Valenti v. Hopkins ( 1996 )

VAN HOOMISSEN, J.

This is an action to enforce restrictive covenants in a residential subdivision. After the subdivision’s Architectural Control Committee (ACC) approved defendants’ house plans, plaintiffs brought this action, asserting that defendants’ construction would obstruct plaintiffs’ view in violation of the subdivision’s restrictive covenants. The trial court denied injunctive relief. The Court of Appeals gave no deference to the ACC’s determination and, on de novo review, held that defendants had violated the restrictive covenants. The Court of Appeals, therefore, reversed and remanded the case to the trial court to fashion a remedy. Valenti v. Hopkins, 131 Or App 100, 883 P2d 882 (1994). The issue is whether the decision of a contractually created private architectural control committee is reviewable de novo by the courts, with no deference being given to the committee’s interpretation of the enabling restrictive covenants or to its conclusions on the merits. For the reasons that follow, we reverse the decision of the Court of Appeals.

In 1988, plaintiffs purchased their two-story home in the West Ridge Subdivision in Deschutes County. At that time, plaintiffs had an unobstructed view of the Cascade mountains to the west and of the Paulina and Ochoco mountains to the east. At the time plaintiffs purchased their home, the subdivision’s restrictive covenants provided that “[t]he height of improvements * * * on a lot shall not materially restrict the view of other lot owners” and that the ACC “shall be the sole judge of the suitability of such heights.”

In 1989, the owners of the lots in the subdivision approved amended covenants that control the design of newly constructed homes. Article I of the amended covenants provides in part:

“Section 1. Architectural Control Committee.

“(A) An Architectural Control Committee is hereby established. This Committee shall consist of three (3) lot owners with the selection being made by an annual vote of all then lot owners to be held on or about May 1st of each year, with each lot owner entitled to one vote regardless of the number of lots owned. * * *

“(B) Generally, the Committee will be responsible for approval of plans and specifications of private areas and for promulgation and enforcement of its rules and regulations governing the use and maintenance of private areas and improvements thereon.

* * * *

“(D) Neither the Architectural Control Committee nor any member thereof shall be liable to any lot owner for any damages, loss or prejudice suffered or claimed, on account of any action or failure to act of the Committee, or a member thereof, provided only that the member, in accordance with actual knowledge possessed by him/her, has acted in good faith.

“Section 2. Architectural Control Committee Consent.

“Consent of the Architectural Control Committee is required for all new construction, exterior remodel, landscaping, and any major improvements upon the lot. In all cases, the following provisions shall apply:

* * * *

“(B) Architectural Control Committee Discretion and Guidelines.

“The Architectural Control Committee may at its discretion withhold consent with respect to any proposal which the Committee finds would be inappropriate for the particular lot or would be incompatible with the neighboring homes and terrain within West Ridge Subdivision. Considerations such as size, height, color, design, view, effect on other lots, disturbance of existing terrain and vegetation, and any other factor which the Committee reasonably believes to be relevant, may be taken into account by the Committee in determining whether or not to consent to any proposal.” (Emphasis added.)

Article II (Restrictions On Use Of Property) provides in part:

“Section 2. Construction and Alteration of Improvements in Private Areas.

“No person, association, or owner shall construct or reconstruct any improvement on any lot, make any change in any lot, whether by excavation, fill, alteration of existing drainage, * * * unless such person, association, or owner has first obtained written consent thereto from the Architectural Control Committee.”

Article III (Architectural Rules) provides in part:

“Section 4. View and Building Height.

“The height of improvements or vegetation and trees on a lot shall not materially obstruct the view of adjacent lot owners. The Architectural Control Committee shall judge the suitability of such heights and may impose restrictions.[¹] If the Architectural Control Committee determines there is such obstruction of view of adjacent lot owners, written notice shall be delivered to the offending owner. If after 30 days the improvement, vegetation or trees are not removed or reduced in height, as approved by the Architectural Control Committee, the Committee shall arrange to have the removal or reduction completed, charging the owner of the lot the reasonable costs for work done. This section is not to be read as justification to create views not present when the lot was originally purchased.” (Emphasis added.)

Article IV (General Provisions) provides in part:

“Section 2. Enforcement.

“Enforcement shall be by proceedings at law or in equity against any person or persons violating or attempting to violate any Covenants either to restrain violation or to recover damages and may be brought by any owner in the subdivision. In the event that suit or action is initiated, the prevailing party shall be entitled to recover all costs and reasonable attorney’s fees incurred in such action.”

Plaintiffs’ lot and house are on the east side of West Ridge Avenue. In 1990, defendants purchased a lot across West Ridge Avenue to the west of plaintiffs’ home. In March 1990, defendants submitted their house plans to the ACC. Plaintiffs objected on the ground that defendants’ proposed house would obstruct their view of the mountains to the west. Plaintiffs understood that the view from their first floor would be obstructed by any house built on defendants’ lot; however, they expected the ACC to protect the view from their second floor. The ACC rejected defendants’ plans for reasons unrelated to plaintiffs’ objection. Defendants then submitted alternate plans for a two-story house, which the ACC approved. Defendants later withdrew those plans and, instead, proposed to build another type of house of the same basic design. With some alterations unrelated to height, the ACC approved those plans. Most importantly, the ACC interpreted the subdivision’s amended covenants to mean that, because plaintiffs’ home was located on the east side of West Ridge Avenue, plaintiffs’ lot was not “adjacent” to defendants’ lot within the meaning of Article III, section 4, and, therefore, that plaintiffs did not have a protected western view.² After the ACC approved defendants’ plans, they began construction. As expected, their house obstructed plaintiffs’ second-floor view of the mountains to the west.

Plaintiffs then filed this action in circuit court, seeking injunctive relief and specific performance of the covenants or monetary damages. The trial court concluded that the ACC had not acted “arbitrarily or unreasonably” in approving defendants’ plans, dismissed plaintiffs’ complaint, and awarded defendants attorney fees. The court relied primarily on Lincoln Const. v. Thomas J. Parker & Assoc., 289 Or 687, 617 P2d 606 (1980) (recognizing a “fraud, bad faith, or failure to exercise honest judgment” standard of review for decisions of private entities like the ACC). Plaintiffs appealed, contending that the trial court erred in failing to find that defendants had breached the amended covenants, in failing to conclude that the ACC’s decision was “arbitrary and unreasonable,” and in failing to grant appropriate relief from defendants’ alleged breach. Defendants cross-appealed, arguing that plaintiffs’ complaint did not state sufficient facts to constitute a claim, because they did not challenge the reasonableness of the ACC’s decision. Defendants also argued that the trial court’s award of attorney fees was inadequate.

The Court of Appeals rejected defendants’ first cross-assignment of error and then concluded that it was not required to defer to the ACC’s interpretation of the enabling covenant or to its findings on the merits, relying on Hanson v. Salishan Properties, Inc., 267 Or 199, 515 P2d 1325 (1973). The court proceeded to review the trial court’s decision de novo and concluded that, within the meaning of the covenants, plaintiffs’ and defendants’ lots were “adjacent” and that plaintiffs were entitled to protection of their view to the west over defendants’ lot. The court found that defendants’ house materially obstructed plaintiffs’ view and concluded that defendants had breached the covenants. Accordingly, the court remanded the case to the trial court to fashion a remedy. Valenti, 131 Or App at 109. We allowed defendants’ petition for review to determine the proper role of the courts in reviewing decisions of a contractually created private design committee charged with enforcing a subdivision’s restrictive covenants.

This court has referred to restrictive covenants, such as those at issue here, as “contractual obligations imposed upon all lot owners.” Ludgate v. Somerville, 121 Or 643, 648, 256 P 1043 (1927). Generally, restrictive covenants such as those found here are enforceable. See Alloway v. Moyer, 275 Or 397, 400-01, 550 P2d 1379 (1976) (the defendant must comply with a reasonable construction of the restriction); Donaldson v. White, 261 Or 314, 493 P2d 1380 (1972) (restrictive covenant enforced); Snashall v. Jewell, 228 Or 130, 363 P2d 566 (1961) (same). As a general rule, the construction of a contract is a question of law. Unambiguous contracts must be enforced according to their terms; whether the terms of a contract are ambiguous is, in the first instance, a question of law. Pacific First Bank v. New Morgan Park Corp., 319 Or 342, 347, 876 P2d 761 (1994).

In Hanson, the plaintiffs sought a permanent injunction prohibiting the defendant, a neighboring leaseholder, from building a specific kind of house on his leased beachfront lot that, the plaintiffs alleged, would interfere with their views of the beach and the ocean. Lease covenants provided that lessees

“shall restrict the height of improvements * * * to the end that the view of other * * * tenants shall be preserved to the greatest extent reasonably possible.” Hanson, 267 Or at 202.

Pursuant to “Architectural Considerations” incorporated into the lease, the defendant submitted construction plans to an architectural committee, which approved them. After the plaintiffs obtained a favorable judgment from the trial court, this court reversed, stating:

“The more serious restriction is that height will be limited to the end that views ‘shall be preserved to the greatest extent reasonably possible.’ The sort of a structure which will so preserve the view is, of course, a matter of opinion [emphasis added]. The documents in question leave such a decision to the Architectural Committee. The committee was of the opinion that a few feet of additional height to the [defendants’] house would obstruct less view of consequence than would be the case if the usable square footage in the second story were added to the first floor, thereby creating additional width. * * * Unless this court can find that the decision of the Architectural Committee did not [original emphasis] preserve the view of upland owners to the greatest extent reasonably possible, that committee’s decision should not be disturbed. From the evidence in this case we cannot say with any conviction that its decision did not so preserve plaintiffs’ view.” Id. at 204.

Hanson did not purport to establish, even in dictum, a non-deferential standard of review for decisions of architectural committees charged with applying and enforcing restrictive covenants of a subdivision.

Friberg v. Elrod et al., 136 Or 186, 296 P 1061 (1931), was a suit to foreclose a mechanic’s lien for labor performed under a construction contract. The contract provided that “[t]he engineer shall be the sole judge of the * * * quality of the work done by the contractor” and that “[a] 11 disputes or disagreements between the parties hereto shall be submitted to and decided by the engineer and his decision shall be binding upon both parties.” Id. at 189. The defendant argued that the plaintiffs lien claim already had been decided by the engineer and that the engineer’s final estimate of the amount to be paid to the plaintiff under the contract should be accepted. This court agreed, holding:

“Where a contract stipulates that a certain engineer is expressly clothed with the broad authority to determine all questions arising in relation to the work, * * * and provides that after the completion of the work the engineer shall make a final estimate of the amount of work done, and the value thereof to be paid by the builder, * * * the contract does not create a mere naked agreement to submit differences to arbitration, such stipulations are of the very essence of the contract, and such agreement is not subject to revocation by either party, and an award * * *, in the absence of fraud or of such gross mistake as would imply bad faith or a failure to exercise honest judgment, is binding on both parties to the contract * * *.”Id. at 194-95 (emphasis added).

Friberg applied a deferential standard of review to carry out the expressed intention of the parties to avoid costly and time-consuming litigation and to promote finality by upholding the decision of a contractually designated third party. The consistent policy of the law is to encourage the private resolution of disputes.

Lincoln was an action for breach of contract between a road builder and a supplier of gravel. In that case, this court recognized:

“Parties to contracts often provide for resolution of disputes by a skilled, neutral third person. The rationale is that a quick resolution of their differences is commercially more practicable than a potentially expensive lawsuit. When a contract clearly expresses that a third person is to make final decisions respecting specified matters, such agreement is enforceable. Such third person’s determination is final, absent a showing of fraud, bad faith, or a failure to exercise honest judgment.” 289 Or at 692-93 (citing Friberg, 136 Or at 195).³

The Lincoln court explained the rationale for deferring to a designated third-party’s decision:

“Normally, when contracting parties agree to abide by determinations made by a third person, they do so in the belief that the third person will make such determinations in good faith, and in a fair, impartial manner. To a substantial degree, the honesty, integrity and objectivity of such third person is a factor in the decision of one to agree that a third person make such determinations.” Id. at 693.

In this case, plaintiffs argue that the ACC’s members are neither “skilled” nor “neutral” and, therefore, that their decision is not entitled to deference under the Friberg standard. We reject that argument. Plaintiffs approved the covenants — including the provisions for the creation and authority of the ACC — knowing that the ACC’s members would be owners of lots in the subdivision who, like themselves, would not necessarily have any expertise in the matters they might be asked to resolve. We proceed to examine the restrictive covenants here to determine whether the Friberg standard of review is applicable in these circumstances.

The subdivision’s covenants expressly provide that “the [ACC] will be responsible for approval of plans and specifications of private areas and for promulgation and enforcement of its rules and regulations governing the use and maintenance of private areas and improvements thereon.” They further provide that “[c]onsent of the [ACC] is required for all new construction” and that “[t]he [ACC] may at its discretion withhold consent with respect to any proposal which the [ACC] finds would be inappropriate for the particular lot or would be incompatible with the neighboring homes and terrain within [the subdivision].” The ACC is given broad authority to consider “height, * * * view, effect on other lots * * * and any other factor it reasonably believes to be relevant” in determining whether or not to consent to any proposal. The covenants provide that “[t]he height of improvements * * * on a lot shall not materially obstruct the view of adjacent lot owners,” but they further provide that “[t]he [ACC] shall judge the suitability of such heights and may impose restrictions.” (Emphasis added.) We take the use of the words “shall judge” to mean that in the context of the broad range of authority granted, the ACC is intended to be the final arbiter both as to the applicable law and the facts, with respect to height restrictions.

In summary, the collective wording of the restrictive covenants set out above clearly expresses that the ACC is to make final decisions respecting the relevant issues. We therefore hold that the standard of review articulated in Friberg and discussed in Lincoln — review for fraud, bad faith, or failure to exercise honest judgment — is the appropriate standard of review of the ACC’s interpretation of the language in the covenants here and of its decision on the merits. Plaintiffs neither have alleged nor proved that the ACC’s interpretation of the language in the covenants or its decision on the merits in this case was the result of fraud, bad faith, or a failure to exercise honest judgment.

We hold that the Court of Appeals erred in deciding de novo that defendants had breached the covenants. We reverse the decision of the Court of Appeals and remand the case to that court for consideration of defendants’ assignment of error concerning attorney fees.

The decision of the Court of Appeals is reversed. The case is remanded to the Court of Appeals for further consideration.

1 Before 1989, the covenants provided that the ACC was to be the “sole judge” of the suitability of heights. The record before this court does not disclose why the owners amended the covenants in 1989 to provide that the ACC “shall judge” the suitability of heights.

2 In a letter to plaintiffs, in the context of an unrelated dispute with another neighbor, the ACC explained its position as follows:

“Previous committees have established ground rules concerning a homeowner’s view that are essentially as follows:

“1. Persons with homes on the West side of the street shall have views to the West out the back of their homes.

“2. Persons with homes on the East side of the street shall have views out the back of their homes to the East.

«jj: # jjc ^

‘Western views, of the Cascade Mountains, are considered the prime views and this is reflected in the fact that lots on the West side of Westridge sell for considerably more than lots on the East side. No one on the East side of the street is guaranteed a Westerly view.”

Although plaintiffs argue that the ACC’s specific decision in their case was “arbitrary, capricious, unfair and unreasonable,” they do not argue that the ACC lacked authority to interpret the covenants.

3 Strictly speaking, the court’s restatement of the Friberg principle was not essential to the decision in Lincoln because, in Lincoln, this court determined that neither of the alleged contractually designated “third parties” had made a binding determination. 289 Or at 693. But the dictum was a strong one, and we find it to be instructive.