Recently I have received a lot of questions from homeowners associations in planned communities regarding declaration amendments. Most of the questions are about procedure, member approval, and challenges to the amendment by members – basically, "are we doing this the right way?" These questions are understandable considering recent changes to the North Carolina Planned Community Act (the "Act") and a recent opinion issued by the North Carolina Court of Appeals. While there are many things to consider when an association amends its declaration, there are two determinations that an association in a planned community must make:
- The level of member approval necessary to amend the declaration; and,
- Whether the proposed amendment is reasonable and consistent with the original intent of the parties to the declaration
Residential planned communities created on or after January 1, 1999 are subject to the Act and may amend their declaration only with the "affirmative vote or written agreement signed by lot owners of lots to which at least sixty-seven percent (67%) of the votes in the association are allocated." The declaration may require a higher level of member approval, but the minimum level of member approval is 67%.
For planned communities created prior to the Act, it's not so easy. Until legislation enacted last year, planned communities formed prior to the Act amended their declaration solely based on the terms of their declaration and other governing documents. In 2013, the Act was amended to make the amendment section of the Act applicable to planned communities formed prior to the Act. The amendment provision of the Act now applies to planned communities created prior to the Act "unless the articles of incorporation or the declaration expressly provides to the contrary." If a declaration for a planned community formed prior to the Act contains a clear and unambiguous provision setting forth the procedure by which members may amend the declaration (by a majority of all members, for example), the provision in the declaration would appear to control over the Act. If however, a declaration for a planned community formed prior to the Act does not provide for member approval of amendments or contains ambiguous language regarding amendments, it is likely that the 67% approval requirement of the Act would apply. The application of the amendment provision of the Act to planned communities formed prior to the Act is new and has not yet been interpreted by a North Carolina appellate court. Until that time, those planned communities without clear amendment provisions in their declarations should follow the Act.
Reasonable and Consistent with the Original Intent of the Parties to the Declaration
For many years, the validity of amendments to declarations was considered based on the standard set forth in Armstrong v. The Ledges Homeowners Association and Southeastern Jurisdictional Administrative Council Inc. v. Emerson. Ledges and Emerson both provided that an amendment to a declaration must be reasonable in light of the contracting party's original intent. The Emerson court also considered the legitimate expectations of owners when determining whether an amendment to a declaration was valid. These two cases essentially created a "reasonableness" test when determining the validity and enforceability of amendments. This created a lot of uncertainty among community associations.
In 2013, the amendment section of the Act was revised to provide that "any amendment passed pursuant to the provisions of this section or the procedures provided for in the declaration are presumed valid and enforceable." This revision to the Act applies to any amendments to planned community declarations recorded on or after October 1, 2013. One of the reasons for this revision was to get rid of some of the uncertainty associated with the "reasonableness" test. As long as an amendment is passed pursuant to provisions in the declaration or in the Act, the amendment will be presumed to be valid. This new section of the Act has not yet been the subject of any case decided by the North Carolina appellate courts and we do not yet know how the courts will interpret and apply the law to amendments recorded after the effective date of the law.
Based on a recent North Carolina Court of Appeals decision, it is clear that the "reasonableness" test still applies, at least to amendments recorded prior to October 1, 2013. In Wallach v. Linville Owners Association, Inc., the North Carolina Court of Appeals considered the validity of an amendment to the declaration of a planned community recorded in 2011 and found that the amendment was invalid and unenforceable because the amendment "disregard[ed] the purpose of the Declaration's original provisions." The Court cited both Ledges and Emerson and agreed with the North Carolina Supreme Court's determination in Ledges that "every amendment must be reasonable in light of the contracting party's original intent." Although the 2013 revision to the Act may allow associations to amend their declarations without complying with the "reasonableness" and "original intent" tests established in Ledges, Emerson, and Linville, until we receive further guidance from our appellate courts, prudent associations should continue to make sure any amendments to their declaration are reasonable and consistent with the original intent of the parties to the declaration.
The laws regarding amendments to planned community declarations will continue to evolve, as is evident by the recent changes to the Act and the North Carolina Court of Appeals cases described above, and it is difficult to know exactly what rules and standards to follow when amending a planned community declaration. In order to best withstand challenges to declaration amendments, I recommend planned community associations follow these two minimum guidelines:
- Obtain Member Approval - Planned communities subject to the Act must obtain member approval pursuant to the Act (at least 67% of the total membership). Planned communities formed prior to the Act also should obtain member approval pursuant to the Act unless the articles of incorporation or the declaration clearly set forth a different amendment procedure to follow.
- Comply with the "Reasonableness" Test - Make sure the proposed amendment is reasonable and consistent with the original intent of the parties to the declaration.
This post is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this post without obtaining the advice of an attorney. If you have questions concerning this post, please contact Justin M. Lewis at email@example.com.