Tag: contract

Law review article criticizes HOA public policy

In her 44-page OK Univ. Law Review “Note” (2022) the author, Saige Culbertson, concentrates on the questions of agency relationships and duty of care. However, in order to discuss the question of agency relationships, Culbertson addressed many of the issues still causing problems in HOA-Land including the status of HOAs as quasi-governments, the validity of the CC&Rs “contract,” and the reality of maintaining property values.

With respect to agreeing to be bound, the author maintains in regard to the individual homeowner subject to the CC&Rs,  that

  • “HOAs use these contracts as a basis for their decision making because courts often presume the homeowners have a full understanding of their HOA’s obligations, because they have the duty to examine their contract for real property. The typical HOA contract is overly generalized and broad.
  • “When buying a home, a homeowner does not often have the option to not join. Homeowners also have little-to-no choice of which actions the HOA may take on their behalf, or, crucially, any actions taken by the HOA for any purpose.  
  • “However, the lack of mutual assent is constant throughout the relationship with the HOA. At the beginning, the homeowner might not have agreed to a relationship with the HOA, and those who have agreed might not have a full understanding of the rules of the HOA.
  • “[S]ome courts and scholars argue that HOA contracts are a form of adhesion contracts. Adhesion contracts are exclusively pre-determined by a single party and are presented as “take it or leave it,” while the non-drafting party has no room to negotiate.”

With respect maintaining property values, Culbertson is concerned about “The Fictional Purpose of a Homeowners’ Association,”

  • “The Community Association Institute recently reported 71% of individuals believed their community association rules ‘protect and enhance property values.’ While this belief may have been true in 2005,  more recent research indicates otherwise. 
  • “[A] study found that “[p]roperties located in HOAs do not appreciate faster, on average, than properties not located in any type of neighborhood government”

 and cites this study by Robertson,

  • “[A] 2021 study conducted by former Yale Professor Leon S. Robertson found that “[c]urrent sales price[s] [are] related to property characteristics and local market conditions[,]” and that “sales prices do not reflect the efficacy of homeowners associations to protect property values.
  • “Robertson remarked that “[s]tate and local laws that sanction homeowners associations and allow their coercive practices based on the premise of property value preservation are ill founded.”

With respect to quasi or local government, the author favors making “HOAs part of local government, founded in democratic ideals, and with regulation by the state or municipality,”

  • “The nature and purpose of the HOA are so closely linked to that of local government that . . . clearly give rise to a special sense of responsibility . . . . This special responsibility is manifested in the . . . requirements of due process, equal protection, and fair dealing. The severity of the risks associated with the substantial overreach by HOAs is further shown by actions depriving individuals of their basic rights.
  • “[U]pon analysis of the association’s functions, one clearly sees the association as a quasi-government entity paralleling in almost every case the powers, duties, and responsibilities of a municipal government. As a “mini-government,” the association provides to its members . . . . [citing Cohen v. Kite Hill Cmty. Ass’n, 142 Cal. App. 3d 642].
  • “The lack of checks and balances on HOA actions is a national problem and homeowners are often left with no remedy for violations of their rights. The need for regulation of HOA activities, and further federal protections for individuals, is especially apparent . . . .
  • “[H]omeowners should urge their local government to increase regulations on HOAs to protect their fundamental rights as Americans. States should therefore pass legislation to make HOAs part of local government, founded in democratic ideals, and with regulation by the state or municipality.”

Source: OK Univ. Law Review (PDF download).

AZ SC in Kalway holds CC&Rs as “special contracts”

Author’s note:  I make extensive use of direct quotes in order to avoid my interpretations “leaking” through.

The Arizona Supreme Court in Kalway[i] threw some light on the controversy that HOA covenants and CC&Rs are valid contracts and are held as such.   The Court held that, my emphasis,

“CC&Rs form a contract between individual landowners and all the landowners bound by the restrictions, as a whole. . . . in special types of contracts, we do not enforce ‘unknown terms which are beyond the range of reasonable expectation . . . . CC&Rs are such contracts.  Because covenants originate in contract, the primary purpose of a court when interpreting a covenant is to give effect to the original intent of the parties’ with any doubts resolved against the validity of a restriction.”

With respect to the requirement for very important but ignored homeowner notice, the Court continued, my emphasis,

“The notice requirement relies on a homeowner’s reasonable expectations based on the declaration in effect at the time of purchase—in this case, the original declaration.  Under general contract law principles, a majority could impose any new restrictions on the minority because the original declaration provided for amendments by majority vote. But allowing substantial, unforeseen, and unlimited amendments would alter the nature of the covenants to which the homeowners originally agreed. . . . Thus, “[t]he law will not subject a minority of landowners to unlimited and unexpected restrictions on the use of their land merely because the covenant agreement permitted a majority to make changes to existing covenants.”

One of the most egregious injustices that I’ve come across is the failure of the courts to apply the full body of contract law to HOA covenants in CC&Rs.  Opinions and dicta refer to the CC&Rs simply as a contract, or an agreement interpreted as a contract — yet in spite of the above opinion — fail to protect the homeowner under contract law 101.  The Cornell Legal Information Institute lists the basic criteria for a valid contract:

 ‘The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.”

Added to this general description of a legal contract is the Opinion holding that the CC&Rs are special contracts that do not permit “unreasonable  expectations” and that the notice of reasonable expectations is set forth in the CC&Rs “at the time of purchase,” and the law will protect minority owners from any such expectations.   

As I have argued many times,[ii] the boilerplate  amendment process that binds non-agreeing owners solely on the basis of a majority or some super majority renders the original “contract” a meaningless piece of paper. 

Professor Barnett explains,

“A law may be ‘valid’ because it was produced in accordance with all the procedures required by a particular lawmaking system, [the HOA amendment procedure, for example] but be ‘illegitimate’ because these procedures were inadequate to provide assurances that a law is just.”[iii]

Conclusion

It should be evident to all that this constitutional issue of “signed the agreement” and are thereby bound to obey needs further thought. As it stands, homeowners in HOAs are subject to special laws, the numerous state HOA/Condo Acts, for special entities allowed to function as de facto private governments outside the protections of the US Constitution.

Notes

[i] Kalway v. Calbria Ranch, CV-20-o152-PR, ¶ 13 -16  (Ariz. March 22, 2022).

[ii] See HOA consent to agree vs. “the will of the majority”,  Contracts, the Constitution and consent to be governed and HOA Common Sense, No. 4: Consent to be governed.

[iii] Randy Barnett, Restoring the Lost Constitution, Princeton Univ. Press, (2004).

Desert Mountain opinion (AZ) constitutionality part 1

The Arizona appellate court ruling in Nicdon v. Desert Mountain[1] needs to be appealed to the AZ supreme court on color of law denial of fundamental rights to property; on violations of the equal protection of the laws.  While the issue at hand was an amendment to restrict short-term rentals to just 30 days, it raised several constitutional concerns.

It is unfortunate that the Court relied on earlier HOA case law as precedent.  When these older decisions are quoted and cited, they must be reviewed and rebutted along constitutional concerns. 

Disclaimer: Understanding that in spite of my 20+ years reading hundreds of federal and state supreme court and appellate court opinions, I am not a lawyer nor am I employed by a lawyer; I only offer my views.

. . . .

With respect to Desert Mountain, the following are quotes from the opinion  that I find contentious and worthy of constitutional challenges.

1.  “By accepting a deed in the Desert Mountain planned community, Nicdon became bound by the Declaration, including properly adopted amendments. . . . when [a] homeowner takes [a] deed containing restriction allowing amendment by majority vote, homeowner implicitly consents to any subsequent majority vote to modify or extinguish deed restrictions”.

Surprise! Surprise! “Implicit consents”  means not clearly stated. This is a reality hidden from and not made known to the buyer at closing by the builder, the HOA, or the real estate agent, thus raising full disclosure of material facts violations. Meanwhile the courts, and CAI, have repeatedly upheld the validity of the CC&Rs as a bona fide contract against homeowners.

2.  “In addition, in interpreting contracts, “we attempt to reconcile and give effect to all terms . . . to avoid any term being rendered superfluous.”  The Court accepts CC&Rs as a valid contract.  Based on (1) above, this is an unequal protection of the laws and a due process violation resulting from misrepresentation of material facts.

3.  “In adopting the Amendment, Desert Mountain properly followed the procedures laid out in its governing documents.”  Under contract law this can be seen as an invalid “agreement to agree.”   The homeowner raised the issue of an unreasonable addition to the CC&Rs, but the Court saw it differently.  The real argument, in my mind, was the invalid agreement to agree and therefore,  a taking of personal property without compensation not permitted under the federal and Arizona constitutions.

“Although no such restrictions explicitly appeared in the Declaration when Nicdon’s principals purchased their home, they could have reasonably anticipated further restriction or expansion on matters within the scope of the Declaration’s regulation.”

There are no grounds for holding that a member “could have reasonably anticipated further restriction or expansion on matters. . . .”  It’s dictum.  The governing documents are not set up for handling agreements to agree on broad and unreasonable amendments that are NOT negotiated with the members. Voting for the amendment is not negotiating. Many members speaking out on contract matters is not negotiating one-to-one. But, in order to make the HOA work, the amendment process, following public processes, rejects contract validity.  We have unequal protection of the law.

Also, is this an open-ended procedure  making the covenant invalid? “Some courts have concluded that an agreement to negotiate at a later date is an unenforceable agreement to agree. . . . But other courts have distinguished unenforceable agreements to agree from valid agreements to negotiate in good faith.”[2]

4.  “Given these provisions, as well as the comprehensive nature of the Declaration and its amendment procedures, a prospective purchaser of a lot in the community would reasonably be on notice their property would be regulated by extensive use restrictions, including limitations on renting of homes, subject to amendment in accordance with the Section 5.20 process.”

I would argue that a buyer would “reasonably be on notice their property would be regulated by extensive use restrictions” is  an abuse of discretion in that reasonableness is with regard to the content of the amendment and not the notice of an amendment.  It is obvious that there is no provision for negotiations with the homeowner.  The governing documents amendment provisions are set up as if it were a local government and not a one-to-one contract. It needs further explanation.

5.  “A restrictive covenant is generally valid unless it is illegal or unconstitutional or violates public policy” was quoted from the Restatement (Third) of Property (Servitudes) § 3.1(1). 

The Court added §3.1(1)),

 “this concept “applies the modern principle of freedom to contract,” which generally means that courts will enforce parties’ agreements “without passing on their substance.”. . . .  A restriction may violate public policy for several reasons, including if the restriction is “arbitrary, spiteful, or capricious.”

I will forego a discussion of freedom to contract[3] and the reliance on the Restatement of Servitudes,[4] which I find biased in its support of HOA and not an independent reporter on common law and court decisions.  Part 2 will go into these complex but highly relevant constitutional issues relating to the HOA legal scheme.

. . . .

What has been lacking in HOA litigation over the years, with all due respect to homeowner champion lawyers, is constitutional law expertise.  I’ve read too many cases that touched upon constitutional arguments like free speech, due process, and equal protection of the laws but failed to delve deeply into these defects in the HOA legal scheme.

  The broad approach successfully used by Justice Ruth Bader Ginsburg in her women’s rights litigation needs to be adopted here. And, as usual, CAI was there representing the HOA or by filing amicus curiae briefs.

References

[1]   Nicdon v. Desert Mountain, No. 1 CA-CV 20-0129 (April 29, 2021).

[2] The Lawletter Blog, The National Legal Research Group, (April 30, 2021).

[3] The question of  “freedom to contract” is explored by Randy Barnett where he argues that there are limitations. Restoring the Lost Constitution: The Presumption of Liberty, Randy E. Barnett, Princeton University Press, (2004).

[4] Restatement (3rd) Property: Servitudes (American Law Institute 2000).

Resurrecting the argument for a homeowners bill of rights

This demand for a homeowners bill of rights by homeowner rights advocates had its play back in the 1997 – 2008 period, some 10 years ago. There was:

  • the AHRC’s 1997 bill,[1]
  • Lois and Samuel Pratt’s 1999 bill,[2]
  • my 2000 address to the AZ Legislature[3],
  • the 2006 AARP bill of rights,[4]
  • and my 2008 “Members Bill of Rights” amendment to CLRC.[5]

And there are undoubtedly others that I missed. Deborah Goonan recently re-posted a 2015 article[6] speaking of no Bill of Rights and constitutional violations of the 14th Amendment.  In 2017 the California Legislature adopted a limited bill of rights dealing with member political free speech.[7]

A new look at homeowner rights is needed, one that takes a down-to-earth approach and focuses on the common CC&Rs covenants and bylaws that read like,

  1. If there are conflicts between the provisions of Arizona law, the Articles, the Declaration, and these By-Laws, the provisions of Arizona law, the Articles, and the By-Laws (in that order) shall prevail.
  2. these By-Laws [Declaration] may be amended only by the affirmative vote or written consent, or any combination thereof of Members representing at least 51% [67%] of the . . . votes in the Association.
  3. no amendment may remove, revoke, or modify any right or privilege of Declarant . . . without the written consent of Declarant

Over the years I’ve discovered that the courts have universally upheld the broad amendment covenant as generically stated in (2) above.  The basis of their decisions is the very dangerous and overly broad interpretation that homeowners agreed to be bound[8] by the CC&Rs and bylaws.   Note that (3) above carves out an exception for the Declarant that requires his explicit consent, while accepting the majority rule principle in regard to the members. But, this “acceptance” to be bound by majority rule violates a fundamental right of citizens in regard a governmental “taking” or eminent domain action.

In many instances the courts have required 100% consent when the amendment adds new covenants, covenants not found in the CC&Rs, the most notable being changing from a voluntary HOA to a mandatory HOA.  This would be inconsistent with (1) above that holds that the law of the land prevails, and which of course, the buyer also agreed to. But, CAI comes to the rescue and prevails in the courts that the CC&Rs and bylaws contain valid waivers and surrenders of fundamental rights, even to the extent of accepting implicit (not stated but presumed consent) waivers and surrenders as valid.

Hold on! It is long held legal doctrine that the surrender and waiver of these rights must be explicit, one by one. And that, under contract law, there must be a meeting of the minds with full consent and no misrepresentation in the buying process. I have concluded that,

Public policy today rejects constitutional government for HOAs allowing them to operate outside the law of the land. The policy makers have failed to understand that the HOA CC&Rs have crossed over the line between purely property restrictions to establishing unregulated and authoritarian private governments.

The point I wish to make is that the absence of any meaningful bill of rights that genuinely protects the rights of HOA members is ab initio (from the beginning) a rejection of democratic norms and institutions.  The HOA cannot, therefore, be considered democratic by any means regardless of the propaganda by CAI and other pro-HOA supporters.

Community associations are not governments — many years of legislation and court rulings have established that fact beyond a reasonable doubt. Yet they are clearly democratic in their operations, electing their leadership from among the homeowners on a periodic basis.

. . . .

The solution to that problem is not to replace democracy with tyranny, royalty, or some other form of government, but to work to make the democratic process better and to hold those elected accountable.[9]

Simply unbelievable!  (In face of subsequent advocate criticisms, CAI began speaking of HOAs as a business, and we are seeing more and more statements that when a homebuyer signed his real estate contract, he was actually investing in a business.  Unbelievable!  Shades of George Orwell’s NewSpeak from his novel, 1984, where people are indoctrinated to hold 2 opposing views at the same time, and be at peace.)

What is intentionally absent — yes, intentionally otherwise the renowned CAI layers would have to claim incompetency regarding the law – is a Homeowners Bill of Rights.  Can you imagine that if the HOA framers, those stakeholders, of the HOA concept had actually met and discussed with knowledgeable and informed public that there would be protections for homeowners?  Can you imagine?

What the absent, yet informed public, would have added was a Preamble to an Amendment to the CC&R that would have been like that found in the Bill of Rights:

 Preamble to the US Bill of Rights

“THE Conventions of a number of States, having at the time of adopting the Constitution, expressed a desire, in order to prevent misconstruction or abuse of its powers, that further declaratory and restrictive clauses should be added: And as extending the ground of public confidence in the Government, will best insure the beneficent ends of its institution:”

The basis for the BOR was a distrust of government and the need to further protect the people.  Regarding the HOA documents, the 9th and 10th Amendments, as applied to the HOA legal scheme, would prevent the broad interpretations that have been and are continuing being held by the courts.  No more generalities, except in favor of the members.  If it was good for America over 230 years, it must be good for HOA-Land!

Amendment IX

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Amendment X

The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

The 9th Amendment simply says that if it ain’t specified – enumerated — in the governing documents, it belongs to the membership.  No more broad interpretations of waivers and surrenders of rights.  The 10th Amendment simply says that if the members did not explicitly agree to certain HOA powers (delegated to), it belongs to the membership.

This is the argument and approach needed to get a Homeowners Bill of Rights accepted by state legislatures.  It should be a national campaign by all advocate groups in all states for their next legislative session.  There is time to organize and prepare.

 

References

[1] See “Short History” in co-opting the HOA “homeowners bill of rights”, Elizabeth McMahon, 1997.

[2] See A BILL OF RIGHTS FOR HOMEOWNERS IN RESIDENTIAL COMMUNITY ASSOCIATIONS (1999).

[3] Statement to AZ Legislative Homeowners Association Study Committee, 2000.

[4] A Bill of Rights for Homeowners in Associations, AARP HOA Bill of Rights, David Kahne 2006.

[5] Supra, n. 1. “CLRC” is the California Law Review Commission.

[6] Let’s Get Some National Attention on HOA, Housing Issues, Deborah Goonan, 2015 original post.  

[7] A California true HOA Bill of Rights (SB 407).

[8] For a summary of the issues regarding the agreement to be bound position, see “Consent to be governed, No. 4”, HOA Common Sense: rejecting private government.  The notes contain very important authorities on this issue.  (In only one case did a court reject this position because it felt that the amendment exceeded the reasonable expectations of the homeowner.  For example, having part of their assessments go toward a private entity unrelated to the HOA).

[9] CAI CEO Skiba in his April 2, 2008 Ungated blog entry.

AZ SB 1088 is an unconstitutional and selective impairment of a contract bill

Arizona’s SB 1088 bill seeks to invalidate CC&Rs that require approval by a homeowner to allow any visitor access to the homeowner.  It specifically deals with — and is only meaningful with respect to gated communities which are gated for a very good reason — not hindering process servers access to a homeowner defendant.  It is punitive with a $250 “civil penalty” for anyone violating this law.

Background 

Under our laws and judicial system a plaintiff must service notice of a lawsuit upon a defendant as required by the Constitution.[1]  It is well known that there are people who act to avoid being served notice, which stops any lawsuit from moving forward. However, the law does allow for posting the summons notice to the public notices page of a newspaper in the event the defendant cannot be personally contacted.[2]

Impairing the obligation of contracts

The proponents’ argument would be generally along the lines that “due process under the law” triumphs over any contract infringement violation as a matter of public policy and for the general good of the people. An HOA covenant cannot hinder constitutional due process of law and the equal application of the law to a person, not necessarily an HOA, who is suing a defendant in such an HOA.  It’s not fair they would cry, referring to the greater good served outside the HOA.

But, the bill seems to be unnecessary as there are other means to satisfy civil procedure process servers.  It would also not pass judicial scrutiny[3] required to deny constitutional rights under contract infringement.  The bill seems to be sponsored as a request from a constituent facing some problem that lacks merit, considering the alternative methods available for service notice by process servers.

Selective enforcement of the law

It is long held doctrine that a government cannot pick and choose what laws to enforce or to ignore, and still be seen as a legitimate government.  The entirety of the covenants in a declaration of CC&Rs — allegedly constituting the voice of the people in a private contract to not be bound by the Constitution and the laws of the land — contains many, many covenants that violate the protected rights of the people.

Yet the state stands idly by and does nothing to end these private contractual violations of the constitution’s requirement for the equal protection of the law.  The CC&Rs are a mockery of due process protections, of fair elections, of eminent domain protections, of cruel and unusual punishment by foreclosure rights, of contract law misrepresentation and full disclosure violations, of the failure to provide civil penalties against HOA violations of the law, etc.

They are either ignored or have the “blessings” of the legislature as a result of laws that coerce compliance with the HOA, cooperate with the HOA, or closely interact with the day-to-day operations of the HOA. Any of which would make the HOA a state actor subject to the Constitution.

SB 1088 is a selective impairment of contract obligations while other infringements of the laws are allowed to stand. Adopting this bill would be a mockery of the law.

 

References

[1] 14th Amendment, “Nor shall any state deprive any person of life, liberty, or property, without due process of law.”

[2] Ariz. R. Civ. P., 4.1(n). “Where the person being served . . . has avoided service of process . . . then service may be by publication  . . . . “ Also, Rule 4.1(m) allows for “alternative or substituted service.”

[3] Judicial scrutiny relating to constitutional rights requires a compelling and necessary government interest, not a general government interest, to deny protected rights.  See, in general, Arizona’s HB 2382 is an unconstitutional violation of eminent domain law.