Wait, You Want An HOA?! Restricting Implied Common-Interest Communities

While the butt of many jokes and a thorn in the side of some property owners, homeowners associations (“HOAs”) serve the vital function of collecting and disbursing funds to care for and maintain common areas of residential developments. Without HOAs, neighborhood open spaces, parks, and other amenities risk falling into disrepair through a type of tragedy of the commons, wherein residents use such amenities but refuse to subsidize care and maintenance for these common areas believing someone else will pony-up the funds. HOAs, when properly organized and managed, avoid this problem by ensuring everyone pays their fair shares for the common areas. Colorado’s Common Interest Ownership Act (“CCIOA”), C.R.S. § 38-33.3-101 et seq., sets forth the manner in which such common-interest communities, and their related associations, must be established.

Earlier this summer, the Colorado Supreme Court issued an opinion limiting the application of previous case law that allowed for the establishment of common-interest communities (and their related HOAs) by implication. See McMullin v. Hauer, 420 P.3d 271 (Colo. 2018). Prior to McMullin, Colorado courts had been increasing the number of factual scenarios implying the creation of common-interest communities under CCIOA. See e.g., Evergreen Highlands Assoc. v. West, 73 P.3d 1 (Colo. 2003) (finding an implied obligation of landowners to fund a pre-existing HOA’s obligations); DeJean v. Grosz, 412 P.3d 733 (Colo. App. 2015) (finding an implied right of a homeowner to found an HOA after the developer filed a declaration expressing an intent to form one but ultimately failed to do so); and Hiwan Homeowners Assoc. v. Knotts, 215 P.3d 1271 (Colo. App. 2009) (finding the existence of an HOA despite no common property existing within the development). The McMullin opinion highlights the importance of strict compliance with CCIOA to preserve common areas in a development, ensure the ability to fund maintenance of such areas, and avoid future litigation.

Crea and Martha McMullin’s 1998 purchase of thirty acres along the White River in Rio Blanco County began the scenario that gave rise to the lawsuit. The McMullin’s intended to fund the construction of a family lodge on one lot by subdividing and selling six other lots, while leaving approximately 17 acres of undivided “common open space.” McMullin, 420 P.3d at 272-73. The McMullins recorded a final plat with a map of the 17 acres of common open space, noting that a “private access road,” domestic wells, and “common ownership and maintenance” would be the responsibility of a yet unnamed and unformed HOA. Id. at 273. Despite the final plat referencing covenants for the HOA being filed with the Rio Blanco County’s Clerk and Recorder Office, no such covenants were ever filed. Id. In connection with filing the final plat, the McMullins entered into a subdivision agreement with the Board of County Commissioners, requiring the McMullins, as developers of the area, to “conform to all conditions and commitments . . . on the final plat.” Id. Over the next 8 years, the McMullins failed to sell any of the lots, ran into financial difficulties after mortgaging six of the lots to build the family lodge, and ended-up selling all seven lots. Id. However, the McMullins never sold any interest in the 17 acres of common open space and continued to pay taxes assessed to that area of land. Id. at 273, 276 n.2.

In 2011, the owners of the 7 lots filed suit to quiet title to the common open space in an unincorporated, unnamed, and non-existant HOA. Id. at 273. Applying the requirements of CCIOA, the Supreme Court reversed the trial and appellate courts, which both found an implied, but unformed, HOA to have title to the common open space. See generally Id. Specifically, the Supreme Court noted that C.R.S. § 38-33.3-205(1) mandates any declaration establishing a common-interest community contain certain elements not present in the McMullins’ 1998 filings. McMullin, 420 P.3d at 274-75. For example, while the McMullins’ filings referenced an HOA and common ownership and maintenance of certain aspects of the development, the filings did not obligate lot owners to pay for the HOA’s expenses or attach such obligation to the ownership of any specific property within the development. Id. at 275 (citing C.R.S. § 38-33.3-103(8)). The failure of anyone to form an HOA and the fact that no conveyance of any lot provided the grantee any undivided interest in the common open space further supported the Court’s conclusion that development of the area failed to establish a common-interest community, leaving no room for an unnamed, unincorporated, and non-existent HOA to own land. Id.

The Court went on to distinguish the facts before it and its resulting holding from the cases upon which the district and appellate courts relied. Id. at 276-77. The Court’s choice to specifically distinguish this case from previous cases related to implied common-interest communities displays the fact-specific nature of any implied common-interest community litigation. The fact-specific nature of such disputes leaves their outcomes unpredictable. Thus, residential developers (and their customers) are well served to ensure strict compliance with CCOIA’s formation requirements so that purchasers have an ownership in the common areas of the development and an HOA is not only formed but also able to care for and maintain such areas. These requirements include:

• Naming the common-interest community and the HOA in recorded documents associated with the development;
• Describing the development’s limited common elements in these recordings;
• Describing any easements or licenses associated with the common areas in the development’s recorded documents;
• Ensuring that conveyances of property within the development expressly allocate an interest in the designated common areas to the grantee; and
• Organizing the HOA by the date of the first lot sale in the development.

Again, prior case law establishes that certain failures in creating a common-interest community can be overcome by an after-the-fact implication, but McMullin shows that Colorado courts are to apply such implications narrowly, giving effect to the Legislature’s requirement that common-interest communities be created “only by recording a declaration executed in the same manner as a deed,” C.R.S. § 38-33.3-201(1), that contains all requirements set forth in C.R.S. § 38-33.3-205(1).