Limitations on Rules and Regulations in Homeowners Associations
By Jonathan Olcott, Olcott & Shore, PLLC, 2004.  www.olcottlaw.com

as published in the Arizona Journal of Real Estate & Business 
(Please note the date on this and all articles.  The law changes and this information may not be correct.)

When there is controversy in a community association, realtors are subject to disclosure challenges related to the controversy. If a realtor is aware that rules related use restrictions are under debate or are in conflict, the realtor may be required to disclose the facts to a purchaser. This article presents methods for resolving the controversies.

Rules and regulations clarify and implement the governance policies in a community. Rules and regulations can:

1.                   Clarifying vague or ambiguous provisions in the covenants, conditions, and restrictions (“CC&Rs”), Articles of Incorporation or Bylaws (collectively “Community Documents”);

2.                   Address rules of conduct in the community; and

3.                   Providing consistent enforcement policies.

To evaluate whether a new rule or regulation may be adopted, the Board of Directors (“Board”) must first determine that the Board has the authority/power to enact the rule or regulation.

One limitation on the Board’s rulemaking authority may be the Community Documents themselves. The Community Documents contain provisions allocating certain powers to the Board, and certain powers to the association’s Members. Usually, the Community Documents contain provisions that provide the Board with the power to enact rules to promote the betterment of the community. Some Community Documents require the Members to approve the rules before the rules become effective. Others require the Members’ approval of the association’s schedule of fines for violations.

The rules and regulations may not contradict federal law, Arizona law, or the Community Documents. A rule that prohibited Members of French descent from using the common areas would violate federal law, and would be unenforceable. If the Community Documents prohibit all basketball apparatus, a rule that would allow portable hoops (stowed away nightly) would be unenforceable.

Another limitation on the Board’s rulemaking authority is express Arizona law. For Planned Communities, ARS §12-1803(B) provides that “the board of directors may impose reasonable monetary penalties on members for violations of the declaration, bylaws and rules of the association.” For condominiums, ARS §12-1242(11) provides that “the association may…impose reasonable monetary penalties upon unit owners for violations of the declaration, bylaws and rules of the association.”

Arizona courts impose a “reasonableness” standard for evaluating the legality of association rules.[1] Boards are required to enact rules and regulations that are reasonably related to the promotion of health, happiness and peace of mind of the association’s members.[2]

In Villas at Hidden Lakes Condominium Association v. Geupel Construction Company, Inc. (“Association”), the Association sued Geupel Construction Co. (“Developer”) for unpaid assessments and late fees owed to the Association on units formerly owned by the Developer.[3] In October 1987, the Board adopted a late fee policy for delinquent assessments.[4] The Association applied the late fee to the current month’s delinquent assessments owed by the Developer.[5] The Association then multiplied the number of units owned by the Developer by the number of months the Developer owned each unit and applied the late fee for each past due assessment.[6] The court held that “…the Association’s imposition of a retroactive late fee was unreasonable, arbitrary, and an abuse of discretion.”[7]

How can we evaluate whether a rule is reasonable? Is it just predicting what a judge might think? Some rules are easy to evaluate. Consider a rule that allows Members to park inoperable vehicles in their driveways. But compare a rule that prohibits street and driveway parking, and requires Members to park all their vehicles only in garages, or in designated overflow areas. That rule could be considered in a gray area. This leads to perhaps the most significant check on the Board’s rulemaking authority: the Members themselves. 

Too many Boards ignore the Members’ views when enacting rules. This often occurs when a “single issue” director is elected. Consider a community in which there is a controversy over whether to prohibit street and driveway parking, and require all vehicles to be parked in garages or in designated overflow areas.[8] Those with multiple vehicles oppose the rule, and those who feel that the vehicles parked on streets and driveways throughout the community are eyesores. If the majority supports the rule, but the minority elects one or two outspoken directors who oppose the rule, there is a possibility that the Board would not adopt the rule, based upon the vote of the “neutral” directors. Dissension on the Board, and throughout the community, immediately follows. The majority of the Members generally prevail, but it often comes at a heavy emotional, social and occasionally financial price.

These controversies cause disclosure problems for realtors. If a realtor is aware of the controversy, the realtor would be obligated to disclose it to a potential buyer whose family owned multiple vehicles.

A suggestion for avoiding this conflict is for a Board to survey the membership, when the Board is considering a controversial rule. The Board can draft the rule to conform to the Members’ collective views. This has the effect of deflecting the controversy from an internal Board conflict, to the membership at large. If the rule is supported by the majority, the Board can persuasively defend the rule to the disappointed Members.

The survey approach will also assist in having the rule withstand the vague judicial “reasonableness” test. If the majority supports the rule in written surveys, even a private property-oriented judge would be hard pressed to find that the rule is unreasonable. We do have judges in Arizona who believe that private property rights are sacrosanct. They apply those beliefs to their judicial decisions. They may believe that “it is my driveway, so nobody can tell me whether I may park on it.” If the majority in the community opines that they would like all vehicles parked in garages or the designated overflow areas, that judge would find those facts persuasive in evaluating the reasonableness of the rule.

The survey approach to rulemaking can defuse or eliminate conflict, and add predictability to enforcement of the use restrictions. If a realtor is doing business in a community that is experiencing such a conflict, a realtor might suggest that the Board adopt the survey resolution to the conflict.

Jonathan Olcott is with Olcott & Shore, Arizona’s Community Association Law Firm with offices in Phoenix, Goodyear, Oro Valley and Tucson.