FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CIVIL NO. 08-1-1855-09)
On the briefs: Diane K. Taira Matthew S.Dvonch Deputy Attorneys General for Appellees-Appellants.
Moses K.N. Haia Alan T. Murakami (Native Hawaiian Legal Corporation) for Appellant-Appellee
NAKAMURA, CHIEF JUDGE, AND FUJISE AND LEONARD, JJ.
The Kalawahine Streamside Project (Kalawahine Project) is a planned residential homestead community located on lands owned by the Department of Hawaiian Home Lands (DHHL). The Kalawahine Project involved the construction of approximately thirty-three single-family homes and fifty-four duplexes and also includes common areas for residents. The Kamehameha Investment Corporation (KIC), a private developer, developed the Kalawahine Project pursuant to an agreement with DHHL.
Qualified applicants on DHHL's waiting list entered into a sales contract with KIC to purchase their residence and entered into a homestead lease agreement with DHHL for the underlying land. In their sales contract with KIC, Kalawahine Project residents agreed to be bound by the Kalawahine Project's Declaration of Covenants, Conditions and Restrictions (DCCRs). The Kalawahine Project residents also agreed to be bound by the DCCRs as part of their lease agreement with DHHL. The DCCRs imposed conditions and restrictions on the residents' use and occupancy of their residences and established a homeowners' association called the Kalawahine Streamside Association (Association), of which all beneficial owners of the leasehold interest in any residential lot were members, to manage, operate, and maintain the Kalawahine Project.
Hui Maka'ainana a Kalawahine (HM) is a non-profit community-based organization comprised of certain Kalawahine Project residents. Approximately five years after members of HM had purchased residences and acquired homestead leases from DHHL in the Kalawahine Project, HM and members of its board of directors filed a petition, and later an amended petition, with the Hawaiian Homes Commission (HHC). In their amended petition, the petitioners sought a declaratory ruling that the DCCRs are void because DHHL had incorporated them into the Kalawahine Project residential leases without first prescribing administrative rules. The petitioners asserted that Section 207.5 of the Hawaiian Homes Commission Act, 1920, Act of July 9, 1921 (HHCA) required DHHL to prescribe rules before imposing the DCCRs as conditions of the Kalawahine Project residential leases.
Following a contested case hearing, a hearings officer rejected the petitioners' arguments. The hearings officer recommended that the HHC rule that HHCA § 207.5 did not apply to the Kalawahine Project, that DHHL therefore was not required to prescribe rules before incorporating the DCCRs into the Kalawahine Project homestead leases, and that DHHL acted appropriately in incorporating the DCCRs into such leases. The HHC adopted the hearings officer's Findings of Fact, Conclusions of Law, and Recommended Decision and Order, denied the amended petition, and dismissed the matter. HM appealed to the Circuit Court of the First Circuit (Circuit Court). The Circuit Court reversed the HHC's decision and declared the DCCRs void.
Appellees-Appellants the HHC, its Chairperson and members, and DHHL (collectively, DHHL) appeal from the Final Judgment entered by the Circuit Court. On appeal, DHHL argues that the Circuit Court erred in concluding: (1) that HHCA § 207.5 applies to the Kalawahine Project; and (2) that DHHL was therefore required to comply with the rulemaking requirements of HHCA § 207.5 before incorporating the DCCRs into homestead leases granted to Kalawahine Project residents. DHHL contends that HHCA § 207.5 does not apply to the Kalawahine Project because the Project was developed pursuant to HHCA § 220.5. DHHL further contends that it properly issued the homestead leases for the Kalawahine Project pursuant to HHCA § 207(a),  which DHHL asserts permits it, without promulgating rules, to impose conditions, such as DCCRs, on residential lot leases. Accordingly, DHHL argues that the DCCRs are valid and enforceable conditions of the homestead leases it issued for the Kalawahine Project.
DHHL notes that if HM is correct that HHCA § 207.5 requires DHHL to promulgate rules in order to impose the DCCRs as conditions of the Kalawahine Project's homestead leases, then the validity of the sales contracts under which HM members purchased their homes would be called into question. HHCA § 207.5 requires DHHL to prescribe rules for the "method of disposition" as well as "the terms, conditions, covenants, and restrictions as to the use and occupancy" of single-family and multifamily units falling within the scope of HHCA § 207.5. Just as DHHL did not prescribe rules regarding the DCCRs, it did not prescribe rules regarding the method of disposition of units in the Kalawahine Project. DHHL asserts that HM's argument, if taken to its logical conclusion, would require invalidation of the sales contracts under which HM members acquired their residences.
DHHL alternatively argues that even if the DCCRs are invalid conditions of the Kalawahine Project homestead leases because DHHL should have promulgated rules before incorporating the DCCRs into the leases, the Kalawahine Project residents agreed to be bound by the DCCRs in their sales contracts with KIC. Accordingly, DHHL asserts that independent of the homestead leases, the DCCRs remain enforceable by the Association pursuant to Hawaii Revised Statutes (HRS) Chapter 421J, which governs planned community associations.
As explained in greater detail below, we conclude that HHCA § 207.5 applies to the Kalawahine Project and that DHHL should have promulgated administrative rules before incorporating the DCCRs into the homestead leases issued to the Kalawahine Project residents. We further conclude that independent of the homestead leases, the Kalawahine Project residents are bound by the DCCRs pursuant to their sales contracts with KIC, and that the DCCRs, which are intended to benefit the entire planned community, remain subject to enforcement by the Association. Accordingly, we affirm the Circuit Court's Final Judgment to the extent that it vacated the decision of the HHC and declared that under HHCA § 207.5, DHHL was required to promulgate rules before incorporating the DCCRs into the homestead leases issued to the Kalawahine Project residents. We vacate the Circuit Court's Final Judgment to the extent that it declared that the DCCRs are invalid and not subject to enforcement by the Association.
Under the circumstances of this case, equitable remedies may need to be fashioned to address DHHL's failure to promulgate rules as required by HHCA § 207.5. The remedies ultimately chosen must take into account their impact on those who relied upon or are affected by the actions taken by DHHL without promulgating rules required by HHCA § 207.5. On remand, the Circuit Court and the HHC should consider whether equitable remedies, including interim measures pending DHHL's promulgation of rules pursuant to HHCA § 207.5, are necessary and appropriate in light of this court's decision.
DHHL entered into a development agreement with KIC to develop and construct the Kalawahine Project, a planned residential homestead community consisting of approximately thirty-three single-family homes, fifty-four duplex units, and common areas. Pursuant to the development agreement, KIC drafted the DCCRs, which created the Association to manage and maintain the Kalawahine Project.
Prior to construction of the homes, KIC sent letters to certain applicants on DHHL's homestead waiting list, informing them of the lot selection process for the Kalawahine Project. A draft copy of the DCCRs was attached to these letters. Selected applicants then entered into a "Deposit Receipt and Sales Contract" (Sales Contract) with KIC for the construction and purchase of homes in the Kalawahine Project. Each Sales Contract between KIC and the selected applicants provided that everyone purchasing homes in the Kalawahine Project would be subject to the DCCRs as follows:
DECLARATION. Buyer acknowledges that the Declaration provides that all owners in the Project are subject to the Declaration, copies of which have been received by the Buyer. The Declaration provides, among other things, that (a) Buyer automatically becomes a member of the Association upon issuance of the Lease to Buyer, (b) that Buyer must pay assessments to the Association (including assessments for upkeep maintenance and repair of certain common areas within the Project), (c) that no construction, or alteration of improvements on the Property is permitted except in accordance with certain design rules and guidelines, and (d) that the Property is subject to certain restrictions o[n] use, all as more fully set forth in the Declaration. The Declaration also provides that initiation and monthly or other periodic assessments must be paid.
On March 28, 2000, the DCCRs were recorded in the Bureau of the Conveyances of the State of Hawai'i. The purposes of the DCCRs are to "enhance the orderly and proper development and use" of the planned community, "to protect the value, desirability and attractiveness of the [Kalawahine] Project, and to promote the quality of improvements and uses of the [planned community] as a whole[.]" The DCCRs provide that its covenants, conditions, and restrictions create mutual equitable servitudes upon each lot in favor of every other lot in the planned community and create reciprocal rights and obligations among all persons and entities having any right, title, or interest in and to any lot within the planned community.
The DCCRs established the Association and imposed various duties and obligations on the Association to be performed for the maintenance and improvement of the Kalawahine Project, including the responsibility for managing and maintaining the common areas. The DCCRs also empowered the Association to, among other things: (1) levy assessments on members of the Association to cover the Association's costs and expenses in performing its duties; and (2) adopt and amend rules to govern the use of the common areas and to govern other matters, such as the collection and disposal of refuse and the maintenance and preservation of the Kanaha Stream. The Articles of Incorporation for the Association were filed with the Department of Commerce and Consumer Affairs on April 4, 2000, and the Association adopted By-laws on May 1, 2000.
In addition to entering into Sales Contracts with KIC for the construction and purchase of their homes, the residents of the Kalawahine Project entered into homestead leases with DHHL for the lots underlying their homes. The homestead leases signed by the Kalawahine Project residents ...