CC&R's not a legal contract

A number of years ago my Brother and I were members of our association Audit & Finance Committee, and during that time we discovered what we believe were and still are serious violations of our CC&R's. It involved using association funds to pay expenses unrelated to the maintenance of the common areas and a resulting increase in member dues. The specifics are not important because that is not the issue I am writing about. After two years of trying to convince the Board to stop these actions we decided to exercise what we believed to be our right as members to enforce the CC&R's. The enforcement clause of our CC&R's states that they shall be enforced by "the Developer, the Association or by any owner".

We filed a breach of contract lawsuit citing specific violations of the CC&R's. Our association Board took the position that we did not have the right to sue for breach of contract because the association was not a party to the covenants. They claimed that the contract was between the property owners and the original developer, but not the association. This is in spite of the fact that the developer required the association to incorporate the entire CC&R document into their own by-laws as a condition of receiving title to any of the common areas, which they did. The Board argued that there was no contract whatsoever between the members (property owners) and the association, making it impossible for individual members to take legal action against the Board for CC&R violations.

Much to our surprise, the court of appeals agreed with the association Board. They did not provide an explanation, but simply stated that they agreed that the association was not a party to the covenants. The result is that the Board can continue to take action against individual members for any CC&R violation, but if the Board is in violation members can only challenge them via a derivative shareholder action rather than a simple breach of contract action. For years our members have believed that the CC&R's were a legally binding contract only to find out that is not the case, at least at our association.

I would like to know if this makes sense to anyone else, or if any other associations have had any similar experience.

Thank you.

That's a new one. I can't say I've ever heard that argument before. It also goes to point out that one should never try to guess how a court may rule. They don't always follow logic.

I think we'd have to read the CCRs to see how they were written. Maybe there's a clue in there.

I can see where the court decided the way they did. The association is a WHOLE of the homeowners. Which means as a WHOLE the association board is in charge of enforcement of the CC&R's. It is NOT an individual owners responsibility to enforce the CC&R's on other members at their free will. It is much like vigilantism.

Put it this way...If your neighbor puts an outhouse in the front yard in your HOA, it is NOT your responsibility to write them a letter telling them to remove it. Instead it is the BOARD of the Association who is responsible for contacting that owner and enforce the rules/violation. This is what the court ruling translates to.

Melissa, thank you for your response but I must disagree with you on two counts. First lets use your example of an outhouse in my neighbors yard. What if I report that violation to the Board and they either chose to do nothing or disagree that it is a violation. I believe that is why our CC&R's give "any owner" the right to enforce them as I said in my original post. If I believe that outhouse is a violation I have every right to take action as a member to correct that violation even if the Board decides not to, or more importantly, especially if the Board decides not to.

Second, I think maybe you missed the issue in my original post. The violation we are talking about is an over-assessment of the amount permitted by the CC&R's, not a property violation committed by another member. The Board is not going to take legal action against themselves and that only leaves the property owners (members) to take action. If the CC&R's were considered a legally binding contract on any party owning property in the association, then the members would be considered "parties" to the contract by virtue of the ownership of their lots and the association would be a "party" to the contract by virtue of their ownership of the common areas. I believe that was the intent of the developer and the reason the association and the individual members were both granted enforcement rights.

But, as I originally stated, the court ruled that there is no contract between the property owners and the association, which goes against everything I have ever read regarding the CC&R's.

Tom,
But if you do post something, be sure to leave out any references that include the name of your association.

Tom,

I agree with Tim, above. Simply because a court did not side with you in a particular lawsuit, does not mean your CCR's are not legally enforceable, but it does mean they can only be enforceable against parties to the Agreement. The CCR's are made part of each homeowner's deed - the Association itself did not enter into that Agreement but the homeowner's have. Since the Association is not a party to the contract, it cannot be sued for Breach of Contract.

At least in Pennsylvania, I believe you would have recourse, but you would have to sue against the proper charge.

Good luck.

Yes, I've seen this before. Personal knowledge.

A person I know had signed a not-to-compete agreement with his employer. He later left his employer and started his own company. His former employer then threatened to sue for breach of contract regarding the not-to-compete agreement. The case never made it to court.

Why?

The original agreement was made with company A. The agreement contained a clause stating that the agreement could not be assigned. The employer ceased doing business as company A and formed a new company called company B and retained the employee. No new not-to-compete agreement was negotiated, the employer believing the employee was still bound by the original agreement. When the employee left the company, the employer (now company B) threatened to sue based on the agreement made with company A. State law prohibited company B from suing because of a breach of contract with company A unless the contract could be assigned to company B by company A. But, the original contract contained a clause saying it couldn't be assigned, so the original contract was unenforceable. Case closed.

I disagree with this statement. I believe (at least in the case of single family homes) that the HOA is a requirement from the city before permits would be issued - as the city/county doesn't want to incur the additional maintenance requirements.

Developers/builders use HOA's a sales tools to attract potential investors/owners. I know of no official permits or applicatons specific to granting HOA status. The paperwork is simply the CC&R's and Articles of Incorporation. Which is what is turned over to the owners to use to run their own HOA.

HOA's were created as a way for the builders/developers to sell their properties by giving the sense that owners had "control" over their own domain. It wasn't just move in and deal with the neighbor next door with the junk cars in the yard...It was "That neighbor with the junk cars isn't allowed in this development and you have the tools to make sure that doesn't happen".

Developers/builders really make their money upfront. They buy the land for say 100K. Break that into say 10 lots. They sell those 10 lots at 40K a piece. A 300K profit. So throwing in a pool or a clubhouse is chump change. Having the owners pay the dues helps the developer/builder to pay the maintenance costs until all the lots are sold and developed.When the HOA is turned over to the owners that is when the real expenses. Continued maintenance on those amenities like pools, lawncare, and rule enforcement is where the real costs lies.

So HOA's are formed by developers/builders to attract buyers...Those buyers become owners...Those owners become and association because they are owners who bought what the developers/builders were selling...

The origination of the CC&R's is where we may disagree. It's not a requirement of the city, county, or state. A developer can still build without creating a HOA. It's when they file those CC&R's with the county they become one. Which is better business sense due to corporation taxation table versus individual.

Basically, the developers/builders out there realized if they call themselves a "LLC" or "corporation" their tax liability is smaller. In order for them to classify as a corporation they have to file documents saying they are a "LLC/corporation" in the business of home building/developing. So they create themselves HOA's to avoid tax liabilities. 20 - 30 years ago this wasn't a concept and laws were different.

HOA's have just become a trend amongst builders/developers out there. They build it, they will come mentatility. Once this trend dies down and laws change...HOA's will also come to pass...

Welcome to the "game"...You don't get rich unless you know how to play it. The cities, counties, or municipalities are realizing the game and play to it. It's now a game where we don't have a choice but to play anymore...It's also spreading though every state in the union. Not much recourse out there but to band together and change legislation...