Wednesday, January 16, 2008, 2:35 PM

Split COA Invalidates Restrictive Covenants

Yesterday the Court of Appeals (COA) held in a split decision that restrictive covenants were enforceable on the ground that they weren't sufficiently definite. The case is Southeastern Jurisdictional Administrative Council, Inc. v. Emerson. It is an important case about how to draft covenants for developments and whether owners/developers can lawfully collect service fees from lot owners when their restrictive covenants don't delineate the fees. The majority: Judges Bryant and Wynn. Judge Hunter dissented.

Plaintiff (the "Council") is the owner/developer of a development in which the defendants are lot owners. The Council assessed them with service charges for police protection, street maintenance, street lighting, drainage maintenance, administrative costs, and upkeep. When defendants refused to pay the service charges, the Council sued. The trial court upheld the service charges, and the lot owners appealed.

All three judges on the panel agreed with the standard for evaluating covenants. A covenant that imposes an affirmative obligation on a property owner (such as a duty to pay money) is strictly construed and unenforceable unless it is "sufficient definite" to assist courts in applying it. To be enforceable, it must contain an "ascertainable standard" by which a court "can objectively determine both that the amount of the assessment and the purpose for which it is levied fall within the contemplation of the covenant." The judges disagreed on how the standard applied in this case.

Two versions of covenants were at issue, with each applicable to different lot owners. The first version was a covenant binding lot owners to bylaws, rules, and regulations "hereafter adopted" by the Council, with the bylaws, rules, and regulations to be treated as if they had been a part of the deed. The covenant did not mention service charges. After the defendants bought their lots, the Council adopted a regulation requiring each owner to pay an annual service charge "in an amount fixed by" the Council for a variety of enumerated services (police protection, street maintenance, street lighting, drainage maintenance, administrative costs and upkeep of the common areas). The COA majority held that this was unenforceable because the covenant didn't specifically state an affirmative obligation to pay any money and the post-covenant regulation incorporated into the covenant wasn't sufficiently definite. "Defendants could not have foreseen from the wording of the restrictive covenants that they would be subject to assessments levied [after] they executed the deed." The problem was the lack of "an express authorization to levy assessments in the text of the covenants"; the covenants did "not explicitly authorize assessments and such power cannot be inferred from the ability to set rules and regulations." Thus, the fact that the covenant authorized the Council generally to adopt regulations wasn't good enough.

The other version of restrictive covenant (a later version) governed other lot owners in the development. This covenant, unlike the earlier one, provided for service charges. It said that each owner must pay an annual service charge "in an amount fixed by" the Council for various services enumerated in the covenant ("garbage and trash collection, police protection, fire protection, street maintenance, street lighting and upkeep of common areas"). It also identified the property subject to these covenants as "Hickory Hill, section one," and included a plat showing four lots. The COA majority held that, although the covenant contained an explicit authorization to collect service charges, "the authorizing clause is not sufficiently definite to be enforceable," because it does not "[1] give sufficient information to determine the amount of the assessment, [2] nor describe with particularity the property to be maintained, nor [3] give guidance as to the facilities actually maintained . . . ." In other words, to be enforceable, the majority seemingly would require (1) that the dollar amount of the charges or a methodology for calculating the dollar amount must be included in the covenant and (2) that all the properties benefited and maintained by the charges must be identified in the covenant.

Judge Hunter dissented. He deemed the covenants reasonable and sufficiently definite. He relied on the Supreme Court's observation that "[d]eclarations of covenants that are intended to govern communities over long periods of time are necessarily unable to resolve every question or community concern that may arise during the term of years.” Accordingly, Judge Hunter said, "homeowners' associations must be allowed some latitude, so long as the amendments follow the requirements of being reasonable and definite." With respect to the later and more specific version of the covenant declared unenforceable by the majority, Judge Hunter suggested that the majority's standard is absurd: "To hold that plaintiff should somehow determine the cost of maintaining 'garbage and trash collection, police protection, fire protection, street maintenance, [and] street lighting' for these four houses is to reduce the restrictive covenant to a logical absurdity," he wrote.

This much is clear: under the majority's decision, the enforceability of service charges assessed on many owners today may now be called into question; and careful consideration must be given to the drafting of covenants in order to satisfy the majority's "specificity" standard.

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