Wise V. Harrington Grove Community Association, Inc.

___ N.C. ___, (No. 428a02, Filed: 22 August 2003)

This decision results 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 where there is a lack of express authority in the organizational documents (the declaration, articles of incorporation, or bylaws). The Court held that the PCA does not grant defendant such a power, and reversed the Court of Appeals and trial court.

The (edited) facts set out by the Supreme Court are as follows: 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 of the Harrington Grove Homeowner's Association, Inc.". The declaration provides that all lot owners automatically become voting and assessment-paying members of the Harrington Grove Community Association, Inc. The declaration provides the defendant with various powers and obligations concerning enforcement of the covenants in the declaration, upkeep of the common areas, and maintenance of the subdivision's aesthetics. Defendant's articles of incorporation allow it to exercise "all of the powers and privileges and perform all duties and obligations of the Association as set forth in the Declaration." The defendant's bylaws vest the board of directors with all powers granted under the declaration. The bylaws also provide for the creation of an architectural control committee (ACC).

The defendant's board has adopted, amended and published "Architectural Standards & Construction Specifications." The ACC uses these standards to evaluate proposed construction projects for ACC approval. The standards in effect when this action arose impose 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 ACC approval for construction of a swimming pool on their lot. During construction, plaintiffs installed a retaining wall varying in height from eleven to twenty-seven inches. After learning of the retaining wall, the ACC revoked its earlier approval and retroactively denied plaintiffs' request for approval of the pool construction as to the retaining wall. By letter dated 13 May 1999, defendant alerted plaintiffs that the ACC had proposed the levying of a fine against plaintiffs for violation of the covenants found in the declaration. On 7 July 1999, defendant's board met to consider the fine and heard presentations from plaintiffs and the ACC. After the board meeting, defendant asserted that the wall was constructed without the required ACC approval and imposed a fine.

Plaintiffs filed the action seeking relief including a declaratory judgment that the attempt to levy a fine was ultra vires and void. The trial court, affirmed by the Court of Appeals, denied the 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.

In his dissenting Court of Appeals opinion, Judge Wynn observed that N.C.G.S. § 47F-3-102 applies the enumerated powers retroactively to a homeowners association "subject to" an association's declaration and articles of incorporation. Judge Wynn concluded that the defendant lacked authority to impose a fine because the declaration only authorized a lawsuit for damages or injunctive relief as defendant's remedy for a covenant violation.

The PCA was enacted in 1998 for the purpose of regulating the creation, alteration, termination, and management of planned subdivision communities. It applies to all planned communities in North Carolina created on or after January 1, 1999. Certain enumerated provisions also apply to older planned communities, such as Harrington Grove, which were created prior to January 1, 1999. N.C.G.S. § 47F-3-102(12) is the provision cited as providing the defendant legal authority to impose a fine for violation of the covenants.

The Supreme Court notes 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 engages in a summary recitation of some of the leading cases providing the common law doctrines associated with enforcement of restrictive covenants. The Court’s analysis of statutory construction as applied to the one in question is illustrative.

"‘Statutes in derogation of the common law . . . should be strictly construed.’ Stone v. N.C. Dep't of Labor, 347 N.C. 473, 479, 495 S.E.2d 711, 715, cert. denied, 525 U.S. 1016, 142 L. Ed. 2d 449 (1998). This is particularly true where a statute is "penal in nature," Elliott v. N.C. Psychology Bd., 348 N.C. 230, 235, 498 S.E.2d 616, 619 (1998), or where the statute "infringe[s] upon the common law property rights of others," Turlington v. McLeod, 323 N.C. 591, 594, 374 S.E.2d 394, 397 (1988). A fine is commonly defined as a "pecuniary punishment" or a "penalty." Black's Law Dictionary 759 (4th ed. 1968). Any statute authorizing imposition of a monetary fine is, therefore, necessarily punitive or penal in nature. Moreover, any fine upheld on the facts of the present case directly implicates plaintiffs' right to use their property as they choose. "Every person owning property has the right to make any lawful use of it he sees fit, and restrictions sought to be imposed on that right must be carefully examined . . . ." Vance S. Harrington & Co. v. Renner, 236 N.C. 321, 324, 72 S.E.2d 838, 840 (1952)."

The Statute in question provides 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 Court addresses 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 recites the strict construction doctrine concerning restrictive covenants replete with citations to the traditional leading cases. The opinion notes again that fines are not addressed in the declaration and notes 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 only enforcement remedies that are specifically provided in the declaration are 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.

The holding also expressly provides that it does not prevent homeowners associations formed after December 31, 1998 from fining their members in appropriate circumstances. "Automatic application of PCA provisions to homeowners associations created on or after 1 January 1999 may therefore be viewed as consistent with the reasonable legal expectations of buyers purchasing homes in planned communities created after that date. We note, however, that the relevant legal instruments creating a homeowners association may withhold the statutory powers described under N.C.G.S. § 47F-3-102 from a homeowners association, if those instruments expressly so provide."

The holding states that it "does not forbid defendant, or any other homeowners association formed prior to 1999, from taking advantage of the statutory powers created under the PCA, provided the legal authority for the exercise of those powers is properly established. Where the declaration of a homeowners association created prior to 1999 is silent as to whether an association has the power to fine its own members, but provides, as the instant declaration does, for amendment of the declaration provisions, the homeowners association may certainly obtain the power to fine its members as described under N.C.G.S. § 47F-3-102(12) by following the prescribed amendment procedure and by adding appropriate language to the declaration." We think it significant that in a footnote the Supreme Court notes that the PCA provides an amendment process for associations created prior to 1999. This amendment process only requires an 80% majority of owners entitled to vote. It could be argued that this provision is also in derogation of the common law rights of lot owners. Under the common law, covenant amendment requires unanimous agreement unless otherwise provided in the declaration. The footnote, while merely dicta, implicitly approves the amendment provision of the statute.