By Deborah Goonan, Independent American Communities
In 2012, California Attorney Tyler Berding published an article on his website, Condo Issues, making his case that an association governed community is purely ‘contractual.’
In Berding’s opinion, ‘community associations’ are not governments, because, in theory, members voluntarily agree to CC&Rs and Bylaws for the good of the collective interests of all members and stakeholders. In theory, he says, homeowners can choose to amend or even terminate the association.
The Contractual Community
Why Community Associations Are Not “Governments”By Tyler P. Berding, JD., Ph.D.
Excerpt:
Most of the law of community associations, both common and statutory, is based upon one fundamental concept–that the interests of the individual and those of the community must function in a kind of consensual harmony in order for the community association to work. That is, virtually every operation of a community association, and all of its authority, is derived from a private, contractual relationship among the owners–imposed by covenants which are recorded against each individual’s property. These agreements, in the form of the CC&Rs and corporate bylaws, are dependent upon the collective will of the parties to that contract–the owners, and others who may share an ownership interest, such as mortgage lenders–to keep the community in existence. The entity exists only with their continuing acquiescence. At any time, these owners, by whatever voting percentage is required, could terminate the community association by the simple expedient of amending the governing documents to eliminate it. Of course, the voting percentage may in some cases be as high as 100% of the owners. Also, the law of partition and corporate dissolution would have to come in to play in order to parcel out the common property, and the interests of lenders would have to be considered, but at least in theory, it can be done.
Read entire article:
http://condoissues.blogspot.com/2012/01/contractual-community.html
Clearly, Berding’s view of common interest communities is based in theory vs. reality. The difficulty in obtaining consensus, let alone a unanimous vote, to terminate a ‘community association’ leads to the reality that the vast majority of owners will be stuck living with the terms of an impractical, unworkable contract.
More recently, and by contrast, California’s judiciary has handed down some important rulings, concluding that HOAs are quasi-governmental, as highlighted by attorney Adrian Adams of Adams Stirling law firm. Adams points out that many association boards share a similar governance structure to that of a small town or city, and provide similar services as well.
Legal opinions on the issue are a source of controversy and much debate.
So, are HOAs, condos, and housing co-ops quasi-governments, or are they contractual communities?
As a self-educated, well-read, non-attorney who has spent the past six years learning about why association-governed communities exist and what makes them tick, here’s my more nuanced point of view:
Association governed communities are, by and large, private entities — most of them corporations—to which state governments have inappropriately granted unrestrained police powers, well beyond powers normally reserved for government.
Allow me to explain.
What is meant by “police power?”
The legal definition of police power is as follows:
Definition from Nolo’s Plain-English Law Dictionary
The fundamental right of a government to make all necessary laws. In the United States, state police power comes from the Tenth Amendment to the Constitution, which gives states the rights and powers “not delegated to the United States.” States are thus granted the power to establish and enforce laws protecting the welfare, safety, and health of the public.
Further explained, at USlegal.com, in terms of municipal powers:
Police power does not specifically refer to the right of state and local governments to create police forces. The exercise of police power can be in the form of making:
laws, compelling obedience to those laws through physical means with the aim of removing liberty;
legal sanctions; or
other forms of coercion and inducements.
Police powers of a municipality are a major function among various governmental functions. Police power extends to all appropriate ordinances for the protection of peace, safety, health, and good morals of the people. General welfare is a generic term to describe police power[ii].
The primary function of police power is the promotion of public welfare. Coercive measures are adopted in police power to regulate threats to public interest[iii].
Generally, a municipality exercises police power by adopting ordinances. A municipality issues ordinance in order to:
promote public welfare;
provide for the safety and comfort of its inhabitants; and
declare and prevent nuisances[iv].Preservation of public health is one of the significant aims behind exercising a state’s police power. A citizen can hold property safely only when municipal corporation exercises police power validly and cautiously.
Police power permits passage of general laws for the entire municipality and special laws applicable to particular localities, highways, rivers, streets, and limits of a territory or a city[v].
Building regulations issued by a municipality is an exercise of police power[vi].
Abatement of nuisances, as a means to promote the public health, safety, and welfare, is a valid goal of the municipal police power. A municipality has the authority to investigate, declare, and seek the abatement of nuisances
Police power of a municipality includes the power to prevent an anticipation of danger to come. There must be an active and earnest interest to protect the public. In order to provide safety, a municipality is empowered to curb and restrain the individual freedom, any business or activity[vii].
The authority given to a municipality to enact ordinances regulating businesses includes:
the authority to charge a reasonable regulatory fee to cover the cost of the regulation; or
a fee for the cost of a business failure[viii].
The right to exercise police power is an attribute of sovereignty.
Police power is of vast and undefined extent and municipalities have wide discretion while exercising it[ix]. However, although broad, police power is subject to restrictions of state and federal constitutions. Police power should not infringe protections contained in the U.S. constitution.
Police power is thus limited by:
the rights guaranteed by the Constitution;
the necessity of a legitimate public purpose; and
a reasonable exercise of other powers[x].
Reading these legal definitions, it becomes crystal clear that enforcement of covenants and restrictions (CC&R) and board-enacted rules in your homeowers’, condominium, or cooperative association is, in many ways, similar to a municipality’s enforcement of its local laws, ordinances, and sanctions, to include zoning and building codes.
But keep in mind that powers granted to private association-governed communities typically extend to restriction of personal liberties and freedoms — even for matters that do not directly impact public health, safety and prevention of public nuisances.
For example, many restrictive covenants and rules enforce aesthetic standards based upon arbitrary uniformity and matters of personal taste. Owners and residents commonly complain that association boards and management agents engage in an over-reaching campaign to prevent what some particularly sensitive residents may consider to be an “eyesore.”
Beyond that, and even more outrageous, is that many association leaders attempt to use their legal powers to squelch freedom of speech and personal expression, including the freedom to speak freely with one’s neighbors on matters of political importance to the community.
The Three Layers of planned communities
It must be recognized that most newly developed common interest communities will consist of up to three distinct layers, and the contract is but one of those three layers.
Layer #1. The physical aspect of the common interest community, which, by definition, includes at least one portion of property that is either owned or maintained in common. In industry jargon, this is the “built environment.”
The “commons” could include shared infrastructure of a multifamily building, private roads and amenities of a master planned community, or, as is the case for the majority of small common interest communities, a single storm water ditch or pond, plus an entry monument.
Layer #2. The restrictive covenants (CC&Rs) that are imposed upon individual property owners, and that “run with the land,” meaning that these rules pass on to each new owner when the property is sold, until such time that they officially expire or are dissolved by a supermajority vote of affected homeowners.
It is this invisible layer of communities that is considered to be a mutual contract, agreed upon by owners and residents. CC&Rs or Declarations are also often the source of restrictions imposed by landowners and developers upon private property rights and individual liberties.
Although CC&R provisions may be in violation of U.S. and state Constitutions, proponents in favor of deed restricted property argue that the Constitution grants individuals the right to waive certain rights and freedoms by mutual contract. This, in a nutshell, is the legal argument that has been used for nearly a century, although the Fair Housing Acts of 1968 and 1988 have imposed limitations upon enforceability of certain CC&Rs restricting ownership by protected classes.
It should be noted that CC&Rs, commonly referred to as the “rules” of the community, can and do sometimes exist without the establishment of a governing body (HOA) to enforce those rules. When that is the case, individual property owners have the right to enforce CC&Rs against any of their neighbors by legal action through local civil courts. Essentially, disagreements over compliance with restrictive covenants are contract disputes.
Although CC&Rs are legally regarded as a contract, the nature of this governing document’s terms can be troublesome. Most housing consumers don’t understand that CC&Rs are one-sided legal documents that, very often, do not provide the owner or resident with equitable power to amend the terms of the contract, either before or after the sale.
And when developers supplement CC&Rs with special rights for themselves, the contract is fundamentally unfair. Not only are the terms of most “modern” CC&Rs onerous in terms of restrictions, they also skew to benefit declarant/developer and the HOA corporation to the detriment of individual rights.
Layer #3. The governance body of common interest communities, which often includes private entities such as homeowners’, condominium, or cooperative associations (collectively, I will refer to these as “HOAs”), but may also include public entities such as Special Tax districts.
As explained earlier in this post, HOAs have governance powers — police powers — that can resemble those of municipal government. For example, HOAs have the duty and authority to collect assessments, make rules, and enforce CC&Rs.
In most states, HOAs have the power to penalize owners and residents by imposing fines, removing privileges to use of common areas, removing the right to vote in the association, collecting the rent from the tenant of an owner in arrears on assessments, and to foreclose on liens to collect unpaid assessments, fees, and fines.
In short, HOAs significantly restrict and sometimes unduly threaten private property rights.
No other private organization in the U.S. has the legal authority to exercise these far-reaching powers: not employers, not businesses, not non-profit entities such as private schools or hospitals.
The controversy of extensive powers of HOAs is heightened by the fact that the CC&Rs these governing bodies have the power to enforce often violate basic Constitutional rights that U.S. citizens expect.
By contrast, Special Districts, chartered as public units of government, are constrained by U.S. and state Constitutions. In most cases, Special Districts are formed to administer maintenance of community infrastructure and recreational amenities, or to provide other public services.
Unfortunately, in most common interest communities, HOAs coexist with Special Districts, with HOA authority primarily limited to enforcement of CC&Rs.
On the HOA as Government vs. Business (contractual) spectrum
Now that the basics have been explained, how do we classify HOAs?
Are they quasi-governments or business-like entities based upon mutual contract?
The answer is not simple, and it depends upon the nature of the community.
In my view, each association-governed community has unique characteristics that determine whether it is best operated under a business model, a small government model, or some hybrid between the two.
So, let’s envision all common interest communities on a spectrum.
At one end of the spectrum, we have associations that operate as de facto businesses under contractual law. Think resort communities, vacation communities, and condo hotels, where the majority of owners are investors that rent their units for profit, on a long- or short-term basis. Perhaps a member or shareholder occasionally uses the unit for a family vacation or a seasonal getaway, but most owners reside elsewhere in their primary home.
At the other end of the spectrum, we have large master planned communities, with HOAs responsible for managing an entire range of typical municipal services — road maintenance, stormwater management, private utility services, exclusive community amenities, and perhaps even private fire protection and security. Most of the residents are owner-occupants or long-term tenants who live, work, and play in the community or within a reasonable commuting distance. Even though not technically cities, such communities operate very much like small cities, and are most likely to be viewed by their residents as quasi-governmental.
Many associations fall somewhere in between.
Size of the community is also a factor. Owners of a condo building with 3 units, with each owner intimately involved in managing common property, will probably view the arrangement as contractual. That is especially true if unit owners lease their units to tenants or vacationers.
Once the association exceeds 3 to 9 owners, and establishes a hierarchy with a board of directors that has considerably more power than owners and shareholders at large, the powers of an HOA’s de facto government model become apparent.
If the HOA’s members are mainly owner-occupants or long-term tenants, primarily a residential community, residents have a great expectation of preservation of their private property rights and civil liberties.
When the HOA’s membership shifts to a majority of investor-owners, it creates a source of conflict with owner-occupants, mainly because of opposing expectations. Owner-occupants often have an emotional attachment to their homes, and their home tends to be their largest personal investment, essential to their net worth. Investor-owners, on the other hand, have no emotional attachment, although they do rely on consistent cash flow from rental income.
To the investor-owner, the property is a business venture. The more invested the association member, the more likely the member will insist that the HOA be managed as it if were a business. The owner-occupant tends to view the HOA as hyper-local government, or as an extension of municipal or county government.
In other words, in terms of the nature of governance of a common interest community, it’s all in the eyes of the beholder. And that’s why the battle rages on as to the best way to govern and manage homeowners, condominium, and cooperative associations.
On eminent domain
One final thought with regard to Berding’s reference to Eminent Domain.
The right of individual property ownership is clearly paramount to the common interest in a community association. There is no mechanism, in the absence of severe damage or destruction[1], whereby a typical community association could take possession of an individual’s separate interest no matter how pressing the need, unless it were the result of foreclosure of a lien for non-payment of assessments, for example–a remedy provided under the contract upon which the community is created and funded. There is no community association equivalent to “Eminent Domain.”
On this point, I respectfully disagree with Attorney Berding. All one has to do is read multiple reports of condo terminations with forced sale of property owned by minority individuals in the association. The process of condominium termination is enabled by state law, for the purpose of encouraging private investment in redevelopment, thereby converting real property to its “highest and best use.”
Some legal experts would call that de facto Eminent Domain.
Regardless of where common interest communities may fall on the Governance Spectrum, one thing is clear.
A long as association-governing bodies continue to be based upon private, legally-binding contracts, with very few Constitutional constraints on power, state and federal law must stop enabling HOAs to operate under the color of law, with powers of real government. ♦
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