Are CC&Rs unenforceable adhesion contracts?

An Arizonan trial case caused me to revisit the fundamental question of: Are the CC&Rs unenforceable adhesion contracts?  As with CC&Rs being unconstitutional, I do not find any evidence that the courts have directly addressed this most serious question in the past.  Most related cases centered on the arbitration clauses in the CC&Rs.

The Arizona case was challenged with the court finding that the clause was unconscionable and beyond the reasonable expectations of the homebuyer.  The Arizona court wrote,

The arbitration clause is in the Declarations of Covenants and Restrictions. Although the terms of the purchase contract may have been negotiable, the terms of the Declarations were not subject to separate negotiation with each Unit purchaser. Therefore, the Declarations which contained the arbitration clause were in the nature of a contract of adhesion (my emphasis).

“Factors showing substantive unconscionability include ‘contract terms so one-sided as to unfairly surprise an innocent party, an overall imbalance in the obligations and rights imposed by the bargain . . . .” (quoting from Maxwell v. Fid. Fin. Servs. Inc., 907 p .2d 51, an Arizona case).

However, as a trial court decision it lacks value as precedent to be cited in other cases.  It must be upheld upon appeal as CAI attorneys attempted to do with their constitutionality challenge to Arizona’s OAH statutes.  Will this decision pass muster on an appeal, if any?

Several cases from the Montana Supreme Court offer a favorable YES. But first I must explain the other criteria for an adhesion contract: the use of a standardized form.  A standardized form is basically one that is,

[D]rafted by one party (usually a business with stronger bargaining power) and signed by the weaker party (usually a consumer in need of goods or services), who must adhere to the contract and therefore does not have the power to negotiate or modify the terms of the contract. Adhesion contracts are commonly used for matters involving insurance, leases, deeds, mortgages, automobile purchases, and other forms of consumer [Legal Information Institute].

Now the Evil Empire and its loyal followers will argue that each Declaration is a unique contract prepared individually for each HOA.  Not really, as one can easily trace boilerplate from one Declaration to another, just like the boilerplate found in state statutes.  The point is, however, that the Declaration agreed to by each homeowner is one and the same Declaration making it a standardized-contract for that HOA!

 In the 2011 Montana Supreme Court Graziano v. Stock Farm HOA decision the homeowner argued that the arbitration clause was beyond his reasonable expectations and that he had received no notice or explanation of its contents.  The Court held that,

An adhesion contract is a standard form contract prepared by one party, to be signed by the party in a weaker position (usually a consumer), who adheres to the contract with little or no choice about its terms. The weaker party can either accept or reject the contract without the opportunity to negotiate its terms.

However, the Court rejected the CC&Rs as an adhesion contract, because the terms were negotiable, they were not beyond the homeowner’s reasonable expectations, and the owner was a sophisticated business person who knew better, so no surprise.

Although holding that the CC&Rs were not an adhesion contract due to the knowledge of the owner, a supporting Judge wrote,

Imposing and enforcing pre-dispute arbitration requirements in such circumstances is nothing more than a means of depriving landowners of their constitutional rights of access to the courts and to a jury trial under Article II, Sections 16 and 26, respectively, of the Montana Constitution.

 “[T]he landowner should not be bound by a pre-dispute arbitration clause imposed by the developer without negotiation on what amounts to be a “take it or leave it”—or, rather, “buy it and you’re stuck with them”—basis.

In the 2009 Woodruff v. Bretz Montana Supreme Court case (non-HOA, motor home case cited in Graziano above), the court found the arbitration clause to be an adhesion contract and unenforceable.   The explanation of “reasonable expectations” is highly informative and is relevant to HOA CC&Rs.

[R]reasonable expectations derive from all of the circumstances surrounding the execution of the contract, such as the consumer’s business experience and sophistication, any routine practice between the parties established through prior dealings, whether the consumer studied the agreement and comprehended its terms, whether the consumer had the advice or representation of counsel, and whether the challenged provision and the consequences of the provision were fully and adequately explained to the consumer. (My emphasis).

 As you can well see, the CC&Rs constitute unreasonable expectations of the homeowner, and we have more support for misrepresentation and fraud in the HOA selling process and in legitimate failure to be bound.

Who would sign the purchase contract if the homebuyer had full and complete knowledge of HOA-Land living conditions, and the legal restrictions contained in the CC&Rs? Expectations so foreign to the reasonable expectations of constitutional protections?    

Who would think that the legislature would not uphold the state constitution and laws that protect the individual property rights of their citizens and reject the standardized CC&Rs contract?  Who? 

It is an insult to the people!

Published in: on March 26, 2017 at 9:47 am  Comments (2)  

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  1. An important HOA case was won this year in Phoenix where the HOA Board was found to be unreasonable and lost the lawsuit. Thus if you have an HOA Board that is unreasonable, hire a good attorney and hold them accountable.

  2. Of course CC&Rs are adhesion contracts.

    1) The CC&Rs are written by and for the benefit of Declarants, while home buyers have no opportunity to negotiate the terms of those CC&Rs. Furthermore, during the period of Declarant (developer) control of the HOA corporate board, homeowners have no control over amendments to CC&Rs, becase the Declarant holds a controlling voting interest in the corporation.

    2) Even following declarant turnover to homeowners, CC&Rs remain de facto adhesion contracts for most homeowners, because the allocation of voting interests in the association directly impacts an individual member’s ability to modify the contract. There are multiple parties to the contract, and a supermajority of voting interests is necessary to amend CC&RS – in other words to change the terms of the contract. Therefore there is no equitable negotiation of the terms of the contract. One party wins and one party loses. Furthermore, even after turnover of Declarant control, in some cases, portions of the CC&Rs cannot be amended without the consent of the Declarant. (For example, the CC&Rs might declare that homeowner members cannot vote to removed the Arbitration only clause involving claims of construction defects.)

    3) The vast majority of home buyers are unsophisticated in matters of real estate law, contract law, and Constitutional law. And there is no adequate level of explanation of the CC&Rs (or the Bylaws, Articles, orr Rules and Regulations) prior to purchase. Also, the terms of most CC&Rs are so poorly written and vague that three different attorneys are often likely to provide three different interpretations.

    4) Yes, CC&Rs are form contracts. Although there is some variation from one association to the next, as George points out, everyone in the Association is subect to same CC&Rs contract. Variations to CC&Rs are no different than variations to homeowner insurance policies – where one can choose a different deductible, opt for replacement costs, or add riders for valuable jewelry or artwork. But the bones of the policy remain essentially the same. If insurance policies are adhesion contracts, then so are CC&Rs.

    5) As for enforceability, on the whole, adhesion contracts may be enforceable by either party — but individual provisions of those contracts may be deemed unenforceable because they are unconscionable, unreasonable, or vague enough to yield to the weaker part of the conract.

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