A recent Arizona court case imposed significant limitations on the ability of property owners to amend recorded restrictions affecting their properties. In Dreamland Villa Community Club, Inc. v. Raimey, 578 Ariz. App. Rep. 17 (App. 2010), Division One of the Arizona Court of Appeals struck down amendments to recorded declarations affecting residential subdivisions on the grounds that those amendments imposed obligations that could not be foreseen by owners when they bought their lots. Although the court’s opinion argued that the holding is consistent with an existing line of Arizona case law, it will come as a surprise to many and may have far-reaching and unforeseen consequences.

The facts in the Dreamland Villa case are fairly simple. Dreamland Villa is a residential community developed in sections from 1958 to 1972. Each section in the community was subject to its own set of recorded restrictions, but those restrictions were largely identical from one section to the next. Dreamland Villa did not have any common area, nor did any of the recorded restrictions provide for a homeowners association. Except for the set of restrictions affecting Section 18 in Dreamland Villa, the recorded restrictions did not provide for assessments.

In 1961, some residents in Dreamland Villa formed Dreamland Villa Community Club, Inc. (“DVCC”), to provide various recreational facilities to those who joined the club. Membership was voluntary; members paid dues to belong to DVCC and to use its facilities. Except for the recorded restrictions affecting Section 18, none of the declarations affecting Dreamland Villa made any reference to DVCC. The restrictions for Section 18 purported to impose assessments on the lots in Section 18 to support DVCC’s activities, but did not change the voluntary nature of membership in DVCC, nor did it discuss any entitlement of non-members to use its facilities.

In 2003 and 2004, amended restrictions were recorded for each section in Dreamland Villa. Apparently, the amendments were made in accordance with the applicable provision of each set of recorded restrictions, which stated that those documents could “at any time be changed in whole or in part or revoked in their entirety by a vote of the owners of a majority of the lots.” The amendments subjected all lots in Dreamland Villa to mandatory assessments in favor of DVCC (and liens to secure those assessments) and made membership in DVCC mandatory and automatic as to all lot owners.

A number of owners refused to pay those assessments, and DVCC filed a series of lawsuits in an attempt to collect. Those lawsuits were consolidated for trial, at which the homeowners asserted that the recorded restrictions could not be amended to impose mandatory assessments and mandatory membership in a homeowners association, notwithstanding the broad amendment provisions in the original restrictions. The trial court upheld the amendments, largely on the basis that the owners bought their lots subject to recorded restrictions which contained provisions allowing for their amendment by a majority vote of lot owners, and therefore knew their obligations could be amended without their personal approval. Both sides appealed certain elements of the trial court’s rulings.

In its decision on appeal, the court re-examined the facts and recited a number of “principles” it acknowledged were established by prior case law. Among those were that deed restrictions are “a contract between the subdivision’s property owners as a whole and the individual lot owners,” that “[b]y accepting a deed subject to deed restrictions, a grantee assents to such restrictions and is bound by them,” and that “assent to deed restrictions is equivalent to executing an instrument containing the restrictions.” The court also acknowledged that the recorded restrictions applicable to Dreamland Villas all contained the broad amendment provisions quoted above, allowing for amendment by majority vote without any stated limitation on the subject matter or scope of the amendment. Finally, the court did not challenge DVCC’s assertion that the amendments were approved by the requisite number of lot owners under those amendment provisions.

Nevertheless, the court concluded that the amendments were unenforceable. It held that the original recorded restrictions contained “only restrictive covenants pertaining to each lot owner’s personal residence,” made no mention of any common areas, did not provide for a mandatory homeowners association or assessments, and (with the lone exception of the recorded restrictions for Section 18) did not even mention DVCC at all. The court sided with the homeowners that the amendments “could not create new affirmative obligations where the previous provisions did not alert the homeowners to the possibility that they would be subject to assessments” or to mandatory membership in an association.

The court’s opinion spends some time attempting to explain and distinguish certain prior case law on the subject. However, its discussion is a reminder of the old adage that “bad facts make bad law.” Perhaps it would be more accurate to say that broad statements as to “governing law” made in one case may be very misleading if you try to apply them to the facts in a subsequent situation. The court’s decision here, and its analysis of certain prior cases, focuses on the “extreme” nature of the new obligations sought to be imposed by amendment, and on the absence of any “notice” in the original restrictions that such significant new obligations could be effected by recourse to the amendment clause of the restrictions. Perhaps in this specific set of facts, given the significant monetary impact these amendment would have had on owners of lots in Dreamland Villa, the court’s decision was justified, at least as a matter of fairness and equity. Nevertheless, the fact remains that the court here simply refused to read the broad language of the amendment provisions as meaning what they said. When another case comes along involving amendments to recorded restrictions, and the “equities” are not quite so clear, what guidance does this court’s decision provide? Presumably, there must be some types of amendments that would pass muster with this court, but it is not clear what those might be; certainly, the court has drawn no bright line to tell us how to make that determination.

The Dreamland Villa restrictions were recorded over a period of years from 1958 to 1972, and apparently contained relatively simple restrictions on things like an owner’s use and maintenance of his residence (as well as certain age restrictions not relevant here). More “modern” recorded restrictions (generally referred to as “CC&Rs”) are typically far more detailed and complex and regulate everything from home design and construction to the sizes and types of permitted pets and the location and screening of satellite dishes and solar panels, as well as requirements of association membership and the establishment, imposition and collection of a vast array of assessments, fees and other costs of ownership. How does one determine whether a proposed amendment to such a set of CC&Rs would be enforceable, given the Dreamland Villa case? At what point do any new obligations that might be included in such an amendment become too burdensome? Or will even an extremely burdensome new set of obligations be acceptable so long as the original CC&Rs provided sufficient notice to purchasers that they might be imposed through amendment? What might constitute such notice? And can careful and detailed drafting of the amendment provision when CC&Rs are first drafted make a difference in this analysis?

The Dreamland Villa decision seems to raise far more questions than it answers. It certainly creates a minefield for homeowners, associations, property managers, builders, developers and lawyers who review, prepare, analyze and advise regarding CC&Rs and prospective amendments. On top of that, there’s nothing inherent in the decision that limits its application only to residential CC&Rs, so the case may pose similar questions for CC&Rs in commercial and industrial settings.