The Arizona Court of Appeals recently imposed significant restrictions on homeowners' associations' rights to impose fines and penalties against homeowners. In Turtle Rock III Homeowners Association v. Fisher, 243 Ariz. 294, 406 P.3d 824 (October 26, 2017), Division One of the Arizona Court of Appeals held that homeowners associations are prohibited from imposing and collecting fines or penalties if the HOA did not have a valid, published written fine penalty policy. The absence of such a policy was per se unreasonable and, as such, the fines were unenforceable.
Arizona law generally allows HOAs to charge reasonable monetary penalties. See, e.g., A.R.S. § 33-1803(B). However, the Court held in a previous case that it was unreasonable to impose late fees based on a retroactively adopted fee schedule. In Turtle Rock III, the Court of Appeals considered whether daily or weekly fines were reasonable or "akin to a punitive damages award." The Turtle Rock homeowner faced "escalating monetary penalties for her failure to cure" certain maintenance violations.
The Turtle Rock III court rejected the fines on several grounds. First, it held that "[a]d hoc fines," that is fines that are imposed seemingly out of thin air, "are per se unreasonable." This is true "even where the HOA has the authority to levy fines." In addition, any fines must be promulgated pursuant to a prior published schedule of fines. In other words, secret fine policies are just as prohibited as no fine policies at all. The absence of a fine policy in the Turtle Rock case was a significant factor in the Court of Appeals' ruling for the homeowner. "The trial court did not make a finding that a promulgated fee schedule existed."
Finally, and perhaps most significantly, the Court of Appeals held that it was the Association's burden to prove that the fines imposed were reasonable. In Turtle Rock, the fees were $25.00 per day. The homeowner "was not required to present evidence controverting the existence of the fee schedule." That burden fell squarely on the Association suing to collect the fines. The Court of Appeals held that there was "no support in the record for a determination that a fine of $25 per day, for any violation, is reasonable. A stipulated damages provision made in advance of a breach is a penalty, and is generally unenforceable."
The Court's central holding is worth repeating:
Although the HOA had the authority under state statutes and the CC&Rs to promulgate a fine schedule for monetary penalties, there is no competent evidence in the record before us that it did so. Without competent evidence of a fee schedule timely promulgated demonstrating the fine amounts and the appropriateness of such amounts, monetary penalties are per se unreasonable. Even if a fee schedule existed, the HOA had the burden to prove its damages. Given our resolution of this matter, we need not address Fisher's due process claim related to the required thirty day notice of a penalty. The trial court's award of monetary penalties is reversed and the attorneys' fees award below is reversed.
The last part of this ruling will continue to resonate: "Even if a fee schedule existed, the HOA had the burden to prove its damages." While an HOA may have the right to impose fees or penalties for CC&R violations, Turtle Rock suggests that any such fines, in addition to being set forth in a published fine policy, must relate to some damage that the HOA might suffer.
Most HOAs that have fine policies charge a minimum of $25.00 for an initial violation. These fines often escalate quickly. $25.00 becomes $50.00, which becomes $100.00, and so on. But if these fines bear no relation to any actual damages that an HOA actually suffers, it raises serious questions whether the HOA can even enforce such fines in the first place.
Have you been fined? Did you pay the fines or are you contesting them?
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