seem quite obvious that the functionality of a document is significantly damaged by the use of ambiguous provisions. The large number of court decisions resolving disputes over ambiguous language underscores the need for improvement in this area. Careful drafting can avoid ambiguous provisions and keep a court from being the ultimate determiner of the parties’ intent.
The dangers of ambiguous language are illustrated by two conflicting cases interpreting the term "mobile homes." In Holiday Acres Property Owners Ass’n v. Wise, 998 P.2d 1106, 1107 (Colo. Ct. App. 2000), a property owners association brought suit to enforce a protective covenant claimed to prohibit the use of double-wide modular homes. The provision stated:
No trailer, camper, mobile home, or motor home shall be used at any time as a permanent residence except use of a trailer, camper, mobile home or motor home may be permitted during the above mentioned one year period permitted for construction and, in addition, may be used for periods of vacation use, but total vacation usage by any one owner may not exceed six (6) months in any calendar year.
In addition, association approval was required before the construction of any "building, fence, patio, or other structure."
The sole member of the architectural committee, who was a general partner of the developer, took the position that double-wide modular homes were acceptable as long as the tongues and axles were removed and the modular homes were fastened to the foundation. After receiving this interpretation, the defendant lot owners began to construct their double-wide homes. However, other property owners sought injunctive relief to compel the removal of the structures. The appellate court held that the term "mobile home" was ambiguous. The court noted that "various bodies of law" used the terms "mobile," "modular," "manufactured," and "trailer" interchangeably. The court was also swayed by testimony that other permanent modular homes had been previously constructed within the subdivision and ignored the architectural committee interpretation as coming from "a general partner cloaked with architectural review authority." As a result, the association was estopped from restricting the use of mobile homes.
In contrast to the Holiday Acres case is Fox Farm Estates Landowners Ass’n v. Kreisch, 947 P.2d 79 (Mont. 1997). The covenant in this case stated: "No structure of a temporary character, mobile home, trailer, basement, tent, shack, garage, barn or any other out building shall be used on any Block at any time as a residence, either temporarily or permanently." With knowledge of this restriction, the lot owners bought a manufactured home, and the association brought action against them to prevent the placement of the home on the lot.
In order to define "mobile home," the court looked to definitions of the term in several statutes and also compared physical characteristics of the manufactured home in this situation to ones in other cases. In this case, the lot owner’s home was built at a factory and equipped with such accessories as axles and wheels. In other words, "it was constructed off site and designed to be transported." The court held on these facts that the manufactured home was a mobile home prohibited under the meaning of the covenant.
From a reading of these cases, one may be left wondering what key factor led the courts to come to opposite holdings. Certainly a double-wide modular home appears to be more of a "mobile" home than a manufactured home, which is only "mobile" when its pieces are being transported to the lot. But Holiday Acres held the covenant was ambiguous, yet Fox Farm held it was not. Because judges may come to completely different conclusions if given the same or relatively similar facts, a better solution is to draft documents that do not have to be scrutinized in a courtroom.
Rather than defining "mobile home" in permanent restrictions, another option would have been to use the flexibility of community codes. Such codes would have given the board of directors the ability to enact a provision when needed that would have specifically stated what constituted a "mobile home" and whether they were permitted in the subdivision. This is especially important when new products or technology comes into existence. Moreover, it likely would have prevented the court’s use of definitions not contained in the association documents.
The bad effects of ambiguous language also are apparent in Greystone Ridge Homeowners’ Ass’n, Inc. v. Shelton, 723 So. 2d 88 (Ala. Civ. App. 1998) . Here, a homeowners association sued a homeowner who affixed a metal weather vane to the roof of her home. The association asserted that the weather vane violated a covenant that read:
No exterior changes, alterations or Improvements shall be made to any Lot or Buildings without first obtaining the prior written approval of the same from Developer. No Owner shall decorate, change or otherwise alter the appearance of any portion of the exterior of any Buildings or the landscaping, grounds or other Improvements situated on such Lot unless such decoration, change or alteration is first approved, in writing, by Developer . . . .
In a brief opinion, the court declined to enforce the provision on the basis that it was unclear, too broad, and "subject to different interpretations."
Just as with the previous cases, the conflict in this one could have been avoided through careful drafting that did not leave the definition of "exterior changes, alterations or [i]mprovements" up to the court to determine. It also would have been wise to draft separate community codes that would have allowed the association or board of directors to define such "changes, alterations or [i]mprovements" when the need arose. If a weather vane was not contemplated at the time of drafting the covenants, it could have been included in the community codes once the association had need for its inclusion. Similarly, a set of design guidelines could have been promulgated by the association to depict the types of exterior modifications that are acceptable to the association.
Clearly Drafted Provisions
In contrast to the ambiguous provisions discussed above, clearly drafted provisions leave no room for judicial interpretation. In Workman v. Brighton Properties, Inc., 976 P.2d 1209, 1210 (Utah 1999), a lot owner brought action against an association for assessments that had been levied against the owner for the development of a water system that did not benefit him. The articles of incorporation gave the association the power to develop the water system, but it also stated that the stock in the association "shall be subject to such assessment as may from time to time be levied by the Board of Trustees." In addition, the bylaws provided for assessments in "such amounts as the board determines necessary to carry out the purposes for which the corporation was organized." The court held that even though the lot owner did not personally benefit from the water system, the governing documents clearly required that he pay the assessment.
Similarly, in McGinnis Point Owners Ass’n, Inc. v. Joyner, 522 S.E.2d 317 (N.C. Ct. App. 1999), a property owners association brought an action to collect overdue assessments. The court held that the provisions in the governing documents were stated with enough particularity and set forth "a sufficient standard by which to measure" a property owner’s liability for assessments.
Although the court may have agreed with either of these lot owners’ contentions that the assessments were inequitable, the documents had adequately set forth the association’s powers and the lot owners’ obligations. Because there was no ambiguity, the court found clear authority in the documents that the lot owners were subject to the covenants.
DCW Enterprises, Inc. v. Terre Du Lac Ass’n, Inc., 953 S.W.2d 127 (Mo. Ct. App. 1997), is a multi-faceted case that illustrates the importance of consistency and thoroughness. When the board of directors passed a resolution that resulted in the assessment of the plaintiff’s property at a higher rate than had previously been assessed, the plaintiff paid only the amount of the earlier assessment. When another resolution was passed that set forth a late payment assessment charge of 10% on all delinquent assessments, the plaintiff asserted that the 10% charge was not permitted under the bylaws because it was in direct conflict with another bylaw provision that allowed for a 6% charge on delinquent payments. Although the bylaws gave the board of directors broad authority "to make and collect assessments against members to defray the costs and expenses of the Association," the court held that the more specific provision that all delinquent assessments shall bear interest at the rate of 6% per annum governed. Therefore, the association’s resolution permitting the imposition of 10% interest was invalidated.
This case demonstrates not only the need to avoid inconsistencies when drafting, but also is illustrative of the need to consider possible changes in the operations of an association. By including the provision limiting interest to 6%, the association would be forever locked into an undesirable position if the economy or interest rates fluctuated. By all measures, it would have been wiser to provide that the interest rate for delinquent assessments would be determined from time to time by the board of directors but would never increase beyond any applicable lawful maximum. In this way, a board would be better equipped to handle how much interest should be imposed upon delinquent assessments.
The Need to Set Clear Standards
Another litigation-prone document is the one that gives broad authority without setting standards for how the authority is to be exercised. In Country Club of Louisiana Property Owners Ass’n v. Dornier, 691 So. 2d 142 (La. Ct. App. 1997), an association filed suit against a lot owner to enjoin him from erecting a "For Sale" sign that was allegedly in violation of a restrictive covenant. The covenant stated:
Except as may be required by legal proceedings, no signs or advertising posters of any kind shall be maintained or permitted within any windows, on any Lot, the exterior of any improvements located within the Development, or elsewhere on any portion of the Property, without the express written permission of the Architectural Review Committee. The approval of any signs and posters, including, without limitation, name and address signs, shall be upon such written conditions, standards, and, guidelines as may be from time to time promulgated by the Architectural Review Committee.
Each lot owner purchased a sign through the association before the construction of a home and used it to post information regarding permits and other stages of construction. These signs were also used to advertise that a home was for sale when homes were built on speculation, but the association asserted that once a home was sold and occupied, the sign was no longer allowed. The lot owner in this case continued to use the sign after construction by putting the words "For Sale by Owner" along with his phone number. In support of his position, the lot owner introduced evidence that many other homes, although never occupied, had "For Sale" signs posted in their yards at the time of trial. The association’s interpretation of the covenant was held to be unreasonable, particularly when signs were permitted during construction but prohibited once homes were occupied.
The case is illustrative of the confusion that can occur through the creation of unclear provisions that give too much authority to the association and prevent it from functioning effectively. Confusion could have been avoided through the drafting of community codes that detailed a reasonable review process for the Architectural Review Committee to follow for the approval of posting signs. Moreover, the standards for such a review covered in the community codes could be made flexible so that the association could change the process, if so desired, in the future. If provisions seemingly unreasonable or unfounded on their face are actually well-grounded and thoughtful, the drafter’s obligation is to make the basis for such provisions understandable.
A recent decision by the New Jersey Supreme Court, Fox v. Kings Grant Maintenance Ass’n, Inc., 770 A.2d 707 (N.J. 2001), illustrates the problems involved in delegating governance rights. The planning board granted preliminary approval for a large residential-planned unit development that consisted of 15 communities on the condition that an umbrella maintenance association be established. However, the planning board’s action was held by the court to be in violation of the New Jersey Condominium Act because individual unit owners were deprived of the power to control their undivided interest in their common elements through the delegation of authority to the umbrella association.
Although the particulars of this case pertain to the New Jersey Act and, therefore, cannot be applied uniformly, it is a good example. The concept of a master association that is delegated a great deal of operating and governance responsibilities from smaller associations within a development is often an efficient and cost-effective way to operate a large community. While meeting applicable legal standards, it is possible to draft documents in which the master association would perform certain responsibilities unless the governing body of the underlying condominium regime objects. In this way, the individual condominium regimes are able to maintain a reasonable level of control while the umbrella association is permitted to function in an efficient and cost effective manner.
Intention of Parties
The focus of much good drafting is meeting the expectations of the parties. In Ray v. Miller, 916 S.W.2d 117 (Ark. 1996), for example, residential lot owners purchased lots that included a bill of assurance, which stated: "All chimneys and foundations below siding shall be constructed with brick or stone." No reference was made to fireplaces, however, so a lot owner built a fireplace with a metal insert fireplace box and metal pipe that extended up the brick chimney. Although there was testimony about knowledge of the need for fireplaces to be constructed entirely of masonry, the court held that metal fireplace construction was permitted because there was no specific prohibition in the bill of assurance. Although it may have been the developer’s intent to limit construction of fireplaces to only masonry materials, this is not what was set forth in the written documents. This case demonstrates why it is imperative to understand the client’s intent and state it clearly. As seen here, if only the bill of assurance included the word "fireplaces," the developer’s goals would have been met.
Another situation establishing the need for the intent of the parties to be clearly reflected in the governing documents is Cooper v. Powell, 659 So. 2d 93 (Ala. 1995). The controversy arose when a lot owner placed two mobile homes on his lot and the adjacent lot owner brought suit alleging the other had violated the restrictive covenants that forbade further subdivision of the lots. The pertinent restrictive covenant stated that "lots or parcels initially subdivided and sold may not be further subdivided into smaller lots or parcels." Although the trial court found that the placement of two mobile homes on a lot was the equivalent of the subdivision of a lot, the appellate court disagreed and held it was the intent of the developer to restrict actual subdivision of lots and not the placement of additional mobile homes on lots. The appellate court’s conclusion was influenced by the developer’s testimony regarding his intent. Litigation could have been avoided, however, if the restrictive covenants clearly expressed whether or not it was prohibited to place more than one dwelling on a lot.
Overly Restrictive Provisions
Flexibility is a another key component to drafting well-reasoned documents. As has been discussed, times change, community interests and desires alter, and laws are amended or repealed. Unduly restrictive documents that do not permit growth in the future will only hamper the malleability of an association to adapt to a changing community.
This point is illustrated by Miesch v. Ocean Dunes Homeowners Ass’n, 464 S.E.2d 64 (N.C. Ct. App. 1995). In this case, residential condominium unit owners sued the board of directors of the association for adopting a policy to charge short-term renters of the condominium units a fee. The plaintiff unit owners rented their condominium units on a short-term basis and claimed they were monetarily damaged by the association’s policy. The plaintiffs contended that the association lacked the power to adopt and enforce this type of policy of collecting fees from anyone other than the unit owners.
Agreeing with the plaintiffs, the court found that the association lacked statutory authority to assess any guests or invitees of unit owners or renters of such units. The declaration gave the association "the power to levy and collect assessments against members of the [a]ssociation to defray the common expenses" and stated that the "common expenses of the [a]ssociation shall be shared by the unit owners in amounts determined by applying each unit owner’s proportionate share of ownership in the common areas and facilities to the total common expenses of the [a]ssociation, and as assessed against the unit owners, and their units. . . ." The result might have been different if the documents expressly authorized the assessment of only those owners whose activities, such as the leasing of units on a short-term basis, resulted in additional expenses being incurred by the association. Because the developer may not have contemplated short-term renting, the documents were too rigid to deal with such circumstances.
The effect of restrictive provisions is also apparent in McDonald’s Corp. v. First National Bank of Lake Forest, 624 N.E. 2d 376 (Ill. App. Ct. 1993 ). McDonald’s sought a declaration that it had entered into agreements with the developer that prevented the construction of a Taco Bell sign on the shopping center of which McDonald’s and the developer each owned a portion. The relevant agreements explicitly provided for two pylon signs to be erected in the shopping center at specific locations. Two pylon signs were noted. One pylon sign could identify only the shopping center, the supermarket, and two other major tenants. The other pylon sign could identify only McDonald’s. Although the trial court found this language to limit construction to two pylon signs, the appellate court disagreed on the basis that there was no specific limitation on the number of signs allowed in the shopping center.
A dispute as to whether the reference to two signs was a complete limitation to the erection of more could have been avoided if the documents had clearly stated the matter one way or the other. Governing documents should be sufficiently clear so that the parties can understand their rights and obligations.
The cases discussed throughout this article provide only a small sampling of provisions that have either failed to meet the needs of associations or, alternatively, were drafted to meet such expectations. The key component to drafting good documents is to consider whether the document will serve community associations as they shift and evolve. Without being mindful of potential future situations and how they could affect an association, a poorly drafted document will not have a strong enough framework to endure unexpected change. But a well-drafted one will prevail.