Consent of 85% of Lot Owners Upheld in Restrictive Covenants

Diamondhead County Club and Property Owners Association, Inc. v. Committee for Contractual Covenants Compliance Inc., 298 So. 3d 421 (Miss. Ct. App. 2020). In 1970, Diamondhead Properties Inc. (“Diamondhead”) began the development of a residential, common-interest community in Hancock County, Mississippi. In the initial phase, Diamondhead established a set of use-and-maintenance restrictions through a “Declaration of Restrictions, Conditions, Easements, Covenants, Agreements, Liens and Charges.” The covenants stated that they ran with the land and were binding on all purchasers. They included a number of directives concerning construction approvals, home sizes and specifications, parking rules, traffic regulation, and the payment of assessments by lot purchasers which were levied by the Diamondhead Yacht and Country Club Inc. and/or the Diamondhead County Club and Property Owners Association (“DPOA”). The DPOA was to maintain the common areas with these assessments. The covenants for Phase I extended for a period of 50 years unless annulled, amended or modified. They could only be annulled, amended or modified by the consent of the owner or owners of record of 85% of the lots in Phase I. Diamondhead put into place similar restrictions during Phases II and III of the development. Purcell succeeded Diamondhead and continued the development from the late 1970s through the early 1990s. Most of Purcell’s covenants and restrictions contained the same 85% vote requirement for amendments. In 2018, three DPOA board members (“plaintiffs”) filed suit against the DPOA in Hancock County Chancery Court seeking a declaration that the 85% participation requirement in the amendment provision of the covenants was unreasonable. They requested that the court set the voting requirement at 60%. The DPOA answered, admitted the allegations and joined the prayer for relief. The City of Diamondhead, the Committee for Contractual Covenants Compliance Inc. (“CCCI”) (a group formed by several Diamondhead property owners), and two individual property owners (“individual interveners”) were allowed to intervene. CCCI challenged the standing of the plaintiffs and argued that the other property owners were indispensable parties. The plaintiffs filed a motion for declaratory judgment claiming that unless the amendment provision was voided or changed, the covenants would expire, and the DPOA would no longer have the authority to enforce them and would be unable to fulfill its purpose. CCCI and the individual interveners argued that there was no ambiguity in the covenants and that they should be enforced as written. The chancery court heard arguments during which the parties stipulated that the covenants were clear and unambiguous. The chancery court found that the covenants were not ambiguous and that the 85% figure did not shock the court’s conscience. The chancery court denied the request to modify the 85% figure. In a decision written by Judge McDonald, the Mississippi Court of Appeals affirmed the chancery court’s ruling, finding that the chancery court had not erred in reaching its decision that the 85% amendment requirement was not unreasonable. In its decision, the Court of Appeals began by noting that a restriction in a covenant expressed in unambiguous language would be enforced. However, even restrictive covenants that are unambiguous must be reasonable. The Court of Appeals noted that the parties had stipulated that the language was unambiguous and that therefore under court precedent, it should be enforced as written. The Court of Appeals then considered the board members’ argument that the 85% vote was unreasonable. The Court of Appeals first rejected the members’ argument that if the amendment provision was not revised, the DPOA would lose its ability to fulfill its purpose, noting that “the interests of the DPOA, a separately incorporated entity, are not those to be considered when considering the reasonableness of the amendment provision.” The Court of Appeals then found that the DPOA had offered nothing to support its claim that the Diamondhead community would be detrimentally affected by the 85% required participation rate. The Court of Appeals agreed with the chancery court’s finding that the amendment provision constituted a substantive, not merely a procedural, right of all members because the members could rely on the 85% provision as insurance that the covenants would not be changed “willy-nilly.” Justice McDonald finally observed in the opinion that the fact that the 85% amendment provision had gone unchallenged for over 40 years and that the DPOA had not previously asked its members to consider the matter undermined the DPOA’s argument that lower attendance at prior meetings required court intervention.

Note 1: The Court of Appeals did not strike down the 85% consent requirement under the facts of this case. This case involved a lot of legal maneuvering by the homeowners’ association. The case leaves open the question of whether under other circumstances, the court might strike such a level of required consent. Is there an even higher level of required consent that as a matter of law would be unreasonable – say 95%?

Note 2: In the editors’ experience, a requirement of obtaining consent from even 60% of owners of all lots in a subdivision is difficult to meet as a practical matter. In addition to good-faith differences of opinion, some lots are always owned by people from out of state who aren’t responsive, tied up in estates or bankruptcies, sold for unpaid ad valorem taxes, or owned or about to be owned by lenders. And some people are just contrary. Recent experience suggests that the COVID-19 pandemic has made property owners even more reticent about making any changes. Getting 85% of all owners to agree on anything likely would be impossible absent extraordinary circumstances.

To learn more about the co-authors, Rod Clement and Lindy Brown, visit Rod’s member profile or firm profile or Lindy’s firm profile.

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