Community association law moves up

Seth G. Weissman

ALM Media

11-19-2012

Community associations, the nonprofit corporations that govern subdivisions, condominiums, planned communities and mixed-use developments, have become as common as fast-food restaurants. Nearly every new real estate development with multiple owners is governed by one or more community associations.

These private governments are not only more numerous than their public government counterparts, but their power and influence oftentimes is greater because, as private corporations, they are not subject to constitutional constraints.

Community associations were virtually nonexistent 40 years ago. As residents in communities began to share in the ownership of such things as swimming pools, clubhouses, tennis courts, landscaping and buildings, community associations emerged on the scene as a mandatory membership taxing and regulatory authority, established to ensure that these facilities were maintained on an ongoing basis and to help keep the peace among owners living in close proximity to one another.

A new body of law developed along with these community associations, principally dealing with balancing the rights of the individual residents versus the community associations that govern them. This article will discuss some of the legal issues and challenges that lawyers are grappling in this emerging area of the law.

Should there be limits?

Community associations, particularly in condominiums, always have regulated activities within residential units that negatively affect other owners. So, for example, it is typical for community associations to enforce elaborate sets of covenants that—among other things—may limit or prohibit noise, pets, the business use of units, leasing, excessive numbers of persons living in a unit, the types of window treatments owners can have that are visible from the outside of units and interior structural changes that could negatively affect other units. These types of covenants generally have been upheld, so long as they are reasonably related to protecting the health, safety, aesthetics or welfare of the community and do not violate laws such as those governing fair housing.

Practitioners regularly discuss whether there should be limits on the degree to which community associations can regulate what goes on inside units. The answer appears to be no, provided that the covenant benefits the community and is not arbitrary, capricious or grossly unreasonable.

Community associations in some high-rise condominiums are beginning to debate whether to adopt covenants restricting smoking inside of units. Should the rights of individual owners to be left alone in their homes outweigh whatever health benefits might result from not having cigarette smoke enter the air handling system that serves the building as a whole? While there have been few reported cases on this particular issue, courts generally have deferred to community associations in deciding how best to govern the communities they are serving.

Courts tend not to substitute their judgment for that of the community, particularly when the covenant in question has been approved by at least a majority of the owners. If there is a recognized health benefit to prohibiting smoking inside of units, a covenant approved by the owners that prohibits prohibiting is likely going to be upheld. However, if the covenant prohibited smoking on an exterior patio or balcony where the health benefits may be negligible or nonexistent, the enforceability of the covenant likely will be a closer question.

One related question periodically discussed by practitioners is whether there should be a difference in judicial review between a covenant that was in the original declaration of covenants versus one that was added to the declaration by amendment at a later time. Owners who do not like a particular covenant amendment often complain bitterly than they should not be bound by restrictions that were not in place when they bought their residences.

The contrary argument, of course, is that all owners bought knowing that amendments could be made to the covenants, so why shouldn't a super-majority of the homeowners be able to approve amendments?

To date, courts generally have not created a distinction between original covenants and those adopted at a later time by amendment so long as the new covenant does not fundamentally alter the scheme of development in a community.

Covenants try to reach indoors

Another question with respect to unit interiors is whether the association's regulatory power should extend to requiring owners to affirmatively take an action rather than merely restricting or prohibiting the same. For example, should a community association be able to require owners to install hard wired smoke alarms in their units for the benefit of the community as a whole?

Whether these affirmative covenants are enforced likely will depend on how broadly the covenants are written. However, since assessment obligations are a good example of an affirmative covenant that has already been upheld by our courts, it would appear that other reasonable affirmative covenants will similarly be upheld.

As private governments, the actions of community associations are not subject to scrutiny under our U.S. Constitution or state constitutions. As such, it is common, for example, to see community associations prohibiting various forms of speech, such as political signs, that are protected against intrusion by public governments.

Should there be a point where the size of the community is so large or its appearance and operation so like a small town that a finding of state action would be appropriate? In the company town case of Marsh v. Alabama, the Supreme Court of the United States found that there can be some circumstances where constitutional protections must be afforded to persons on private property.

While courts generally have yet to tackle this issue, it is clearly coming as community associations get larger and perform more quasi-governmental functions.

Does the model work?

The viability of the business model for community associations is related to two premises. The first is that all owners will want to pay their fair share of the common expenses of the community association to protect the value of their individual residences. The second is that owners, by spreading the cost of community amenities and services across the entire community, can enjoy more and better services than might be available to them in other housing without being unduly burdened.

The downturn in the economy over the last five years has severely tested these two premises.

What many members of community associations are beginning to realize is that they effectively are in a business partnership with partners they did not choose and who may have different values than themselves, including not paying their bills. For the community association business model to work, owners need to have confidence that they will not be stuck having to pay more than their share of the expenses because their neighbors are not paying at all.

This has left practitioners scrambling to figure out how to strengthen the assessment collection rights of community associations. Many states are considering or have passed laws granting community associations expedited foreclosure rights when owners do not pay and are making mortgage lenders obligated to pay some portion of the unpaid assessments (usually six months' worth) when they foreclose on a property.

The theory behind "super-lien" statutes is that if lenders did not properly underwrite those who could afford a mortgage to buy a home in a community association, they should share in having to pay at least a portion of the assessments owning to the community association to help keep it afloat.

A new generation

Practitioners also are beginning to discuss whether this next generation of homeowners will want the same types of covenants as their parents. As a result, we are already starting to see new covenants protecting the rights of owners to have such things as solar panels, vegetable gardens, compost piles and rain barrels to hold water for irrigation purposes.

There also is some debate on whether this next generation will be as concerned as their parents about having strict controls on the design and appearance of homes and landscaping.

Some portion of this next generation appears to be more tolerant about allowing for the mixing of architectural and landscaping styles within the same community. They see diversity in architectural style and use helping to create vibrant living environments.

As a result, unlike the communities of today, we may see more communities in the future where a modern house may be next door to a more traditional home or where a house with a lot of grass may be next to a home with a xeriscape landscape. While there may be greater tolerance for diversity in design, this acceptance does not seem to extend to owners who are not keeping up their homes and yards.

In addition, in communities where owners are living in close proximity to one another, the expectations of the next generation actually may be higher than their parents with regard to wanting the community association to enforce covenants designed to ensure that owners do not unreasonably disturb neighbors.

At the end of the day, changing consumer preferences always are quick to be reflected in covenants since developers are very focused on being able to sell houses.

Covenants generally have been upheld, so long as they are reasonably related to protecting the health, safety, aesthetics or welfare of the community and do not violate laws such as those governing fair housing.