CR2A Agreements Explained
A CR2A agreement is a private agreement (commonly called a "covenant") between homeowners/occupied real estate owners and their homeowners association ("HOA" or "Association"). The term "CR2A" comes from the Washington State law that creates them, Chapter 64.36 RCW. The CR2A law describes the basic elements of a CR2A. RCW 64.36.010(1) defines them as:
… [Any] contract affecting a fee ownership of real property, which is free of reciprocity and is of public record in the county auditor’s office, and runs with the land which provides for:
(a) The elimination activities otherwise required or prohibited by the controlling documents and the limitation of such activities to those specified pursuant to an amendment procedure;"
(b) The removal from standing for election specified persons or categories of persons for any governing board of a homeowners association or subdivision community organization by reason of any criteria set forth in the controlling document other than failure to pay assessments, dues, or fees to the association;"
(c) The removal from active membership in a homeowners association or subdivision community organization, members who are delinquent in the payment of regular, special, or emergency assessments or fines, provided that such removal from active membership cancels only the right to vote and hold office in the association or organization . "
So, while the CR2A law lets Associations create these "free standing contracts affecting title," it also constrains what they can do. Specifically, if a provision is going to eliminate certain criteria or create new qualifying criteria for someone to hold office or serve on a board, it needs to be described in detail. Courts seem to segment CR2A agreements that are made to create presidential or vice-presidential offices into two categories. The first category creates a whole new office without relating it to any other office. The second category creates a new level of offices below the presidency and vice-presidency, commonly referred to as "cabinet level," "administrator level" or positions such as "sheriffs" etc..
The CR2A Statute in Washington
The legal framework governing CR2A agreements in Washington State is primarily found in the Developer Agreements Statute, codified in Revised Code of Washington (RCW) 36.70B.200-230.
RCW 36.70B.215 defines "development agreement" and specifies that a development agreement "shall contain assurances satisfactory to the parties that the development agreement shall be vested." Vesting means that a property owner has certain rights to develop area in such a way that those rights cannot be changed legislatively, or by another form of governmental action. Vested rights for development means that the conditions and the laws that are in effect at the time a permit application is deemed complete will remain in effect during the process of developing.
RCW 36.70B.210 provides that a jurisdiction shall not require the execution of a development agreement. Significantly, RCW 36.70B.205 refers to this type of agreement as a "binding contract." As such, any development agreement entered into by a city or county may only be adopted by an ordinance. This section further requires a jurisdiction to submit a report to the state Department of Commerce of its development agreements every year.
The frequent adoption of RCWs from the Australian Model Code reflects a strong focus by Washington State to encourage the use of CR2A agreements. Washington legislation has gone so far as to specify that development agreements "shall be used and should at a minimum allow flexibility in permitted uses, density, bulk, dimensional requirements, design standards, and other development regulations." RCW 36.70B.210(3). Washington courts have further clarified the rights of developers, including that developers have vested rights not just to develop according to existing zoning regulations, but to be governed by those regulations throughout the development process, including subsequent stages of the development process. See Association of Cities of the State of Washington v. Mount Vernon, 98 Wash.2d 1, 641 P.2d 684 (1982).
Essentials of a Valid CR2A
To ensure the ability to enforce a CR2A agreement, the parties to the agreement should consider including the following key components:
- (1) The agreement should clearly state that both the seller and buyer are subject to the "Covenant Code," including "Covenant Code," as defined under the agreement.
- (2) The covenant code should be attached as an exhibit to the agreement and include specific language that provides the subdivision with a covenant code. Once the property is subdivided and the subdivision becomes part of a homeowners’ association, the subdivision will be subject to the covenant code.
- (3) A description of the property being subdivided should be provided as an exhibit to the agreement, if possible.
- (4) The subdivision plat recorded with the County Auditor, to create the association, should be attached as an exhibit to the agreement.
- (5) The agreement should make clear that all owners hold common areas as tenants in common and share costs of maintaining the common areas.
- (6) The agreement should state who will own the common areas.
- (7) The agreement should include language stating that the parties agree not to record the agreement with the County Auditor, because the agreement is not binding until the subdivision is created and an individual plat is recorded for each lot with the County Auditor, if the subdivision is brought under the Washington Uniform Common Interest Ownership Act, RCW 64.90.
Both the association and the CLG association should not forget to include language in the CR2A agreement that addresses how decisions will be made and how disputes among the homeowners will be resolved. One of the best ways to do this is to adopt an informal constitution or bylaws at the same time the CR2A agreement is established, such that the informal constitution or bylaws build upon the terms of the CR2A agreement.
How a CR2A Agreement Can Help
However, the party who is willing to pay (in whatever form that payment takes) should not want to put themselves in a position where they could find themselves potentially liable to a third party, even a third party they have not yet identified or even met. A CR2A agreement can help mitigate that concern by allowing you and your counsel to identify who the third parties are that would find the money beneficial, and to obtain their consent to receiving the money before it is made available.
It provides clarity for the parties A CR2A agreement provides clarity for all involved. For example, one advantage is that the dollar amount placed in the CR2A is not automatically going to be offset by the value of other things such as tax offsets, consideration already provided, and consideration to be provided. If an amount is agreed to be paid as a CR2A payment, then that amount is guaranteed and is an amount over and above anything else provided or owed. Once the dollars enter the CR2A account it is not possible for the other pieces of the deal to have a readily ascertainable value that will be subtracted from those dollars.
CR2A agreement also allows the party who is receiving the CR2A payment to have certainty about those funds. The party receiving the payment can receive it from the first deposit to be deposited into the CR2A account, before other elements of the deal have been performed or completed. The CR2A agreement allows the party receiving the payment to trust that as funds are deposited into the account amount stated in the CR2A agreement will be there when the account is actually opened and the request to release the funds are made.
Enforceability The other important benefit of a CR2A agreement is enforceability. CR2A agreements are often referenced in settlement proposals at the conclusion of litigation or other dispute resolution processes. They can be an important tool to make sure an agreement that is being relied upon to avoid the time and cost of litigation is actually binding on the party with whom the party relying on the agreement wants to have that agreement and relationship. The problem is that if a party refuses to sign the CR2A agreement when the CR2A agreement provides for it to be signed, is it really binding? The answer is that it depends on the circumstances. However, signing a CR2A agreement when the CR2A agreement provides when it will be signed, is always presented as a compromise and finalization. When it is not signed it could be considered a qualified or contingent agreement and not actually binding without further agreement.
How to Create a CR2A Agreement
A CR2A agreement is not just any old contract, nor is it a re-worded version of the HOA Declaration. There are some unique requirements and steps in preparing such a document. This section will provide some insight about how a legal practitioner should draft a CR2A agreement.
The Washington law which governs CR2As is ambiguous on its face. But it is important to note that RCW 64.34.364(2) states as follows: "The conversion does not result in any alteration of the rights and obligations of the members or of the association, except as expressly set forth in the agreement." It follows that a CR2A should be drafted in accordance with all applicable laws and it should not add or subtract any relevant rights and obligations. We recommend that every CR2A use the language in this subsection as a preface to the actual agreement. It is so basic that it helps avoid ambiguity. The use of extra language to alter member rights and obligations, and other provisions of the declaration, creates a highly risky ambiguity and we recommend against this .
The CR2A is a very specialized document that must be tailored to meet the particular circumstances involved in an individual conversion. It is not appropriate for practitioners to cut and paste from previously prepared CR2As or to download one off the Internet and plug in relevant terms and conditions. A CR2A is not a purchase and sale agreement that can be used over and over again as a generic template. And it is not a deed of trust that likewise can be used repeatedly as a fill in the blank form.
We recommend that the legal practitioner always prepare a sketch of the property and include it as an exhibit to the CR2A. At a minimum, said drawing must show the location of all buildings, common or otherwise. Showing the location of each individual unit is also helpful.
Each CR2A must also provide for providing copies of the CR2A to all unit purchasers, whether the CR2A is or is not incorporated into the declaration. We recommend that this requirement be added as a new section to the association’s declaration relating to the powers of the board.
Limitations and Drawbacks
Despite the advantages CR2A agreements can provide, they are not without challenges. Further negotiation after the less formal LOI phase may yield unexpected or unintended results that could become highly problematic. The first area of potential challenge is that of confidentiality. With regard to arbitration proceedings, the agreement will be confidential. If the parties have agreed to the contrary, that additional confidentiality protection must be clearly spelled out. However, let’s say an arbitrator interprets the new provision to mean that the CR2A agreement is going to be kept completely secret. An employer who loses a race discrimination case following arbitration may prefer the case to be made public to counteract any negative impressions or assumptions about its work culture. A clear explanation and understanding of the effect of the confidentiality requirement is needed, or a party may not get what it thought it was getting. Most likely, the party with the more knowledge of the potential effect of such a clause on the arbitration will prevail when the parties are in a dispute as to the meaning of their agreement. Another common problem with CR2A agreements comes when an employer attempts to insert language preserving pre-existing claims of action. It is not uncommon for an employer to want to insert into the CR2A agreement a provision that preserves the employer’s right to proceed against both the employee and any CR2A co-defendants that were not specifically agreed upon in the written agreement. This practice is common in ?blackline? negotiations. It serves to preserve pre-existing claims of action while retaining the targeted effect of the CR2A agreement in persuading the arbitral forum to apply the heightened evidentiary and procedural rules that are favorable to employers. It is important to note, however, that an insertion of this language without input and consensus from the employee is a recipe for disaster. Employers should consider these balancing principles when engaging in CR2A negotiations: The CR2A provisions will never be more favorable in arbitration than in jury litigation. The CR2A provisions will likely be extremely unfavorable in a court of law. Vague terms in a CR2A agreement can lead to disastrous results. Like the blackline practice mentioned above, failing to quantify or specify custom norms and prohibitions within the CR2A can leave the crucial terms of the agreement open to challenge.
What Happens When You Breach a CR2A Agreement
Enforcement of a CR2A Agreement in Court in Washington State
If there is a dispute regarding enforcement of the CR2A or other agreement, often the first step is to attempt to informally resolve the issues. However, if resolution through negotiations and mediation is not possible, the Parties may need to involve other sources of resolution. Frequently, the best place to first look to resolve issues if you and the other party cannot reach a resolution through negotiation is within the language of the CR2A itself. In the CR2A, there is likely a "Dispute Resolution" section that will guide the parties’ actions. Oftentimes this involves the filing of an informal request for mediation with the applicable Developer, Architectural Review Committee, or similar entity. The CR2A likely gives the Developer or committee a period of time to consider the situation and respond. Hopefully this process will lead to a resolution of the issues without the need to seek further involvement of a court or government agency. However, if the dispute cannot be resolved through the informal process, the next step is often litigation to have the court interpret which side’s position is more consistent with the applicable provisions of the CR2A. Washington law clearly allows for the enforcement of a CR2A through court action. CR2A’s are frequently analogized to easements (language in the CR2A granting an easement to each lot owner in favor of all other lot owners). The common law of easements indicates that a party can seek an order from a court requiring the other party to grant an easement. In the context of a CR2A, this can mean you request an order from the court (issued in the form of a temporary or permanent injunction, among other potential forms of order), to either require that the other person comply with the terms of the CR2A, or alternatively, you can seek an order from the court that will prohibit the other persons from taking an action that would violate the terms of the CR2A. The best practice is to seek an order of the Court enforcing the CR2A and prohibiting the other parties from violating the terms of the CR2A. At the time a Plaintiff files a lawsuit with a court, one can also seek an asset preservation order. An asset preservation order is an order of the Court that will prohibit any defendant in the case from selling or disposing of their assets pending resolution of the lawsuit. This can be a very effective method to preserve the value of a disputed (violated) easement/CR2A.
Your rights under a CR2A Agreement
Involving professionals for any CR2A issues is crucial to protecting your legal rights. Attempting to draft your own agreement could be disastrous if not executed well, as it potentially can include illegal provisions. Attempting to enforce an agreement without first seeking legal advice can leave you with a steep uphill battle. All these issues involve common common law principles under Washington law , and that’s the reason for hiring an attorney that specializes in community association law – to ensure that your association gets the legal protection the community needs.