Maarten Kalway v. Calabria Ranch HOA

People often say that western courts are conservative about property rights. I guess it depends upon how you define “conservative.” But this is not a political post; this is a semantic or definitional post. The question is what property rights are Arizona courts conserving?

Most people know that the government cannot take your property without just compensation, as it says in the Fifth Amendment to the U.S. Constitution. That is the law in Arizona—as it is everywhere in the United States—and it’s a conservative law. It restrains the government and conserves private property rights. But in Arizona a non-government party whose property is landlocked can privately condemn a way of access to her property. Arizona Constitution, Sec. 17. There are limits and restraints on private condemnation, and just compensation must be paid by the condemning owner to the party whose property is condemned, but still that seems like a pretty un-conservative policy if what you are trying to conserve is the right of private property owners not to have their property taken by others.

On the other hand, if what you are trying to conserve is the utility of private property for all property owners, maybe private condemnation is conservative. Why should accidents (and they usually are accidents) of how land gets carved up and sold end up in one guy having a totally useless piece of property he can’t even get to by foot? Doesn’t that guy have private property rights that should be conserved?

You might say, well, the way a piece of property gets landlocked is through a series of conveyances—sales or exchanges—that are enacted by deeds and other documents made in writing: contracts. And if people contract to do something privately, wouldn’t it be conservative to hold them to that contract? And don’t we record deeds and easements and covenants for just that purpose, so people in the future will have record notice of private decisions about land made by their predecessors? By that theory, it is perfectly conservative to hold future owners to the private property decisions—contracts—of those who came before them. Those private decisions are what gets conserved. And if that’s the conservative way, then why should some jerk be able to come along later and open a private way of necessity across my land to get to his landlocked parcel, even if he pays me fairly for creating that road? Suddenly, that doesn’t seem very conservative.

There does seem to be a conflict between conservatism, property rights, and contracts. Here is one that has bothered me since my first day as a lawyer, and I bet it bothers you too. If you live in a neighborhood with homeowners’ association governed by CC&Rs, you probably understand that those CC&Rs can be amended at any time by a particular vote of homeowners. Sometimes it’s a supermajority or 75 percent; sometimes it must be unanimous. It depends on the CC&Rs themselves, which are a recorded contract, so you are charged with notice of them whether you ever waste your time reading them or not.

Most changes made by an HOA are insignificant, so most of us just cruise along ignoring the HOA. If the HOA changes the quiet hours at the community pool or tells me that next time I paint my house it must be one of these five approved colors, as opposed to the old five approved colors, who really cares? The fact that we all must paint our houses periodically to keep them looking spruce probably serves to conserve my property value, so aren’t these HOA decisions conservative?

That’s where we get to the part that bothers me. What if the HOA votes by a 75 percent super-majority of owners to ban rentals or short-term rentals (like Airbnb) in the neighborhood? This decision is legal under the CC&Rs, and I knew the CC&Rs could be changed with a 75-percent vote, and it may even be the case that it conserves property values for everyone in the neighborhood, but is it really conservative? If I bought my property solely for the purpose of renting it and making money, hasn’t the HOA just privately condemned my property without paying me just compensation—or at least taken away my rental rights without paying me for it?

Governor Ducey is a conservative and he thinks so. In 2016, he signed into law a bill that prevents the government from barring rentals. A.R.S. §§ 9-500.39. But that law doesn’t stop neighborhoods from amending CC&Rs to ban rentals, usually short-term rentals (“STRs”). A.R.S. § 33-1806.01. And many neighborhoods have done just that; you might even say it’s become a trend in Arizona. The argument for it is the one I’ve already discussed: the CC&Rs can be amended with a super-majority vote, and everyone knows it. That’s the decision of the predecessor owners and it should be conserved; that’s the conservative way of doing things. Right?

But hang on. There’s a huge difference between changing the quiet hours at the pool and taking my private right to do as I please with my property. The U.S. Constitution says nothing about quiet hours at the pool (they didn’t even have pools when it was written, they only had ponds) but it makes a huge deal about not taking property without just compensation. That’s why I’ve always been bothered by Arizona courts allowing CC&Rs to ban rentals. That’s an uncompensated taking. You can’t convince me otherwise.

The wheels of justice turn slowly. In March, the Arizona Supreme Court decided Maarten Kalway v. Calabria Ranch HOA, 506 P.3d 18, a case that had nothing to do with STRs or takings, but which strongly limits the rights of HOAs to make decisions that are not “reasonable and foreseeable” about private property rights based upon a less-than unanimous vote. This is the court taking a giant step in the direction of Governor Ducey’s two bills on rentals and in favor of conserving the right of a property owner to do what they want with their property.

What happened in the Kalway case is that an HOA made a bunch of limiting decisions about how property can be used involving “owners’ ability to convey or subdivide their lots, restricting the size and number of buildings permitted on each lot, and reducing the maximum number of livestock permitted on each lot.” The problem wasn’t that the HOA did anything wrong procedurally. All the votes were taken properly based on the general amendment provision of the CC&Rs. But the Supreme Court found that the “general-amendment-power provision may be used to amend only those restrictions for which the HOA’s original declaration has provided sufficient notice.” Bottom line: “future amendments cannot be ‘entirely new and different in character,’ untethered to an original covenant. Otherwise, such an amendment would infringe on property owners’ expectations of the scope of the covenants.”

If the original CC&Rs allow rentals or are silent on the subject, it is probably unlawful for less than all the homeowners to modify the CC&Rs to restrict rentals. The Supreme Court has finally stepped in to bring Arizona case law on CC&Rs in line with Arizona law barring government prohibitions against rentals, and the result was resoundingly conservative. Just as the government cannot infringe upon your rental property rights in Arizona, neither can an HOA vote of less than all the owners do so, except in very specific circumstances, which are going to be rare.

How will Kalway play out? Most likely with a test case. Somebody in a neighborhood with a STR ban adopted by the general amendment policy of the CC&Rs with less than unanimity will simply rent her place out on Airbnb or VRBO. Then the HOA or another owner will sue to enforce the ban on STRs in the CC&Rs. Then we will get to see if Arizona trial courts have gotten the message from the Arizona Supreme Court: Arizona is conservative about property rights.