United States: Arizona Supreme Court Rejects Unforeseeable HOA Amendments

In Maarten Kalway v. Calabria Ranch HOA LLC, et al., the Arizona Supreme Court weighed in on the issue of whether a homeowners' association ("HOA") may rely on a general-amendment-power provision in its covenants, conditions, and restrictions ("CC&Rs") to place restrictions on landowners' use of their land. The court ultimately held that general-amendment-power provisions may be used to amend only those restrictions for which the HOA's original declaration has provided sufficient notice.

Background:

Maarten Kalway owned a 23-acre lot in Calabria Ranch Estates, a residential subdivision comprised of five lots located east of Tucson, Arizona. The general-purpose statement in the CC&Rs was to "protect the value, desirability, attractiveness and natural character of the Property.¹ Additionally, per the original declaration, "the CC&Rs could be amended 'at any time by an instrument executed and acknowledged by the majority vote of the owners' under the general-amendment-power provision."²

The owners of the other four lots in Calabria Ranch Estates amended the CC&Rs pursuant to the general-amendment-power provision—and without Kalway's consent or knowledge—to change and add certain definitions, create new restrictions, and enact new enforcement measures. Kalway sued, seeking a declaratory judgment to invalidate the amendments.

The trial court ultimately invalidated some of the changes in their entirety, and others only partially. Kalway appealed, arguing that all of the amendments were invalid without unanimous consent. The Arizona Court of Appeals disagreed and upheld the trial court's decision on the grounds that Kalway purchased his lot with "notice that the CC&Rs could be amended by majority vote and that the general-purpose statement in the original declaration was sufficient to provide notice of the amendments."³ The case was then appealed to the Arizona Supreme Court.

Analysis:

Arizona law generally "permits the amendment of CC&Rs by a majority vote if such voting scheme is specified in the original declaration."⁴ However, under common law, some amendments are prohibited even if they are passed by a majority vote if the original declaration does not give sufficient notice of the possibility of a future amendment. In other words, "amendments must be reasonable and foreseeable."⁵

In coming to its decision, the court found Dreamland Villa Community Club, Inc. v. Raimey⁶ particularly persuasive. In Dreamland, the homeowners collectively comprised a residential community with 18 sections, named Dreamland Villa. Dreamland Villa Community Club, Inc. ("DVCC") was a nonprofit corporation by volunteer members to provide recreational facilities to those who joined the club, membership in which was voluntary and required a membership fee.

Each of the 18 Dreamland Villa sections had its own set of CC&Rs, but only one of the 18 sections' original declarations had any mention of DVCC. Additionally, each of the original declarations had an "amendment by majority vote" provision—like the provision in Kalway. Under this provision, a majority of the homeowners voted to amend the original declarations to make DVCC membership mandatory and to impose annual assessments. DVCC subsequently brought claims against the minority homeowners who failed to pay annual assessments, prompting the minority homeowners to challenge the validity of the amendments mandating DVCC membership. The court of appeals held the amendments were not enforceable because the original declarations did not provide "proper notice that such servitudes could be imposed non-consensually under the generic amendment power."⁷

The Supreme Court in Kalway  adopted the same holding as Dreamland, namely, "an HOA cannot create new affirmative obligations where the original declaration did not provide notice to the homeowners that they might be subject to such obligations...Although contracts are generally enforced as written, in special types of contracts, we do not enforce 'unknown terms which are beyond the range of reasonable expectation.' CC&Rs are such contracts."⁸

The Court reasoned that "the notice requirement relies on a homeowner's reasonable expectations based on the declaration in effect at the time of purchase,"⁹ which, in this case, was the original declaration. "Allowing substantial, unforeseen, and unlimited amendments would alter the nature of the covenants to which the homeowners originally agreed"¹⁰ and is therefore impermissible. The CC&Rs need not give notice of the particular details of a future amendment, however the CC&Rs must give notice "that a restrictive or affirmative covenant exists and that the covenant can be amended to refine it, correct an error, fill in a gap, or change it in a particular way."¹¹ Importantly, future amendments cannot be "entirely new and different in character, untethered to an original covenant."¹²

The Court applied the principles gleaned from Dreamland  to the amendments in Kalway  and determined the general-amendment-power provision and general-purpose statement were not sufficient notice of future amendments. The Court noted that relying on such general provisions "would provide limitless justification for new amendments."¹³ Because these general provisions were not sufficient notice, the Court then analyzed each challenged amendment individually, exercising the blue pencil rule¹⁴ to modify the amendment or strike it entirely.

Examples of Impermissible Amendments:

The first of the amendments the Court found impermissible concerned the new definition of "Single Family Dwellings," which was undefined in the original declaration. The amendment required a dwelling "must have at least 60% living space and at most 40% [g]arage" space. The Court reasoned that "[n]othing in the original declaration restricting residences to single-family dwellings would put a property owner on notice that the [o]ther [o]wners could...limit the size of his residence." As such, this particular limitation was invalid, and the Court struck the space limitations.¹⁵

One impermissible amendment modified the application of setbacks. The original declaration only established setbacks for structures, and the amendment replaced the word "structures" with "improvements" and defined improvements in a way to include any and all changes, including patios, driveways, and landscaping. As a result, homeowners were now restricted from making any changes within 50 feet of their property line. Because there was no notice that the setback restrictions could be expanded to any improvement whatsoever, the Court modified the new definition of improvements to only apply to typical structures.

Another impermissible amendment related to voting. Specifically, the original declaration allocated votes per lot. The amendment to the CC&Rs added a provision stating the votes would remain unchanged in the event of a subdivision, which meant the voting power associated with a subdivided lot would be diluted. The original declaration did not provide for subdivision, however the amendment provision did provide notice that future amendments could account for subdivision, and no notice was provided that subdivision may result in a loss of voting power for new lot owners.¹⁶ The Court revised the amendment by striking the portion that established that new lots would not have an equal vote per lot.

Last, one of the amendments concerned types and quantity of permissible livestock. The original declaration allowed up to six livestock per 3.3 acres. The amendment limited the definition of livestock to only chickens, horses, and cattle. The amendment also capped the total number of permitted livestock units at 15, regardless of the size of the lot, thus the limitation was no longer proportional to the size of the lot. The Court noted the definition of livestock "was expressly 'not limited to' horses and cattle." The Court further noted one might reasonably believe chickens are not livestock and therefore not subject to any restrictions. The Court found the change to limit the definition of livestock to be a drastic, unreasonable change that was not foreseeable. Likewise, the Court found a landowner would not likely foresee a numerical cap unrelated to the size of the lot. Accordingly, the Court modified the amendment to strike the new limitations on type and number of livestock.

Amendments that were stricken entirely by the Court included a new limitation on the size, height and location of non-dwelling structures, and a number of provisions imposing limits and requiring approvals for improvements and subdivision of lots.

Conclusion:

In summary, the Court's decision in Kalway  is significant for all owners of property subject to restrictive covenants. According to Kalway, the original declaration must give fair notice of any enacted amendment so that the amendment is foreseeable to the property owner. According to the Kalway  decision, general purpose statements and general rights to amend the declaration are likely insufficient notice for amendments that are not directly related to an existing covenant or are not otherwise reasonably foreseeable. An amendment cannot be entirely new and different in character, untethered to an existing covenant, unless the original declaration provides notice of the possible amendment.

Footnotes

1. See Maarten Kalway v. Calabria Ranch HOA LLC, et al., Ariz. (2022) at ¶ 2.

2. Id. at ¶ 3.

3. Id. at ¶ 6.

4. Id. at ¶ 6, citing A.R.S. §33-1817(A).

5. Id. at ¶ 10.

6. 224 Ariz. 42 (App. 2010).

7.Id. at ¶ 13.

8.Id. at ¶ 14.

9.Id. at ¶ 15.

10. Id. at ¶ 16.

11. Id. at ¶ 17.

12. Id.

13. Id. at ¶ 20.

14. The blue pencil rule is used by a Court to strike unauthorized terms from a contract provision, or where the entire provision is invalid, to strike the provision in its entirety. Id. at ¶ 21.

15. Id. at ¶ 22.

16. Id. at ¶ 28.

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