In a case released yesterday, Fort Pierce Indus. Park v. Shakespeare, 2016 UT 28, the Utah Supreme Court has clarified the standard of review to be applied in the interpretation of community association declarations. The case clarifies previously conflicting precedent by confirming that association declarations should be “neutrally construed,” as are other contracts, rather than “strictly construed.”
Whether a document is “strictly construed,” “neutrally construed,” or “liberally construed” can have a significant impact on the outcome of cases arising under the document. While these distinctions are familiar to most lawyers, they’re far from intuitive, and some explanation is in order. I’ll attempt to clarify.
The Factual Dispute and Trial Court Decision
This case arose following the installation of a cell phone tower in a St. George, Utah industrial park. The owners of a lot in that association sought to install a cell phone tower on their lot; the association’s board denied the request, but the owners installed it nonetheless. As would be expected, litigation ensued.
At the trial court level, the lot and cell tower owners prevailed. Their victory at the trial court level was aided by the trial court’s reliance upon an earlier Utah case from 1991, which had asserted that “restrictive covenants are not favored in the law and are strictly construed in favor of the free and unrestricted use of property.” The court cited several subsequent cases to the contrary, and asserted the quoted language to be “dicta.”
(Referencing precedent in an earlier case as “dicta” is almost akin, to a lawyer, as admitting to an earlier mistake. There’s more to it than that, but most readers won’t care about the distinction.)
The Court’s opinion states, quite clearly and without equivocation:
We continue to reject strict construction of restrictive covenants and make it clear that restrictive covenants are to be interpreted using the same rules of construction that are used to interpret contracts.
By construing the contract “neutrally,” rather than “strictly,” the Court appropriately referenced and gave significance to numerous provisions in the association’s declaration which gave the board “the right to refuse to approve any [submitted] plans and specifications.” Considerations that the board could make in reviewing plans included “the suitability of the proposed structure, the materials of which it is to be built, the site upon which it is proposed to be erected, the harmony thereof with the surroundings, and the effect of said building, or other planned structure, on the outlook from adjacent or neighboring property.” Further direction to the board included that permitted uses were required to be “aesthetically attractive and harmonious structures.”
The district court had acknowledged, as was obvious, that the construction of the tower following the board’s rejection thereof “constituted a breach of the CC&Rs.” The district court further found that the board had acted in good faith in denying the application. However the district court reversed the association’s decision, concluding the denial was improper. The association appealed; the lot and tower owners cross appealed on issues related to the timeliness of the association’s denial and the limitation of fees awarded to them. The Supreme Court reversed the district court’s decision regarding the board’s decision, upheld the timeliness of the association’s denial, reversed the award of attorney fees to the lot owners, and sent the case back to the district court, to determine the fees to which the association is entitled.
The association’s declaration actually provided, as do many if not most association declarations, that it was to be interpreted “liberally.” The Court determined it didn’t need to interpret the declaration liberally in order to uphold the board’s decision; they were clearly within the bounds of their discretion in denying installation of the cell towers.
The Significant Aspects of the Decision
Setting aside a number of procedural appeals issues that would be of interest to only some lawyers, the Supreme Court made several significant statements which will impact future community association disputes in Utah. These include:
The Court clearly dismissed an earlier case suggesting that declarations should be strictly construed. The court noted that “servitudes are widely used in modern land development and ordinarily play a valuable role in utilization of land resources.”
The Court acknowledged, while declining to define, the fact that the “business judgment rule” applies to an association board’s decisions arising under the association’s governing documents. The court affirmed that “In applying the business judgment rule, courts generally apply a presumption of reasonableness.” Even under the standard of the business judgment rule as applied by the lot and tower owners, the board’s decision was upheld, because it was “reasonable and made in good faith and [was] not arbitrary or capricious.”