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).

Are there vibrant, competent, harmonious HOAs?

Community Associations Institute (CAI), is a national trade organization that claims it is dedicated to fostering vibrant, competent, harmonious community associations. I am well aware of HOAs that do not have any signs of abuse or rogue boards, and the members seem not to have any serious complaints.  The ‘happiness’ level is high.  In my view this can occur on a case by case basis where the board can be described as a benevolent dictatorship governing the HOA with reason and common sense.

However, this condition would also require a certain caliber of members who fully understand that they did not buy a residential home, but a home in a resort with the reasonable expectation of resort amenities and rules. As long as the board is benevolent and non-intrusive, the members are quite content with the conduct of their private government.

But, this is a special case where the HOA legal structure is not really needed, yet has been adopted for convenience. For example, time share resorts also have a homeowners association and the resort category of HOAs can be seen as “full year” timeshares. (The other categories are retirement HOAs with their expected rules and regulations — where active adult communities are more of a resort HOA — and residential HOAs with unreasonable expectations of authority).

The criteria for determining whether the HOA is a residential or resort HOA would depend on the eyes of the beholder, the homebuyer.  And that would depend, in part, on the advertising, catalogues, brochures, and statements by the developer, the HOA and the real estate agent as to the nature of the subdivision. Subdivisions are not classified in this manner except for saying they may have amenities.

I am also well aware of the many resort type HOAs that are not benevolent dictatorships.

In my long 14 years as a homeowner rights advocate (please see http://pvtgov.org/pvtgov/bio-hoa.pdf) I do not believe CAI has contributed to solving the 40 years of HOA problems, and thereby helping to create “vibrant, competent, harmonious community associations.