Many of us live in communities or subdivisions where each owner’s use of their property is governed and limited by certain restrictive covenants (“Covenants”), and many of these communities also have homeowners’ associations (“HOA”) charged with maintaining certain common areas located within the subdivision, enforcing the Covenants, and/or charging property owners annual assessments to cover the HOA’s cost of performing its duties as specified in the Covenants. As time goes by and situations change, HOAs often take action to amend the Covenants, but are those amendments always legal and enforceable?
There are several different types of community associations in North Carolina, each of which has a different statutory framework under which it must operate. One of the most commonplace is the North Carolina Planned Community Act (“Act”), which is governed by Chapter 47F of the North Carolina General Statutes. The Act generally applies to planned communities created in North Carolina on or after January 1, 1999, unless the subdivision has fewer than 20 lots or all lots are restricted exclusively to nonresidential purposes. Even if the planned community was created before January 1, 1999, a substantial portion of the Act will likely still apply to the planned community.
The process for an HOA to amend its Covenants is set forth in the Covenants themselves, but the process is also regulated by the terms of the Act. Generally, an amendment to the Covenants requires notice of a meeting of the members of the HOA and the affirmative vote of a certain percentage of all lot owners (and sometimes consent of the developer), although an amendment can also frequently be accomplished without a formal meeting of the HOA members, so long as the requisite percentage of lot owners sign a document agreeing to the amendment. Once approved, the amendment, just like the original set of Covenants, must be recorded with the office of the Register of Deeds in which the property is located.
If an HOA adopts an amendment to the Covenants and in doing so complies with all procedural requirements of the Act and the Covenants, will the amendment always be enforceable? In Armstrong, et al., vs. Ledges Homeowners Association, et al., 360 N.C. 547, 633 S.E.2d 78 (2006), the North Carolina Supreme Court clarified that covenant amendments are not necessarily enforceable, even if the proper procedures are followed by the HOA in connection with the amendment’s adoption. In Armstrong, the developer recorded Covenants restricting the use of all lots within the subdivision; however, the Covenants did not contain any provisions for the collection of dues or assessments from the lot owners. After the developer sold lots, the HOA decided to amend the Covenants to require lot owners to pay assessments for common expenses. A lot owner filed a lawsuit challenging the ability of the HOA to adopt such an amendment, since no such financial obligation was included in the original Covenants, which the buyer reviewed and relied upon before purchasing a lot within the subdivision.
The court in Armstrong stated that “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.” The court in Armstrong was not concerns with the content of the original Covenants. Instead, it focused on the content of amendments adopted by the HOA after buyers purchased lots in reliance on the content of the original Covenants.
For example, assume the original Covenants recorded by the developer made no mention of owners having any obligation to pay assessments/dues to the HOA. A potential buyer may have been looking for a community in which to live where he/she would not have to pay HOA assessments. That buyer would have purchased a lot within the community in reliance on the original Covenants (which made no reference to obligations to pay assessments/dues). If, after the buyer purchases his/her lot, the HOA amends the covenants to require owners to pay annual assessment moving forward, the buyer could take the position that he/she would have never purchased the property had he/she known that assessments/dues would be owed to the HOA on a recurring basis.
As another example, assume a buyer was looking for an investment property to purchase and lease. If the original Covenants contain no prohibition against owners leasing their property, it would be reasonable for the buyer to assume that he/she would be able to continue leasing his/her property in perpetuity. If, after the buyer purchased the property, the HOA amends the Covenants to prohibit owners from renting their homes, the owner could take the position that he/she would have never purchased the property had he/she known that the property couldn’t be leased.
Depending on the facts of the cases, the amendments described in the two examples above may be invalid/unenforceable, even if the HOA followed the proper procedures in adopting the amendments. The point to be taken from Armstrong is that North Carolina law requires that amendments to Covenants be “reasonable in light of the contracting parties’ original intent.”
Article Written by: Aaron Arnette for Neighbor's Magazine / September, 2024
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