Recently, in Moretto Trustee of the Jerome F. Moretto 2006 Trust v. ELK Point Country Club Homeowners Ass’n, Inc., 507 P.3d 199 (Nev. 2022), the Supreme Court of Nevada adopted Restatement of the Law Third, Property (Servitudes) §§ 6.7 and 6.9 “to govern issues concerning an association’s authority to enact rules regarding the restriction of individually owned property.”
The case arose when a homeowners association governing a common-interest community exercised its rulemaking authority to establish a regulation creating an architectural review committee and to adopt a set of guidelines creating restrictions on individually owned lots that required landowners wanting to develop their lots to submit any proposed plans to the architectural review committee, which would then recommend to the association’s executive board whether or not to approve the proposed plans. An owner of property in the community filed a complaint against the association, seeking, among other things, a declaration that the new guidelines exceeded the association’s rulemaking authority. The association argued that the guidelines were in accordance with its bylaws, which required individual owners to seek approval from the association’s executive board before commencing construction of any structure on their property and provided the executive board with the general rulemaking authority to adopt rules and regulations necessary for it to carry out its powers. The district court granted the association’s motion for summary judgment, finding, inter alia, that the association had the authority to adopt rules to control the design of properties owned by individuals, and did not exceed the scope of its authority by adopting the guidelines.
The Supreme Court of Nevada reversed and remanded to the district court to determine whether the association’s guidelines were reasonable under Restatement of the Law Third, Property (Servitudes) §§ 6.7 and 6.9, which “provide well-reasoned limits on construing an association’s implied power to act with respect to individually owned property.” The court agreed with the district court’s conclusion that the association was authorized to adopt the guidelines, because its bylaw—which stated that “[n]o structure of any kind shall be erected or permitted upon the premises of any Unit Owner, unless the plans and specifications shall have first been submitted to and approved by the Executive Board”—was the type of express provision required by § 6.9 to allow an association to adopt design restrictions for individually owned property. The court remanded, however, for the district court to consider whether the guidelines were valid under § 6.9, because “neither party addressed whether the [association’s] exercise of its designcontrol power was reasonable, which is a central tenet of section 6.9.”
In making its decision to adopt §§ 6.7 and 6.9, the court reasoned that it had previously adopted other Sections of the Restatement “when doing so furthered public policy and was consistent with Nevada law,” that “the Restatement’s approach is consistent with the importance and high value Nevada law places on private property ownership and use,” and that “the Restatement’s approach is consistent with NRS 116.31065[, the state statute governing rules applicable to management of common-interest communities]’s requirement that an association’s rules be reasonably related to the specified purpose for which they are adopted, sufficiently explicit in their prohibition, and in all other aspects consistent with the association’s governing documents.” The court considered the rationale for the two Sections “particularly persuasive,” noting that the Restatement’s approach “protects the traditional expectations of landowners, ensures landowners are afforded proper notice before restrictions are imposed on their individual property, and prevents an association from circumventing the procedural protections landowners would be afforded if the association had adopted the design-control restrictions as covenants in the association’s declaration.”
The court pointed out that both §§ 6.7 and 6.9 stemmed from the recognition that tradition supported the expectation that individuals were free to use their property in any manner not expressly prohibited, and had the right to determine their property’s design aesthetic, within limits imposed by zoning and building codes. The court observed that § 6.7, Comment b, examined the difference between restrictions imposed as part of an association’s declaration and those imposed through an association’s rulemaking power, and was concerned that a broadly construed implied power to act could allow an association to adopt restrictions without the notice and safeguards usually needed for an amendment to the declaration. Quoting § 6.7, Comment b, the court noted that, “[w]hile ‘an association enjoys an implied power to make rules in furtherance of its power over the common property,’ it ‘has no inherent power to regulate use of the individually owned properties in the community, . . . except as implied by its responsibility for management of the common property.”’
The court explained that the reasonableness requirement described in § 6.9, Comment d, was imposed to address concerns that arise when an association has discretionary power over design-control restrictions, and that it “strikes a balance between ensuring an association’s action is not beyond the scope of its authority while otherwise deferring to the substance of the association’s action,” with the initial burden on the property owner to establish a prima facie showing that the association’s restrictions were unreasonable. “[U]nder a reasonableness standard, the court’s focus is on whether ‘the committee informs itself of the facts and is consistent in its treatment of community members,’ as opposed to focusing on whether the court agrees with the ‘aesthetic judgment’ of the association’s decision.” The court concluded that the parties did not present sufficient evidence for it to evaluate the reasonableness of the guidelines, and thus remanded for the district court to do so.