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).

Restructuring HOAs: “benefit of the member” pt. 1

Mentoring: “inure to the benefit of the member”

Government of the members

Continuing my discussion of the Declaration’s intent and purpose[1] as expressed by “shall inure to the benefit of the member, ” the question arises as to how does the BOD accomplish this task when it has a contractual obligation to many owners. How can the BOD represent the individual interests of the buyer with those of all existing members? Must we accept the interpretation of “member” in the Declaration to really mean “members”? Really!

This concern is of importance and not a mundane, trivial concern because it involves concepts and principles of representative democracy, as claimed by HOA proponents, the will of the people doctrine, vote of the majority, and obedience in conscience. It is relevant because the HOA is not subject to municipal law or the Constitution, but under a binding, private contractual agreement. HOAs are allowed to exist as outlaw governments, operating and functioning outside the laws of this democracy.

Much too often the courts and legislatures have treated the HOA as if it were a municipal government, ignoring the CC&Rs contract and misapplying municipal doctrine and precedent; without applying those aspects of the laws that protect the member’s constitutional rights. For example: allowing the HOA to tax its members — called assessments — with a right of draconian foreclosure, but providing a laughable “due process” known as “a right to a hearing” where the judges are the accusers and judicial civil procedure is an unknown.

Ask yourself: Is this the benefit being provided in the best interests of the members? I think not! And the legislatures do not have clean hands in this matter, not at all!

Maintaining an orderly HOA

The philosophical theory, simply stated, behind a democracy as a direct democracy is the voice of the people. But what does that really mean? First, it means each person gets to have his voice heard in the governance of his community or society along with all others. And that combined, aggregated voice is measured not so much as by shouting but by a vote of the hands or a ballot. Second, our US representative democracy the people elect representatives to speak their voice. In HOA governments members choose a board of directors to govern the HOA as their elected representatives, or their voice.

In both cases the practical application of the voice of the people has been reduced to a vote of the majority and the majority rule doctrine.[2] These were issues that the political philosophers of the Age of Enlightenment — Rousseau, Montesquieu, Voltaire, Adam Smith — had to contend with as necessary for an orderly society even though it was not a true, direct vote of the people. But what about the minority, those who disagreed with the majority position? Well, they had to obey the general will of the people represented by the majority even though they were on the losing side.[3] However, they may not agree in conscience especially if they firmly believe the law is unjust and not fair.

Former AG Meese wrote,

Through deliberation, debate, and compromise, a public consensus is formed about what constitutes the public good. It is this consensus on fundamental principles that knits individuals into a community of citizens.[4]

Where is the consensus of the HOA members to constitute the public good? To knit individuals into a true community? Surely not by a hand-me-down contract that the buyer must accept as is without any give and take.

Randy Barnett, Director of the Georgetown Center for the Constitution, wrote,

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.[5]

With respect to the courts and legislatures upholding tacit (implied) consent, Keith Wittington, Prof. Politics at Princeton, wrote,

Tacit consent purports to provide a rationale for obligating those of us who, by chance or choice, have not made their approval of the government explicit. . . . Perhaps most significantly, we are taken to have consented tacitly to government action if we continue to vote for government.[6]

Understand that when your HOA says the majority rules maintaining that it represents the voice of the owners just remember it’s just a means to maintain an orderly society and to grant the board the authority to govern. What about a member’s agreement in conscience?

This topic continues with Restructuring HOAs: “CAI influence on member benefits” pt. 2 with the CAI School to be posted soon.

Notes

[1] See “Restructuring HOAs – intents and purposes,” George K. Staropoli, HOA Constitutional Government (Feb 2020).

[2] State laws governing corporations provide the legal basis for BOD authority and powers. Robert’s Rules provides widely accepted procedures based on majority rule.

[3] For a summary of the will of the people see my Commentary, HOA consent to agree vs. “the will of the majority. For a detailed discussion of agreement in conscience and consent to agree see Randy Barnett, Restoring the Lost Constitution, Princeton Univ. Press, (2004); Keith E. Whittingham, “Chapter 5, Popular Sovereignty and Originalism,” Constitutional Interpretation, Univ. Press of Kansas (1999); Edwin Meese III, “What the Constitution Means,” The Heritage Guide to the Constitution (2005).

[4] Id, Meese.

[5] Supra n. 3, Barnett.

[6] Supra n. 3, Whittington.

 

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, seeConsent 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.