PUD and Condo Acts Amended
Chris Burti, Vice President and Legal Counsel

Senate Bill 1167 appears to be a legislative repeal of the North Carolina Supreme Court decision in Wise V. Harrington Grove Community Association, Inc., ___ N.C. ___, (No. 428a02, Filed: 22 August 2003). This decision resulted from a declaratory judgment action brought by lot owners against the subdivision’s homeowners association. The question analyzed by the Supreme Court was whether the North Carolina Planned Community Act (the PCA) retroactively authorizes a homeowners association to fine lot owners for violations of restrictive covenants where there is a lack of express authority in the organizational documents (the declaration, articles of incorporation, or bylaws).

In 1999, the plaintiffs purchased a home in the Harrington Grove subdivision in Raleigh. All lots in the subdivision are subject to a recorded declaration of covenants, conditions and restrictions. The declaration provided that all lot owners automatically become voting and assessment-paying members of the Harrington Grove Community Association, Inc. The declaration provided the Harrington Grove Community Association with the authority to maintain the subdivision's aesthetics. The Association’s bylaws vest the board of directors with all powers granted under the declaration and also provide for the creation of an architectural control committee.

The Association amended and published "Architectural Standards & Construction Specifications." The architectural control committee used these standards to evaluate proposed construction projects for committee approval. The standards in effect when this action arose imposed fines on association members for violations of the architectural standards. These standards were never added to the declaration by amendment and have never been recorded. No provision of the declaration, the articles of incorporation, or the bylaws expressly provides for the imposition of fines on Association members.

Prior to closing on the purchase of their home, plaintiffs obtained the architectural control committee approval for construction of a swimming pool on their lot. During construction, plaintiffs installed a retaining wall and after learning of the retaining wall, the architectural control committee revoked its earlier approval. The architectural control committee notified plaintiffs that the architectural control committee had proposed a fine against plaintiffs for violation of the covenants by letter. The Association’s board met to consider the fine and heard presentations from plaintiffs and the architectural control committee. After the board meeting, defendant asserted that the wall was constructed without the required architectural control committee approval and imposed a fine.

The trial court, affirmed by the Court of Appeals, denied a motion for partial summary judgment ruling that defendant was authorized to levy fines. The trial court held that a power to impose fines under N.C.G.S. § 47F-3-102(12) is automatically and retroactively granted to homeowners associations created prior to 1 January 1999 unless the declaration or articles of incorporation expressly provide otherwise. The Court of Appeals held that defendant possessed such a power solely by virtue of the statute because the declaration does not expressly discuss the power to impose fines.

The Supreme Court held that the PCA does not grant defendant such a power, and reversed the Court of Appeals and trial court. The Supreme Court noted that the "retroactive application of the PCA potentially disturbs the common law rights of persons owning property in a planned community created prior to the PCA's enactment." The Court engaged in a summary recitation of some of the leading cases that provide the common law doctrines associated with enforcement of restrictive covenants

The Statute in question provided as follows:

"Subject to the provisions of the articles of incorporation or the declaration and the declarant's rights therein, the association may: . . .
(12) After notice and an opportunity to be heard, impose reasonable fines or suspend privileges or services provided by the association (except rights of access to lots) for reasonable periods for violations of the declaration, bylaws, and rules and regulations of the association[.]"

The Supreme Court addressed the authorization in the statute with the following;

"The language of N.C.G.S. § 47F-3-102 does not, in and of itself, authorize defendant to exercise the powers listed therein. First, the statute uses the word "may" when listing association powers. N.C.G.S. § 47F-3-102. The word "may," when used in a statute, is generally construed as permissive rather than mandatory. In re Hardy, 294 N.C. 90, 97, 240 S.E.2d 367, 372 (1978); Felton v. Felton, 213 N.C. 194, 198, 195 S.E. 533, 536 (1938). Therefore, the statute does not require homeowners associations to wield the enumerated powers, but merely provides them an option to do so. Second, the statute explicitly states that the listed powers are "subject to the provisions of the articles of incorporation or the declaration." N.C.G.S. § 47F-3-102 (emphasis added). The word "subject," in this context, means "contingent on or under the influence of some [other] action." Merriam Webster's Collegiate Dictionary 1172(10th ed. 1998). In common legal parlance, the phrase "subject to" is defined as "[l]iable, subordinate, subservient, inferior, obedient to; governed or affected by." Black's Law Dictionary 1594; see also State v. Coker, 312 N.C. 432, 435, 323 S.E.2d 343, 347 (1984) (construing the same phrase). Thus, the General Assembly explicitly acknowledged that the powers described in N.C.G.S. § 47F-3-102 were contingent on, subordinate to, and governed by the legal instruments creating a homeowners association."

The Supreme Court recited the strict construction doctrine concerning restrictive covenants replete with citations to the traditional leading cases. The opinion noted that fines are not addressed in the declaration and noted that they are penal in nature. There is a discussion of the provisions of the declaration for assessing owners as well as an extensive discussion of the application of contract construction principles as applied to covenants. "Assessments are collected solely for the purpose of fairly apportioning the cost of maintaining the subdivision's common areas. Article V provides a specific process for calculating assessments, as well as a means of enforcing and collecting arrearages. These charges clearly constitute an annual contractual obligation of all association members, however, and are not punitive in nature." The Supreme Court found that the only enforcement remedies specifically provided in the declaration were for a proceeding at law or equity, "to restrain violation or to recover damages resulting from any violation of the terms of the declaration."

This results in the Court concluding as follows: "Prior to the enactment of the PCA, restrictive covenants were generally enforceable only by an action at law for damages or by a suit in equity for an injunction. If the restrictive covenants at issue here were construed to grant defendant the power to fine, defendant would be permitted to impose financial punishment for construction of unapproved structures in addition to recouping any compensable loss or halting the undesired construction. As explained above, the declaration does not expressly describe any such power. In view of the lack of any such express language and considering the mechanisms for enforcement of restrictive covenants commonly accepted prior to enactment of the PCA, we cannot say that the parties to the declaration ever contemplated that defendant would have the power to fine homeowners in Harrington Grove."

"In short, the organizational documents for Harrington Grove do not expressly empower defendant to fine plaintiffs for violations of the architectural standards. In light of the legal rule that restrictive covenants must be strictly construed, Rosi, 319 N.C. at 592, 356 S.E.2d at 570, we decline to create such a power by implication. "The courts are not inclined to put restrictions in deeds where the parties left them out." Hege, 241 N.C. at 249, 84 S.E.2d at 899."

A fair statement of the holding is that an owners association of a subdivision developed prior to the effective date of the PCA may not incorporate the enumerated powers of the Act unless the declaration or organizational documents expressly provide for such exercise of powers. It is widely considered that this is counter to the intentions of the Act.

The new legislation modifies Chapter 47C, referred to as the New Condo Act and Chapter 47F, the Planned Unit Development Act. The addition of the words "unless the declaration expressly provides to the contrary" to the numerous empowering provisions in the Acts that provide retroactive authority would seem to override the ruling in Harrington.

The bill is lengthy and sets out of extensive provisions, but the amendments are consistent throughout the Acts and we will only provide illustrative examples. We chose this particular section as representative as it was the provision at issue in Harrington and included the black line changes for comparison purposes.

SESSION LAW 2004-109

AN ACT TO CLARIFY THE LAWS ON THE POWERS OF CONDOMINIUM UNIT OWNERS' ASSOCIATIONS AND PLANNED COMMUNITY OWNERS' ASSOCIATIONS, AS RECOMMENDED BY THE GENERAL STATUTES COMMISSION, TO PERMIT ELECTRONIC NOTICES OF OWNERS' ASSOCIATION MEETINGS, TO AMEND THE SECRET PEEPING STATUTE, AND TO MAKE CONFORMING CHANGES.

SECTION 4. G.S. 47F-3-102 reads as rewritten: "§ 47F-3-102. Powers of owners' association. Subject to the provisions of the articles of incorporation or the declaration and the declarant's rights therein, Unless the articles of incorporation or the declaration expressly provides to the contrary, the association may:

1. Adopt and amend bylaws and rules and regulations;
2. Adopt and amend budgets for revenues, expenditures, and reserves and collect assessments for common expenses from lot owners;
3. Hire and discharge managing agents and other employees, agents, and independent contractors;
4. Institute, defend, or intervene in litigation or administrative proceedings on matters affecting the planned community;
5. Make contracts and incur liabilities;
6. Regulate the use, maintenance, repair, replacement, and modification of common elements;
7. Cause additional improvements to be made as a part of the common elements;
8. Acquire, hold, encumber, and convey in its own name any right, title, or interest to real or personal property, provided that common elements may be conveyed or subjected to a security interest only pursuant to G.S. 47F-3-112;
9. Grant easements, leases, licenses, and concessions through or over the common elements;
10. Impose and receive any payments, fees, or charges for the use, rental, or operation of the common elements other than the limited common elements and for services provided to lot owners;
11. Impose reasonable charges for late payment of assessments and, after notice and an opportunity to be heard, suspend privileges or services provided by the association (except rights of access to lots) during any period that assessments or other amounts due and owing to the association remain unpaid for a period of 30 days or longer;
12. After notice and an opportunity to be heard, impose reasonable fines or suspend privileges or services provided by the association (except rights of access to lots) for reasonable periods for violations of the declaration, bylaws, and rules and regulations of the association;
13. Impose reasonable charges in connection with the preparation and recordation of documents, including, without limitation, amendments to the declaration or statements of unpaid assessments;
14. Provide for the indemnification of and maintain liability insurance for its officers, executive board, directors, employees, and agents;
15. Assign its right to future income, including the right to receive common expense assessments;
16. Exercise all other powers that may be exercised in this State by legal entities of the same type as the association; and
17. Exercise any other powers necessary and proper for the governance and operation of the association."

The bill also includes amendments to Chapters 47C and 47F permitting notices of meetings to be "sent by electronic means, including by electronic mail over the Internet, to an electronic mailing address designated in writing by the lot owner."