Case of the Day – Monday, January 3, 2022

RESTRICTIVE COVENANTS ARE CHILD’S PLAY

I have previously reported harrowing tales of homeowner woe at the hands of a homeowners association. You remember the kind of officious, annoying kid in junior high school who was on student council? Well, he grew up and is on the HOA board.

In today’s case, well-heeled homeowners bought the house next door, planning to demolish it and turn the property into a playground for their kids. And to think you couldn’t even find a Paw Patrol MIghty Lookout Tower for your offspring this Christmas. Supply chain issues, you know…

But the property manager for the HOA that oversaw the development – seeking to enforce a deed restriction that required prior approval before “changes or alterations” – got a court to issue an injunction.

Injunctions aren’t easy to come by. The biggest hurdle is that the HOA had to convince the judge that it was likely to win the case. Homeowners Bob and Kathy Guzzetta argued that “change and alteration” was different from “demolition.” They had not changed anything that existed. Instead, they had simply taken away something, leaving nothing.

The grant of the injunction suggested to us that the court found their argument to be a “dead-bang loser.” It seemed like game, set, and match for the HOA – well before the first day of trial.

But trials have a way of turning losers into winners. The Guzzettas, undeterred by the pall of imminent defeat a preliminary injunction cast over their case, put their evidence on anyway. And they won.

The court, it seems, was no fan of restrictive covenants. Such covenants, the court rightly observed, “implicate contractual rights, such as the right of a buyer and seller to enter into a binding contract, but they also implicate property rights, such as one’s right to the free use of her land. In situations where these two rights conflict, the law favors the free use of land.”

Applying that standard, the court said, the analysis was simple. “Changes and alterations” required prior consent, but the Guzzettas were right: taking something away was not the same thing as changing or altering. After all, nothing else in the covenants required that a house even be on the lot. It was just that if there was a house on the lot, the HOA had to approve it. Requiring prior approval of something did not imply that prior approval of nothing was required as well.

Service Corp. of Westover Hills v. Guzzetta, 2009 Del. Ch. LEXIS 221 (Del.Ch., 2009). The Guzzettas had been homeowners in Westover Hills for 11 years when they bought the property next to theirs. The adjoining property included a 1943 colonial-style house and mature maple and oak trees. The Guzzettas intended to raze the house to expand their backyard for their children.

However, properties in Westover Hills are subject to deed restrictions that are binding on all owners within the development. One of the restrictions provides that “no building, fence, wall or other structure shall be commenced, erected, or maintained, nor shall any addition to or change or alteration therein be made, until the plans and specifications, showing the nature, kind, shape, height, materials, floor plans, color scheme, location and frontage on the lot and approximate cost of such structure shall have been submitted to and approved in writing by” Service Corp., the property manager.

Service Corp. had the right to refuse to approve any such plans or specifications that it found not suitable or desirable for aesthetic or other reasons. Since 2004, Service Corp. has used an Architectural Review Committee to initially review proposals, request additional information as necessary, and make recommendations to the Service Corp. board. Service Corp. had approved demolitions before, as well as landscape plans.

The Guzzettas went ahead with their plans without obtaining approval, and Service Corp. sued for an injunction prohibiting the demolition of the home and landscaping. The trial court granted a preliminary injunction until a trial on the merits could be held, but at trial, it reversed course, finding in favor of the Guzzettas. 

Held: The Guzzettas didn’t need HOA approval to demolish the house next door. The restrictive covenant at issue held that “no building, fence, or wall or other structure shall be commenced, erected or maintained, nor shall any addition to or change or alteration therein be made” until the plans and specifications were approved by the HOA. Service Corporation argued that the Guzzettas’ planned demolition was a “change” within the plain meaning of that word. But the court, resorting to the dictionary, concluded that an “alteration” to a structure might encompass a new paint scheme. At the same time, a “change” was more radical, such as the gutting of a house followed by a complete refurbishment. While either of these terms might conceivably include a demolition, that interpretation made no sense when read with the requirement in the same covenant that the HOA must approve “the plans and specifications, showing the nature, kind, shape, height, materials, floor plans, color scheme, location and frontage on the lot and approximate cost of such structure…”

The court held that “the complete demolition of a structure so that it is replaced only by a grassy field would result, by necessity, in a change that has no ‘height, shape, materials, floor plans, color scheme, location or frontage’.” After all, how can the HOA approve plans for a grassy field? The third clause, the court held, “narrows the broad coverage of the second clause. Read together, the second and third clauses only apply to ‘changes’ to an existing structure where some structure will remain afterward. Accordingly, because the Guzzettas do not propose to leave any structure on the Property following demolition, the second and third clauses of Article V do not require them to submit their plans for the complete demolition of the adjacent house to Service Corporation for approval.”

Service Corporation argued that the drafters obviously intended to prevent homeowners from making such a radical change to a property as the Guzzettas proposed without the consent of the organization representing the community. But the Court responded that the restrictive covenants did not require that a structure be erected on every plot, but rather only that the plans be approved if a building were built. “Presumably,” the Court drily observed, “vacant lots could thus exist in Westover Hills.” In fact, one of the covenants provided that “free or open spaces shall be left on every plot built upon, on both sides of every residence erected thereon, which free spaces shall extend the full depth of the plot.” 

The lesson here is that because restrictive covenants tie a property owner’s hands, limiting what he or she can do with property that has been bought and paid for, a court is likely to construe such covenants strictly against the organization that imposed them. It’s a fair bet that if the writers of the covenants had ever imagined that homeowners like the Guzzettas would tear down a house in favor of – horrors! – green open space, the restrictive covenants would have required the hobnail boots of the HOA to march over the plans ahead of time. But no one imagined such a matter would arise, and the court was not about to rewrite the covenant to pull the HOA’s chestnuts out of the fire.

The game may have gone to the HOA. But the set and match belonged to the Guzzettas.

– Tom Root