Dangers of “Deemed Approved” Clauses in Architectural Control Provisions of CC&Rs

By Ted J. Schneider, Esq.

Many homeowners associations have architectural restrictions to protect the value and desirability of a harmonious and attractive residential community. Such restrictions range from limiting the type of shrub that may be planted within a subdivision, to restricting the type and color of material that may be used to construct a building. These architectural guidelines are generally enforced by an architectural control committee ("ACC") that is established pursuant to the association’s governing documents. At times, the ACC may consist of the association’s board of directors, or it may be composed of persons who have been appointed by the board of directors.

The ACC generally is given the ongoing duty of ensuring that the association is maintained in compliance with the overall vision of the community that was set forth when the community was developed. As such, the ACC is given the tasks of inspecting the community on a regular basis to ensure compliance, as well as review owners’ requests to construct, maintain, or alter certain improvements within the community. Unfortunately, it is not uncommon to find a "deemed approved" provision within the association’s governing documents similar to the following:

Decisions by the ACC shall be transmitted by the ACC to the applicant at the address set forth in the application for approval, after receipt by the ACC of all materials required by the ACC and within thirty (30) days after receipt of the application by the ACC. Any application submitted pursuant to this section shall be deemed approved unless written disapproval or a request for additional information or materials by the ACC shall have been transmitted to the applicant within the time herein set forth.

Deemed approved provisions such as the one above can create many problems if the ACC is not diligent and fails to respond to an owner’s request. For instance, say you live in a community where the governing documents include a deemed approved clause, and also require that all exterior building walls shall only be painted with natural brown and tan earth tones. Perhaps an owner needs to repaint the outside of his home and decides that bright red matches the color of his favorite college football team and looks much better than the bland brown colors of other houses within the community. The owner submits an application to the ACC to paint his house red on June 1 but, as is often the case, the persons on the ACC are busy with work, summer vacations, baseball, and other activities and are unable to meet and respond to the owner’s request within thirty days. On July 2, the owner paints his house bright red, just in time for the Fourth of July fireworks.

The association is now confronting a dilemma - the owner is stating his request is deemed approved as a result of the ACC’s failure to disapprove his application, but the red house also may subject members of the ACC to litigation by other owners that purchased their homes with the belief they would never have a neighbor whose house is red.

Courts have gone in different directions under similar situations where the ACC has failed to timely deny or disapprove an owner’s application. Some courts have held that the association failed to timely respond, and the red house is deemed approved (to remain red). Other courts have veered from the strict reading and ruled that the ACC did not have any discretion to approve the red house, since it is expressly restricted by the governing documents (and, therefore, the application failed from the outset). Then some courts may find that the application fails on its face for being incomplete or not in compliance with the governing documents and, thus, has excused the ACC’s failure to timely issue a formal denial.

However, if you want to avoid spending tens of thousands of dollars in litigation, to potentially be ruled against by a court that thinks you buried your head in the sand when an owner applied for something that may be expressly prohibited by the association’s governing documents, it’s advised you respond to the owner’s request in a timely fashion. Although the "deemed approved" provisions are intended to provide incentive for the board or ACC to respond quickly to owner’s requests, you may consider amending the governing documents to ensure the ACC’s failure to respond does not result in a change to the harmonious and attractive residential community that was initially established or envisioned when you purchased your home.

I suggest the following to help avoid the foregoing quagmire: First, be familiar with the provisions in your governing documents that set forth time limits to respond to requests; Second, ensure that you timely respond to such requests; Third, when responding to a request, you may be required to expressly "deny" or "disapprove" the request, so a response seeking additional information from the owner or informing the owner to make certain revisions—without expressly denying the request—may not be construed as a denial, thus deeming the application approved; Fourth, if your governing documents do contain a deemed approved clause, consider amending the governing documents to provide that the ACC’s failure to respond timely is deemed a denial of the application. Finally, it is important to seek legal counsel to guide you away from the many pitfalls that exist as you volunteer your time in serving on an ACC or association board.

Charitable Giving

By Roy Schneider, Esq.

Many people give to charity during their lives, but unfortunately too few Americans take advantage of the benefits of incorporating charitable giving into their estate plans. By planning ahead, you can save on income and estate taxes, provide a meaningful contribution to the charity of your choice, and even guarantee a steady stream of income throughout your lifetime.

Those who do plan to leave a gift to charity upon their death typically do so by making a simple bequest in a will. However, there are a variety of estate planning tools designed to maximize the benefits of a gift to both the charity and the donor. Donors and their heirs may be better served by incorporating deferred gifts or split-interest gifts, which afford both estate tax and income tax deductions, although for less than the full value of the asset donated.

One of the most common tools is the Charitable Remainder Trust (CRT), which provides the donor or other designated beneficiary the ability to receive income for his or her lifetime, or for a set period of years. At death, or the conclusion of the set period, the "remainder interest" held in the trust is transferred to the charity. The CRT affords the donor a tax deduction based on the calculated remainder interest that will be left to charity. This remainder interest is calculated according to the terms of the trust and the Applicable Federal Rate published monthly by the IRS.

The Charitable Lead Trust (CLT) follows the same basic principle, in reverse. With a CLT, the charity receives the income during the donor’s lifetime, with the remainder interest transferring to the donor’s heirs upon his or her death.

To qualify for tax benefits, both CRTs and CLTs must be established as:

  • A Charitable Remainder Annuity Trust (CRAT) or a Charitable Lead Annuity Trust (CLAT), wherein the income is established at the beginning, as a fixed amount, with no option to make further additions to the trust; or
  • A Unitrust which recalculates income as a pre-set percentage of trust assets on an annual basis; which would be either a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).

Another variation is the Net Income Charitable Remainder Unitrust, which provides more flexible payment options for the donor. One advantage to this type of trust is that a shortfall in income one year can be made up the following year.

The Charitable Gift Annuity (CGA) enables the donor to buy an annuity, directly from the charity, which provides guaranteed fixed payments over the donor’s lifetime. As with all annuities, the amount of income provided depends on the donor’s age when the annuity is purchased. The CGA gives donors an immediate income tax deduction, the value of which can be carried forward for up to five years to maximize tax savings.

Under the American Taxpayer Relief Act of 2012, IRA contributions are also an option for 2013 for donors who are at least 70½ years of age. Donors who meet the age requirement can donate funds in an Individual Retirement Account (IRA) to charity via a charitable IRA rollover or qualified charitable distribution. The amount of the donation can include the donors’ required minimum distribution (RMD), but may not exceed $100,000. The contribution must be made directly by the trustee of the IRA.

With several ways to incorporate charitable giving into your estate plan, it’s important that you carefully consider the benefits and consequences, taking into account your assets, income and desired tax benefits. A qualified estate planning attorney and financial advisor can help you determine the best arrangement which will most benefit you and your charity of choice.

Exemption Requirements for Non-Profit Public Benefit Corporations

By Roy Schneider, Esq.

A public benefit corporation is a type of non-profit organization (NPO) dedicated to tax-exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code which covers: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Public benefit NPOs may not distribute surplus funds to members, owners, shareholders; rather, these funds must be used to pursue the organization’s mission. If all requirements are met, the NPO will be exempt from paying corporate income tax, although informational tax returns must be filed.

Under the rules governing public benefit NPOs, "charitable" purposes is broadly defined, and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. These NPOs are typically referred to as "charitable organizations," and eligible to receive tax-deductible contributions from donors.

To be organized for a charitable purpose and qualify for tax exemption, the NPO must be a corporation, association, community chest, fund or foundation; individuals do not qualify. The NPO’s organizing documents must restrict the organization’s purposes exclusively to exempt purposes. A charitable organization must not be organized or operated for the benefit of any private interests, and absolutely no part of the net earnings may inure to the benefit of any private shareholder or individual.

Additionally, the NPO may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.

All assets of a public benefit non-profit organization must be permanently and irrevocably dedicated to an exempt purpose. If the charitable organization dissolves, its assets must be distributed for an exempt purpose, to the federal, state or local government, or another charitable organization. To establish that the NPO’s assets will be permanently dedicated to an exempt purpose, the organizing documents should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. If a specific organization is designated to receive the NPO’s assets upon dissolution, the organizing document must state that the named organization must be a section 501(c)(3) organization at the time the assets are distributed.

If a charitable organization engages in an excess benefit transaction with someone who has substantial influence over the NPO, an excise tax may be imposed on the person and any NPO managers who agreed to the transaction. An excess benefit transaction occurs when an economic benefit is provided by the NPO to a disqualified person, and the value of that benefit is greater than the consideration received by the NPO.

To apply for tax exemption under section 501(c)(3), the NPO must file Form 1023 with the IRS, along with supporting documentation, including organizational documents, details regarding proposed activities and who will carry them out, how funds will be raised, who will receive compensation from the NPO, and financial projections. If approved, the IRS will issue a Letter of Determination. Public charities must also apply for exemption from state taxing authorities, a process which varies from state to state.