Eight years ago, Mr. and Mrs. Smith moved into what was planned to be an upscale community containing one hundred single family detached homes with a mandatory membership homeowners association subject to a declaration of restrictive covenants. Since then, the original declarant defaulted on its loan and the unsold property all went back to the bank. The lender, however, did not acquire the rights of the declarant and the declarant rights remained with the defaulting borrower. The community currently contains forty-seven homes. To protect their property values, the homeowners association and the existing homeowners want to amend the declaration to impose a leasing restriction in the community, but the declaration requires that any amendments thereto require the consent of the declarant. The declarant ceased all business activity in the community three years ago and the declaration does not contain any language indicating when the rights of the declarant expire. Unfortunately, in the current real estate market, the above scenario is all too common, leaving many associations to wonder when the rights of the declarant to take, consent to or approve actions under their restrictive covenants expire and whether action taken without the consent of the declarant, if required, is enforceable.
In condominium communities the rights of the declarant expire by virtue of the express language in the Georgia Condominium Act (O.C.G.A. 44-3-70, et seq.). In single family detached and townhome communities sometimes the answer to this question is straightforward as the declaration contains explicit language stating when the rights of the declarant expire. Typical termination language usually provides that the rights of the declarant will expire when the declarant no longer owns any property in the community, all lots intended to be part of the community have been conveyed to owners for occupancy and the declarant no longer has the right to annex additional property to the provisions of the declaration; essentially, when the community has been completed.
However, it is also very common, as with the scenario above, that the declaration is silent with respect to the termination of declarant rights. Not surprisingly, there is very little case law on point, though the Georgia Supreme Court did address this issue in Armstrong v. Roberts, et al (254 Ga. 15; 325 SE2d 769) (1985). This case addressed the ability of the developer to waive restrictions in restrictive covenants. The court held that “a developer of a subdivision who reserved the authority to waive restrictions in covenants running with the land no longer possesses that authority after divesting himself of his interest in the subdivision.” The court essentially held that a developer’s economic interest in the subdivision dictated its rights under the declaration. When the developer no longer owns any property in the community and no longer has the right to add any additional property to the community, it has no economic interest in the subdivision and its rights have arguably expired. It can be argued that the rationale can be applied to any action taken by the declarant under restrictive covenants.
Homeowner associations should examine their governing documents to see if there is a provision setting forth a time period during which the declarant has the right to add additional property to the community. In the absence of such a provision, a strong argument can be made that the developer’s rights have expired when the declarant no longer owns any property and thus, amendments or other actions taken under the declaration would not require the consent of the declarant. Contacting the original developer to see if it would be willing to execute a document to be filed in the land records stating that it has voluntarily terminated its rights under the declaration is recommended. This minimizes potential challenges to amendments or any other actions under the declaration that require the consent of the declarant and eliminates any confusion regarding the status of the rights of the declarant.
If the declaration permits the declarant to annex additional property to the declaration for a certain period of time and that time period has not expired, there are a few options available to homeowner associations to ensure that actions taken without the consent of the declarant are valid and enforceable. As noted above, if the declarant will execute a termination document, this should resolve any outstanding issues regarding the rights of the declarant. In the current real estate climate, a declarant that still has rights under the declaration many have either voluntarily dissolved or been administratively dissolved by the Georgia Secretary of State for nonpayment of the required annual registration fees. In such instances, I recommend that the homeowners association, or its legal counsel or management company, send written correspondence to the last known registered agent and officers of the declarant entity, as shown on the Georgia Secretary of State corporate records, of its intent to amend the declaration or take such other action that requires the consent of the declarant. Additionally, in the case of an amendment, I recommend that the amendment contain language stating why the declarant consent is not required despite the express language in the declaration to the contrary. If an amendment or other action taken by a homeowners association is challenged for failing to obtain the consent of the declarant, and the above referenced actions are taken, it would be difficult for a court to conclude that the association did not take all reasonable and appropriate action to ensure that the amendment or other action is valid and enforceable.
Because the issue of declarant rights is not always clear, associations would be well advised to consult with their legal counsel.