Tag: Property Values

High Court Upholds Public Policies Against Restrictive Covenants

The issue of restrictive covenants often comes up in news or social media stories where a HOA or condominium demands that an owner take down an addition, a shed, a statue or some other architectural feature on the grounds that it offends the rules. The board claims that the rule is found in (or derived from) a document recorded in the land records encumbering all of the properties in the community. The board’s assertion of the restriction may come as a surprise to the owner. In a recent blog post, Does an HOA Disclosure Packet Effectively Protect a Home Buyer?, I wrote about how the existing legal framework fails to adequately disclose to the purchaser what it means to live in a HOA. That post started some great conversations with attorneys, realtors and activists about how consumers could be better protected during the sale process. Today’s post focuses on what the legal requirements are for a contractual relationship to arise between the community association and a resale purchaser who did not sign off on the restrictive covenants originally.

Restrictive covenants that bind future owners are a legal device that predate HOAs and condominiums by hundreds of years. Community associations derive their power to collect $$$ from and enforce rules against their owners through restrictive covenants. However, many owners are not aware that enforcement of restrictive covenants are disfavored by Virginia courts on public policy grounds.

Restrictive covenants are contract terms which, if enforceable, follow the property or the person around even after the contract between the original parties is over. They aren’t limited to real estate. For example, a pest control company may ask an employee to sign an agreement not to compete against the employer even after leaving the company. Courts are skeptical of contracts that restrict the ability of a worker to make a living in the future. For public policy reasons, workers should be able to reasonably put their skills to use in the marketplace regardless of what a written agreement might say. The courts enforce only very narrowly tailored covenants-not-to-complete in the employment context. Judicial precedent and the uncertainties of litigation make many businesses reluctant to sue former employees now working as rivals.

Courts disfavor restrictive covenants on real estate for similar policy reasons. Covenants that bind future owners narrow the usefulness of the property. Labor and property should be freely marketable without short-sighted, unreasonable restrictions. Such a policy protects property values and market liquidity.

The Supreme Court of Virginia still shares this viewpoint. On February 12, 2016, the Court decided Tvardek v. Powhatan Village HOA. That case was about the validity of an amendment to the HOA declaration, including its restrictive covenants. In ruling in favor of the homeowners, the Court reaffirmed the strict construction of covenants that run with the land, even in contemporary HOAs. Justice D. Arthur Kelsey’s opinion explains:

“The common law of England was brought to Virginia by our ancestors” in large part “to settle the rights of property.” Briggs v. Commonwealth, 82 Va. 554, 557 (1886). At that time, English common law had developed a highly skeptical view of restrictions running with the land that limited the free use of property. “Historically, the strict-construction doctrine was part of the arsenal of restrictive doctrines courts developed to guard against the dangers imposed by servitudes.” Restatement (Third) of Property: Servitudes § 4.1 cmt. a (2000).

Virginia real estate law generally views restrictive covenants as a threat to liberty. University of Virginia law professor Raleigh Minor prophetically wrote in his 1908 treatise, “perpetual restrictions upon the use of land might be imposed at the caprice of individuals, and the land thus come to future generations hampered and trammeled.” If only Professor Minor could see how property rights have eroded in many communities today.

The viewpoint of many people in today’s real estate industry and local governments is the opposite of what courts have traditionally held. Buyers are told that covenants protect their investments from barbarian neighbors who might do something to make the surrounding properties look undesirable. But as Professor Minor pointed out 100 years ago, these rules give an opportunity for capricious enforcement. Is the message of our contemporary industry an insight misunderstood by previous generations, an appeal to the preferences of certain buyers who dislike non-HOA neighborhoods or merely a sales pitch?

English common law recognized very few restrictive covenants running with the land. Those receiving judicial approval appeared to be limited to easements appurtenant “created to protect the flow of air, light, and artificial streams of water.” United States v. Blackman, 270 Va. 68, 77, 613 S.E.2d 442, 446 (2005); see also Tardy v. Creasy, 81 Va. 553, 557 (1886). Over a century ago, we noted that “attempts have been made to establish other easements, which the [historic common] law does not recognize, and to annex them to land; but the law will not permit a land-owner to create easements of every novel character and attach them to the soil.” Tardy, 81 Va. at 557. Since then, in keeping with our common-law traditions, Virginia courts have consistently applied the principle of strict construction to restrictive covenants.

The court applied this principle in the Tvardek case where the association sought to enforce an amendment to the declaration against certain owners who didn’t vote for it. As the court reaffirmed in this 2016 decision, restrictive covenants are not always enforceable. The Tvardeks opposed being deprived of their right to rent out their property. The covenant has to fall within a recognized category. The principle of “strict construction” works against the restrictor and to the benefit and protection of the owner.

A restrictive covenant running with the land that is imposed on a landowner solely by virtue of an agreement entered into by other landowners who are outside the chain of privity would have been unheard of under English common law. See generally 7 William Holdsworth, A History of English Law 287 (1925) (“Whether or not the burden of other covenants would run with the land, and whether or not the assignee of the land could be sued by writ of covenant, seem to have been matters upon which there is little or no mediaeval authority.”). Privity has long been considered an essential feature of any enforceable restrictive covenant. Bally v. Wells (1769) 95 Eng. Rep. 913, 915; 3 Wils. 26, 29 (“There must always be a privity between the plaintiff and defendant to make the defendant liable to an action of covenant.”). Many of our cases have recognized this common law requirement. See, e.g., Beeren & Barry Invs., LLC v. AHC, Inc., 277 Va. 32, 37-38, 671 S.E.2d 147, 150 (2009); Waynesboro Village, L.L.C. v. BMC Props., 255 Va. 75, 81, 496 S.E.2d 64, 68 (1998); Sloan v. Johnson, 254 Va. 271, 276, 491 S.E.2d 725, 728 (1997). We thus approach the statutory issue in this case with this historic tradition as our jurisprudential guide.

Someone is “in privity” with another if they have legal standing to sue them because he (or his predecessor-in-interest) was party to the contract that creates the rights at issue.  The court affirmed the common law privity requirement, rejecting any suggestion that it should be discarded as outdated. For this reason, the legal requirements that the association  disclose certain documents and the seller honor a right of cancellation of the purchase contract have the effect of establishing privity between the HOA and the subsequent purchaser. Do these statutes fairly balance the respective rights of resale purchasers and community associations?

The Tvarkeks did not contest that they were not bound to the HOA covenants that existed when they bought their home. Instead, they sought to have an amendment to the covenants declared invalid because the statutory procedures were not properly followed. If you are curious about the technical reasons why the court found this particular amendment invalid, there are other bloggers, such as Jeremy Moss, following community associations law developments in Virginia have written about Tvardek from this angle. An HOA may have hundreds of members. The membership changes every year. Most owners have never personally made any transactions with the developer or the owners who voted to amend the declaration of covenants. How can privity exist if the declaration can be amended without a signature from every owner? That’s where the legislature comes into play:

The Virginia Property Owners’ Association Act, Code §§ 55-508 to 55-516.2, expanded the concept of privity considerably beyond common-law limits. In general terms, the Act permits the creation of a restrictive covenant running with the land and enforceable against subsequent owners of the parcels covered by the declaration, whether or not they consent, so long as the association follows the statutorily prescribed procedures governing the association’s declaration and amendments to it.

The enactment of the HOA statutes do not wipe out the rule of strict construction of covenants that run with the land. Instead, the General Assembly expands certain exceptions to the privity requirement for the enforceability of restrictive covenants. The basic rule of skepticism holds. The Property Owners Association Act must be understood within the context of the common law.

One might think that the modern age of statutes would have marginalized the role of English common law, but this is not so. “Abrogation of the common law requires that the General Assembly plainly manifest an intent to do so.” Linhart v. Lawson, 261 Va. 30, 35, 540 S.E.2d 875, 877 (2001). We do not casually presume this intent. “Statutes in derogation of the common law are to be strictly construed and not to be enlarged in their operation by construction beyond their express terms.” Giordano v. McBar Indus., 284 Va. 259, 267 n.8, 729 S.E.2d 130, 134 n.8 (2012) (citation omitted). A statute touching on matters of common law must “be read along with the provisions of the common law, and the latter will be read into the statute unless it clearly appears from express language or by necessary implication that the purpose of the statute was to change the common law.” Wicks v. City of Charlottesville, 215 Va. 274, 276, 208 S.E.2d 752, 755 (1974).

Case law is very important to make sense of any HOA. Otherwise the statutes just seem to be an enablement of legal powers for the boards that are not found in the governing documents.

The Virginia Property Owners’ Association Act authorizes the creation and enforcement of restrictive covenants against nonconsenting landowners in a manner unknown to the common law. The General Assembly, however, policed the imposition of these covenants with a host of strict procedural requirements — not the least of which is the plainly worded command that no recorded amendment shall be “effective” unless it is accompanied by a certification verifying that the requisite majority signed the amendment or a ratification of it. See Code § 55-515.1(F). In effect, the General Assembly created something entirely new to the law (the right to form private associations having power over land use) while adding precautions to honor the common law’s ancient antipathy toward restrictions on the free use of private property.

The POAA is not some sort of freeway that allows boards to completely bypass the old traffic lights of the common law. As attorney John F. Faber, Jr. observes in his July 2016 Hampton Roads Realtor magazine article about Tvardek, “‘close enough’ does not count when interpreting statutes that allow broad application of restrictive covenants prohibiting the free use by owners of their properties.” In Tvardek, the court articulates three important, related legal protections for owners:

1. A restrictive covenant has to be expressly stated in a public land recording (or fairly implied by very narrow exceptions).
2. Restrictive covenants must fall within narrow exceptions to the general rule prohibiting them in order to be enforceable.
3. If the board relies upon the POAA to enforce the covenant but can’t show that it meets the strict requirements of the statute, it is out of luck.

Does this mean that an owner should disregard notices from the HOA or condo that there is a rules violation or monthly assessments due? Certainly not. Owners should presume that courts will enforce clear and validly adopted restrictive covenants. But what the board, property manager or other representatives of the association is tell the owner may not accurately reflect what the owner’s legal obligations actually are. The owner may not even have a complete set of the governing documents in her possession. In any dispute with an HOA or condominium, owners should see a qualified attorney to help them protect their rights.

For Further Reading:

Tvardek v. Powhatan Village Homeowners Ass’n, 291 Va. 269, 784 S.E.2d 280 (2016)

Photo Credit:

Geoff Livingston The Georgetowner via photopin (license)