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Condo | HOA Lawyers

When is a Business NOT a Business?

Eith v. Ketelhut, — Cal.Reptr.3d — (2018)

The Facts

Homeowner bought home in 2003.  In 2005 they planted a vineyard consisting of 600 plants on around .4 acres after obtaining approval of the Board’s Architectural Committee to their landscape plan that included the grape vines.  The CC&R’s (Covenants Conditions and Restrictions) specifically prohibited that “No lot shall be used for any purpose (including any business or commercial activity) other than for a residence of one family…”  The first wine harvest was in 2008 and the owner began selling the wine in 2009.  In a good year he would produce 720 bottles of wine.  Neighbors objected and when the Board did nothing, they filed suit seeking declaratory and injunctive relief claiming that the Board breached its fiduciary duty and to prohibit the owner from operating their business.  At trial the owner admitted that “the sale of wine is a business,” that the vineyard “operates like a business” and that “this was a hobby.”  The owner also testified that he filed IRS Schedule C for the vineyard, which is entitled “Profit or Loss of Business (Sole Proprietor).”  Under the IRS rules you would not file Schedule C if the business was only a hobby 

The Court

The trial court held that although “the vineyard may have constituted ‘business or commercial activity’ in the literal sense…A literal interpretation in the present case would elevate form over substance and lead to absurd results.” Consequently, it found that because the “wine was made, bottled, and sold commercially offsite, and the activity at the vineyard did not affect the residential character of the community, …there was no business or commercial activity within the meaning of the CC&Rs.” The appeals court agreed finding that the trial court correctly applied the judicial deference rule to the Board’s decision that the owner’s operation of a vineyard was not a prohibited business. Specifically, the appeals court held that where “a duly constituted community association board, upon reasonable investigation, in good faith and with regard for the best interests of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development’s common areas, courts should defer to the board’s authority and presumed expertise.” However, the court also found that it would not “defer to the Board’s interpretation of the CC&Rs” because that action is a “legal question to be decided by the courts, not the Board.” Finally, the appeals court concluded that “as a matter of law…the vineyard is not prohibited business or commercial activity because it does not affect the community’s residential character.” It reached this result in part because it analogized that if the court interpreted the CC&Rs as prohibiting any business, then it would prohibit appellate attorneys from working at home, including reading records and writing briefs because they would be “engaged in the business of practicing law.” It essentially found such a result “absurd.” 

Lessons:

  1. Tax records can be used as evidence, but may not be persuasive of the use of property;
  2. Obtaining Board authority to do something, BEFORE DOING IT, can carry a great deal of weight with the court; and
  3. Take arguments to the extreme if it will support your position and show how absurd a position is.

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