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Beware CC&Rs — They Can Bite

In teaching Real Estate Transactions and Litigation to advanced Law and Business students at U.C. Berkeley’s School of Law, I find that one of the most difficult concepts to explain is the impact of property use restrictions in the form of covenants, conditions, and restrictions — the often dreaded “CC&Rs.”

After all, being in America, aren’t we free to do what we want with the property we own?

The short answer is:  No.

Larger scale land use and zoning regulations are pretty easy to understand.  Nobody should reasonably expect to be able to build a commercial high-rise or an industrial factory in the middle of a residential neighborhood.

But CC&Rs can get downright personal, dictating small-scale improvements and uses, such as the color you paint your house, the types of pets you keep, or the location of the swimming pool in your backyard.  And, as one recent case — Nellie Gail Ranch Owners Assn. v. McMullin — illustrates, failing to comply with the CC&Rs can result in a very expensive and frustrating mess.

Facts:  Owners want to make improvements to their backyard; fail to get written permission from their HOA

The HOA and CC&Rs

The McMullins purchased a home in Nellie Gail Ranch in Laguna Hills, California.  The development was governed by CC&Rs administered by a homeowners’ association (HOA).  The HOA maintained several common areas within the development, including horse trails, an equestrian center, parks, and tennis courts.

The McMullins’ home was at the end of a cul-de-sac on a hilltop with canyon views.  The back of their property sloped down toward and abutted Lot 274 — a 15-acre canyon lot owned by the HOA and dedicated as open space.  The McMullins’ backyard had three retaining walls to make the sloping land more usable — the first retaining wall separated the house and patio from the next level, which contained a grass area.  Another retaining wall separated the grass area from a lower area containing a swimming pool.  The third retaining wall separated the pool from the remaining slope to the rear of the property that abutted the HOA’s Lot 274.

The HOAs governing CC&Rs and Architectural Review Committee Guidelines required all homeowners to obtain written approval before constructing or altering improvements on their property.

The Applications

The McMullins submitted a series of applications, with the intent of making some improvements to their back yard, including: replastering their swimming pool, re-doing the pool deck, constructing a bar area near the pool, replacing a wrought iron fence at the rear property line with a retaining wall, back-filling behind the new retaining wall, and installing a large sports court and garden in the new flat area below the swimming pool, as well as a staircase leading to that lower area from the pool.

One problem: the application failed to depict the location of the McMullins’ lower property line abutting Lot 274.

Much back and forth ensued between the McMullins and the HOA.  The McMullins re-submitted their application numerous times, but each submission failed to depict the rear property line, and the HOA never gave written approval to the contemplated improvements.

The Encroachments

The McMullins proceeded with their improvements, and ended up building a new retaining wall that substantially encroached on the HOA’s Lot 274 (by a total of 6,100 square feet).  A big oops!

The HOA contemplated resolving the issue by having the McMullins purchase the encroached portion of Lot 274, but the homeowners rejected that idea in a vote.

Litigation ensued.

The trial court’s ruling:  remove the improvements

The HOA sued to quiet title to Lot 274 and sought an injunction requiring the McMullins to remove the retaining wall and all other unauthorized improvements.

The McMullins cross-sued for quiet title and for adverse possession.

The trial court ruled in favor of the HOA.  The court held that the McMullins breached the CC&Rs, and issued a mandatory injunction requiring the McMullins to pay for the cost of removing the sports court and retaining wall, and restoring the original grade and slope on the encroached areas of Lot 274.

The trial court later awarded attorney fees to the HOA totaling $187,000.

The McMullins appealed the judgment.

The Court of Appeal’s Opinion

About half of the Court of Appeal’s opinion addressed multiple procedural mis-steps by the McMullins.  The other half dealt with the McMullins’ substantive arguments centered on their claim of adverse possession and their challenge to the trial court’s mandatory injunction.

The McMullins’ Procedural Mis-Steps

The Court of Appeal addressed several mis-steps by the McMullins.  These included:

  • The McMullins failed to request a statement of decision at the end of trial.  This means the Court of Appeal infers that the trial court made factual finding in favor of the HOA on all issues necessary to support the judgment.  (In short, it makes any appeal much more difficult to win.)
  • The McMullins waived their arguments based on equitable estoppel and the statue of limitations by failing to raise them in the trial court.  (Parties often come up with clever arguments on appeal, but if they were not raised in the trial court, the odds are the Court of Appeal won’t consider them.)
  • The McMullins failed to appeal the attorney fee order.  (Attorney fee orders are normally separately appealable from the judgment, so if no separate appeal is filed, the attorney fee award cannot be challenged.)
Adverse Possession

Moving to the substantive issues, the Court of Appeal rejected the McMullins’ claim that they obtained the portion of the HOA’s Lot 274 by adverse possession.

The Court noted that one element of a claim for adverse possession requires the plaintiffs to show that they paid all property taxes levied and assessed on the disputed property during the five-year period of occupation.  The McMullins conceded that they did not pay property taxes on the portion of Lot 274 that their retaining wall encroached upon.

Mandatory Injunction Affirmed

Finally, the Court of Appeal rejected the McMullins’ argument that the trial court erred by issuing a mandatory injunction, and that the trial court should have instead simply awarded damages based on the value of the land encroached upon.

Mandatory injunctions are usually tough to obtain, but in actions between adjoining landowners based on the defendant’s construction of improvements on a neighbor’s property, the plaintiff is generally entitled to a mandatory injunction requiring the defendant to remove the encroachment.  A trial court has discretion to deny an injunction and instead award damages for a judicially-created easement allowing the encroachments to remain.  But to exercise its discretion in this manner, the trial court must first find that the encroachment was “innocent.”

Here, the Court of Appeal held that the McMullins were not innocent.  The evidence showed that they knew where their rear property line was located, they intentionally did not identify the property line in their multiple applications to the HOA (despite the HOA flagging this issue on numerous occasions), and they constructed their improvements knowing they did not have necessary approvals from the HOA.

Further, the applications repeatedly assured the HOA that the new retaining wall would be built in the exact same location as the original wrought iron fence, which was on the property line.  But the retaining wall was actually built in a way that substantially encroached on the HOA’s property.

Thus, the mandatory injunction was proper.

Lesson

As “un-American” as CC&Rs may seem to some people, they are an accepted part of real estate law in California.  The idea behind CC&Rs is to promote the orderly development and use of property, so that a few neighborhood “bad apples” don’t bring down property values for the whole neighborhood.

Whether you agree with the CC&Rs in your neighborhood or not, it is wise to know them and abide by them.  Usually HOA board members aren’t out for blood; just basic cooperation and compliance.

Making improvements to your yard without required HOA approval is a bad idea.  Constructing improvements that substantially encroach on the HOA’s “common area” property is a really bad idea, and can result in an injunction with a large restoration tab to pay.

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