Our law firm worked with the Costa Serena Architectural Committee in amending and extending its recorded Declaration of Restrictions (“DoRs”).  This process was the subject of a recent Court of Appeal decision.  The case of Costa Serena Owners Coalition v. Costa Serena Architectural Committee, 2009 Lexis Cal. App. 1165 contains important rulings for all California communities with recorded covenants, conditions and restrictions.

FACTS OF THE CASE

This case involved amendments to a recorded declaration of restrictions (“DoRs”) for the Costa Serena community.  The DoRs provided for the establishment of an architectural committee (“Committee”), and also contained architectural provisions and age restrictions for a senior housing development.  Costa Serena was first established in the 1970’s and was built in 7 phases.  Each phase had its own set of DoRs.  The amendment provision in each set of DoRs originally stated:

Subject to the provisions of paragraph[s] 16 and 27, the provisions of these restrictions, other than this paragraph, may be amended by an instrument in writing signed and acknowledged by record owners of at least seventy-five percent (75%) of the units located on the real property, which amendment shall be effective upon recordation in the Office of the Recorder of San Diego County, California.

In 1986, in response to a change in the law, the Committees for each of the seven phases recorded amendments to the DoR’s increasing the minimum age of residents from 45 to 55. Each amendment was signed by one or more individuals certifying they were members of the Committee and that the amendment had been approved by 75% of the owners in the corresponding phase.  KThe owner signatures were not attached.

In 1987, an amendment to the DoRs was recorded which consolidated the 7 phases into one development, subject to one set of DoRs and established one Committee.  The amendment also changed the procedure to amend the DoRs in the future by allowing a majority of the Committee to certify that the required percentage of owners voted to approve amendments.  Similar to the previous year’s amendment, the 1987 amendment did not contain the owner signatures, but a certification from the Committee stating the amendment had been consented to by 75% of the owners in each of the 7 phases.

A third amendment was recorded in 1999 which further changed the amendment provision by requiring amendments to be approved by over 50% of “all owners entitled to vote and casting ballots.”  The 1999 amendment was signed by members of the Committee who certified that the amendment had been adopted by a vote of the owners as required by the DoRs.

The original DoRs were due to expire on December 31, 2006, but by its terms, could be extended.  The extension provision stated, in pertinent part:

Each and all of the foregoing conditions and restrictions shall terminate on December 31, 2006, unless the owners of a majority of said lots have executed and recorded at any time within six (6) months prior to December 31, 2006, in the manner required for a conveyance of real property, a writing in which they agree that said Conditions and Restrictions shall continue for a further specified period . . .

In 2006, the Committee attempted to amend and restate its DoRs, using the amendment procedures contained in the 1987 and 1999 amendments. During the vote on the proposed restated DoR’s, plaintiff, a group of owners (“Coalition”) who no longer wanted the community to be a “senior housing development,” filed a lawsuit and successfully enjoined the Committee from tabulating the ballots on the restated DoRs.  The main basis of the Coalition’s claims was that the 1986, 1987 and 1999 amendments to the DoRs were not procedurally correct and therefore were void ab initio and could be challenged at any time.

The Committee then attempted to extend the existing DoRs by obtaining written consent (signed and notarized) by a majority of the owners in the entire development.  An extension document was recorded in September, 2006 which contained the signed/notarized consents of the Owners as an exhibit.  In November, 2006, additional consent forms were recorded.

The Coalition supplemented its lawsuit to include a challenge to the DoR extension.  The Coalition claimed that since the amendments were invalid, the development had not been consolidated and the Committee failed to prove that it obtained consent from a majority of the owners in each of the 7 phases.

TRIAL COURT PROCEEDINGS

In November, 2007, the trial court granted a summary judgment motion in favor of the Coalition.  The trial court, relying on several cases, including Taormina Theosophical Community. v. Silver (1983) 140 Cal.App.3d 964, determined that since  the three amendments had not been adopted pursuant to the required procedures in the original DoRs, they were void ab initio and could be challenged at any time.  Since the community had never been validly consolidated, he further found that the extension needed the consent of a majority of the owners in each of the 7 phases.

The trial court excluded from evidence, numerous consent forms signed by the owners on the basis that they did not conform to information on the deeds of the lots and therefore were insufficient to convey real property.  The exclusion of these consent forms resulted in the Committee being unable to prove that a majority of the owners in each phase had consented to extend the DoRs.

The trial court rejected the Committee’s contention that  challenges to the amendments were barred by the statute of limitations.  The trial court ultimately determined that as of January 1, 2007, no valid declaration  of restrictions or similar instrument existed which governed any of the lots in the Costa Serena community, including the age restriction.

PROCEDURAL CHALLENGES TO AMENDMENTS

On appeal, the focus was whether challenges to the procedure by which CC&Rs are amended can be brought at any time which, if successful, would render the amendment void.  The Coalition’s only challenge to the amendments was  that they were enacted in a manner that failed to conform to the requirements of the DoR provision that outlined how they could be amended. The court noted that there was no claim that the amendments were procured by fraud or some other method that would undermine the validity of the amendments from their inception.

The court of appeal rejected the trial court’s reliance on the Taormina case:

The case does not speak to the issue here-i.e., whether an amendment that was not enacted pursuant to the procedure set out in the provisions of a declaration of restrictions is void ab initio, or merely voidable. The Taormina court never expressly considered the question whether the parties’ challenge to the amendment at issue in that proceeding would render the amendment voidable or rather, void ab initio.

Since the challenge to the amendments in Taormina  were filed within three years of the recording of the amendment in question, that court did not focus on the timeliness of such a challenge.

Rather, the Costa Serena court concluded that the Coalition did not show that the amendments were void ab initio, but that, at most, the amendments may be voidable

The court of appeal then analyzed the Committee’s contention that the Coalition’s challenge to the three amendments was not timely brought under the four year statute of limitations of Code of Civil Procedure Section 343.  The court recognized that other cases have applied this statute in cases seeking to cancel voidable instruments.  The court concluded that the four year statute applied in this case to the Coalition’s claims seeking to invalidate the three amendments.

The next question was when the four years would begin to run.  The court recognized that the statute of limitations begins when a “manifest and palpable” injury occurs.  If the amendments were ineffective due to the manner in which they had been adopted, the court reasoned that the “injury” would have occurred upon recording of the amendments since that is when the amendments were put into effect.  The court also noted that recording the amendments served to provide notice to anyone who may have wished to challenge their validity.  The court held that recording the amendments triggered the beginning of the four year statute of limitations.

Since the Coalition’s 2006 lawsuit was filed 20, 19 and 7 years after the respective amendments were recorded, its claims challenging the amendments were time-barred.  The appellate court ruled that the trial court erred in determining that the three amendments were void.

VALIDITY OF DoR EXTENSION

The appellate court then examined the validity of the 2006 DoR extension.  Since the 1987 “consolidation” amendment was deemed to be valid, the appellate court rejected the Coalition’s contention that a majority of owners in each of the 7 phases had to consent to extending the DoRs. Since the Committee proved that a majority of the total lot owners within Costa Serena had consented to the extension, the extension was valid.

Furthermore, the appellate court ruled on the evidentiary objections to the Owners’ consent forms and held that is that it was not necessary to have each homeowner execute and record a document that would be sufficient to convey property in order to comply with the DoR extension provision.  Rather, the extension document itself must comply, which it did.  Therefore, the extension of the DoRs was valid.

The appellate court reversed the trial court’s order and remanded the case to the trial court to enter judgment in favor of the Committee.

WHY THIS CASE IS IMPORTANT FOR HOMEOWNERS ASSOCIATIONS

Although the Costa Serena community was not a “common interest development,” the holdings of this case would apply to any community with recorded declaration of covenants, conditions and restrictions.  Occasionally, prior amendments to CC&Rs, on their face, do not conform to the procedures for their adoption.  Based on the holdings in this case, we now understand that in those circumstances:

1.    CC&R amendments that did not conform to the procedures required to be followed are not void ab initio, but are “voidable.”  This means that they can not be challenged at any time.

2.    Challenges to the procedures by which a CC&R amendment was adopted is subject to the four (4) year statute of limitation of Code of Civil Procedure Section 343.

3.    Challenges to the procedures by which a CC&R amendment was adopted must be brought within four years of the date of recording the amendment. .

These holdings are regarding the procedures by which an amendment has been adopted.  If an amendment contains substantive issues that are problematic, it may still be void at any time.

Furthermore, this case will help those communities where the recorded CC&Rs contain a termination provision that requires affirmative action to extend the document.  Depending on the wording of that provision, it may not be necessary to obtain signed/notarized signatures of the owners within the community in order to extend the CC&Rs.  This can save a community a significant amount of time, money and effort in extending their CC&Rs.

The legal issues involved in this case are complex .  If your association has a question regarding the validity of prior amendments, automatic termination of CC&Rs, or the procedure to extend the CC&Rs, you should consult with legal counsel who is familiar with the laws governing the amendment process.