At quick glance, it seems to me that if the city issued them a building permit, then the city doesn’t seem to think that the CC&R’s are binding in any way.
If they were binding, wouldn’t the city require an approval document from the neighborhood group. If there is no HOA, funding or legally recognized authority, I don’t understand what the point is of even having the CC&Rs.
If the neighborhood wanted to sue, it seems they would have to include the city in the lawsuit, driving up the cost even more.
I’d say the remodellers called the Architectural Jury’s bluff and won.
Only thing left is to do what the Amish do – shun them.