Question:  How can community association boards alter the uses of common areas?

Answer:  Very carefully, and with scrupulous attention to the requirements of the community’s governing documents and the wishes of its residents.

A recent California appeals court decision illustrates what can happen when a board ignores this common sense advice. The story, which reads like a case study in what not to do, takes place at Pelican Hill Community Association in Orange County, CA.  Dr. Lipman, a member of the association’s board of directors and chairman of its landscape committee, decided in the mid-90’s that he wanted to convert a portion of a lot into a community park.  The lot, designated in the governing documents as a “community slope,” was covered with a variety of trees, shrubs, and rough, tall ground cover that made it close to inaccessible for residents and their pets.

Dr. Lipman approached two of the neighbors (but not all of them) whose homes were located closest to the slope.  He told them the board wanted to make “minor aesthetic changes” and might also consider larger-scale changes in the area. He did not indicate that he actually envisioned the creation of a fully equipped park, complete with nearly an acre of grass, walking paths, park benches, bike racks and playground equipment.

Minor Changes?
The neighbors, who became the plaintiffs in the case, said they told Dr. Lipman they would have no objections to the minor aesthetic changes he proposed as long as the changes did not alter the lot’s current use (actually, its non-use).  “Dr. Lipman did not disclose any plans to remove the trees and shrubs from [the lot] or to do anything to convert [the lot] into a park or to otherwise change the lot’s use,” the trial court noted.

Dr. Lipman subsequently told both the community’s developer (who had agreed to provide financing for the alterations) and the association’s board, that community residents generally supported his plan, and that the owners nearest the site had raised no objections to it.

The board took the next step, retaining a landscape architect to draft the project plans, which did not include benches, walking paths, or any other park features.  The association’s Architectural Control Committee (“ACC”) subsequently approved the plans as presented.  Concluding that the owners did not need to vote on the project, the board retained a landscaping firm to carry it out.

However, before the firm began work, Dr. Lipman altered the plans the ACC had approved, adding the walking path and park benches, leaving a grassy area available for playground equipment, and instructing the firm to make the site “as flat as possible.”  Following Dr. Lipman’s instruction, the firm tore out all of the existing vegetation, built up a portion of the site, and substantially flattened the rest.

The homeowners nearest the site, who did not think “minor aesthetic changes” would involve completely clearing the site and flattening it, objected.  In a letter to the board, they noted, among other points, that they had never approved a park and that the failure to obtain prior homeowner approval of the changes violated the association’s governing documents.

Ignoring the Owners
Although the board indicated a willingness to accept input from the owners and accommodate their concerns, it never actually did so.  Work continued on the project and the park was built as Dr. Lipman had envisioned. Several owners sued, contending that the board did not have the authority to construct the park without homeowner approval, and that the park created a nuisance that could be remedied only by restoring the lot to its original condition as a “community slope” with limited accessibility.

The trial court agreed and the appeals court subsequently upheld the lower court’s conclusions that:  1) the board exceeded its authority; 2) it should have obtained the approval of owners but didn’t; 3) the board “and Dr. Lipman specifically, did not act upon reasonable investigation [and] did not act in good faith,” or in the best interests of the association; and 4) that the appropriate remedy was to undo the construction of the park.

Although this is a California case, and not binding on Colorado courts, the California appeals court’s reasoning, and its disdain for the association’s arguments, are instructive and worth noting in some detail.  “Our difficulty with the Association’s contentions begins on the first page of the opening brief, where it attempts to set the stage for its arguments by rather substantially distorting the facts of this case and the court’s decision,” the appeals court writes.  From the perspective of the association’s board, the opinion doesn’t get any better from there.  Among other board assertions with which the court had little patience:

The board’s suggestion that the “broad grants of authority” conferred by the governing documents clearly permitted it to replace the lot’s existing vegetation with grass.  That may be true, the court said, but it “is hardly an accurate description” of what occurred, which was “a wholesale alteration of the slope” and its use.

The board’s contention that the trial court’s conclusion that the board’s authority “was limited to maintaining the site in a perpetual condition of non-use” distorted the declaration and defied common sense.  Rejecting this contention, the appeals court stated that the trial court had “done no such thing” as it had held that the board lacked unlimited authority to alter the use of the community slope, not that it lacked any authority to do so.

The board’s argument that the park provided “obvious benefits” to community.  “What is ‘obvious’ here,” the appeals court countered, “is that reasonable minds can differ on that issue” and that the confiscation of the decision making process by the few “cannot be tolerated.”

No Broad Authority
The board based its claim to broad authority on language in the declaration giving the board “the duty and obligation to manage and maintain” the commonly owned property.  That duty should be construed as broadly as possible, the board argued.  But not so liberally as to distort the meaning of those words, the appeals court said.  The obligation to “maintain” the property does not imply unlimited authority to “change” it, the court stated. “When we turn to the specific duties given to the Association in the [declaration],” the decision continues, “it becomes clear that [the board] was not intended to have the power to act unilaterally in changing an unusable decorative community slope into a recreational park….That provision gives the Association no power to make improvements to the common areas which are not ‘necessary.’”

Rejecting another key board argument, the appeals court found that the lower court properly refused to apply the “business judgment rule” to the board’s actions, because the evidence was clear that the board failed to meet the requirements of that legal principle. Specifically, the court said, the board failed to undertake a “reasonable investigation,” failed to act in good faith and in the best interests of the other association members. The appeals court concluded, “All of the facts provide more than sufficient basis for the court to conclude that the association’s board, despite all its protestations about the obvious advantages of a park, actually knew that the community’s residents would not support its desire to construct one [on the contested site], and nonetheless chose to proceed in defiance of what it believed to be the community’s wishes, apparently to further Dr. Lipman’s personal agenda.”

Unable to persuade the court that the board had the authority to construct the park in the first place, the association argued that, given the cost to the association of removing it, the “balance of conveniences” argued in favor of finding a different remedy.  But again the appeals court was unsympathetic, finding that the trial court’s order was reasonable and justified by the board’s actions.  “Most significant to us is the fact that the Association’s conduct was … checkered with misrepresentations, misleading statements, obstruction and obfuscation…Allowing the Association to retain the prize it won by virtue of such tactics would be anathema to the concept of equity,” the court said.  “Of course, we do understand that requiring the restoration of [the lot] will entail some financial hardship,” the court acknowledged, “But the Association has no one to blame but itself and its board for that result.”

An Expensive Lesson
The “financial hardship” amounted to $517,922 in court costs, association and plaintiffs’ attorneys’ fees, the $17,000 the association had contributed to the cost of creating the park, and the additional cost (whatever that will turn out to be) of deconstructing it.

The clear lesson was noted at this article’s beginning – boards considering alterations in the use of common areas should determine what uses would be welcome by the community’s owners.  This determination should be made in a reasonably formal way – through a poll, for example – in which the responses can be documented.  If the responses indicate a reasonable level of owner interest in the proposed changes, the board should develop specifications for the project, obtain estimates on the likely cost, and make that information available to owners so they will know precisely what the project will entail.   We usually recommend that boards call a special meeting at which owners can discuss the plans and express their support or reservations.

If the plan still has reasonable support after the meeting, the board should have the association’s attorney review the association’s declaration to determine the approval process required to change the use of a common area. Most governing documents require an affirmative vote of a specified percentage of the owners, and some require a declaration amendment.   Needless to say, the board should comply with those requirements, what ever they are.

Change in a community association is rarely easy and often controversial. It is sometimes difficult to persuade owners to express an interest in a plan until after it has been implemented, when they decide they don’t like it.   But before changing the existing use of a common area, boards must make an effort to solicit input from owners and determine, if possible, what they want the board to do. Boards must also be able to document that they have acted in what they perceive to be the best interests of the community as a whole in good faith and with the best interests of the association in mind.  Failure to follow these guidelines won’t just produce changes many owners dislike; it will likely produce legal bills and other costs that everyone will have to pay.