March 2009
In This Issue:
Restaurant Does Not Have Right to Use Association's Pier and Boat Slips
Without Express Contract, Association Cannot Collect Fees From Resident
Association Has No Duty to Insure Personal Property Located Outside Unit
State Department of Transportation Must Consider All Owners and Property in Condemnation Action
Lot Owners Do Not Have Access to Easement Across Their Lot
Homeowner Cannot Construct Addition that Violates Setback Restriction
Mandatory Arbitration Clause Not Substantively Unconscionable
Amendment that Changes Approval and Enforcement Provisions Valid
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Restaurant Does Not Have Right to Use Association's Pier and Boat Slips

Anchor Point Condominium Owner's Association v. Fish Tale Properties, LLC, No. 2007AP2378, Wisc. App. Ct., July 3, 2008

Contracts: A Wisconsin appeals court ruled that pier use and pier placement were riparian rights that arose from a condominium association's owning land abutting navigable water and, therefore, an adjacent restaurant could not use the association's pier or boat slips.

In 2002, Jiran & Sadek, LLC, owned two adjacent lots in Columbia County, Wisc., one of which abutted Lake Wisconsin. Lot One, the non-lake property, was the site of a restaurant. Lot Two, the lake property, was the future site of Anchor Point Condominiums, which would be administered by the Anchor Point Condominium Owner's Association ("association"). In June 2002, Jiran & Sadek executed a declaration creating an easement for shared driveways and parking lots between the two lots, granting the restaurant property an eight-foot easement for ingress and egress on the condominium property, and granting the restaurant property the right to use some of the condominium's piers, boat slips and docks. In January 2003, similar rights were assigned to Fish Tale Properties, LLC ("Fish Tale") in connection with Fish Tale's purchase of the restaurant property. In January 2007, the association sued Fish Tale to prevent it from using the association's piers and boat slips. Both parties moved for summary judgment, which the trial court granted to Fish Tale. The association appealed.

The association argued that the declaration and the assignment were invalid because they purported to transfer riparian rights to non-riparian owners and thus violated a Wisconsin statute that prohibits a riparian owner from transferring any riparian right to another except for the right to cross land in order to have access to navigable water. Fish Tale argued that the right to use the piers and boat slips was not a riparian right, and that even if such use was a riparian right, that it fell within the exception to the statute allowing transfer of such right to have access to navigable water.

The appeals court agreed with the association, concluding that the use of the piers and boat slips was a riparian right. According to the court, riparian owners enjoy specific property rights based on owning land abutting water, including the right to use the shoreline and have access to the waters; the right to reasonable use of the waters for domestic, agricultural and recreational purposes; the right to construct a pier or similar structure in aid of navigation; and the right of exclusive possession as necessary to access and use the water.

While Fish Tale argued that pier use had never been recognized by Wisconsin courts as a riparian right, that navigable waters belong to the state, and that pier use was therefore merely a valid public use of private property in the water, the court did not agree that this translated into a non-riparian owner's right to use a riparian owner's pier. The court further declined to accept Fish Tale's distinction between pier placement as a recognized riparian right and pier use as a distinct act. The court declared that both pier use and pier placement were riparian rights that arose from a riparian owner's owning land abutting navigable water and subject to the state's superior interest in protecting the waters.

The court also rejected Fish Tale's assertion that use of the pier and boat slips fell under the exception to the statute that allows crossing of land to have access to navigable water. The court distinguished between using piers and boat slips and simply crossing land to access water. The court also responded to Fish Tale's argument that the court's interpretation of the statute would mean the non-riparian owner with an easement to the water would only be allowed to cross the land and walk to the water's edge, without placing his or her toes in the water. The court noted that where land reaches navigable water, the land ends at the ordinary high water mark, but that public enjoyment of the state's waters does not include the use of a riparian owner's piers or boat slips. Fish Tale's valid easement over the association's land to access the water would allow Fish Tale to cross the ordinary high water mark to access publicly owned waters, but such right is clearly distinct from allowing Fish Tale to use the association's piers and boat slips.

The court reversed the trial court's decision and remanded the case to the trial court, instructing the trial court to deny Fish Tale's motion for summary judgment. The court also granted in part the association's motion for summary judgment, declared the transfer of pier and boat slip use to Fish Tale void, and enjoined Fish Tale from using the association's piers and boat slips.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Without Express Contract, Association Cannot Collect Fees From Resident

Mahoney v. Loma Alta Property Owners Association, Inc., No. 2060750, Ala. App. Ct., Aug. 22, 2008

Assessments: When a townhome resident initially admitted owing assessments and late fees and later said she had no contractual obligation, a court determined that the association could only sue the owner of the townhome, not the resident.

Carol Mahoney lived in a townhome in the Loma Alta townhomes subdivision. The Loma Alta Property Owners Association, Inc. ("association") sued Mahoney, claiming breach of the condominium association declaration when she refused to pay association fees, assessments and late charges. The association also sought to recover its costs. Mahoney asserted that she was entitled to a setoff because the association had failed to make repairs on her unit. The trial court ruled in favor of the association, awarding it costs and attorney's fees.

On appeal, Mahoney relied on the Alabama Litigation Accountability Act. Her defense was that she was merely a tenant in the townhome that her husband, Joseph Mahoney, owned. Joseph Mahoney does not reside in the townhome but is the sole owner of the property. Therefore, the court determined that the association had no right to hold Carol Mahoney accountable for failure to pay dues to the association. In addition, the association had no right to force an eviction on Carol Mahoney due to her failure to pay. The association filed an amended complaint naming Joseph Mahoney as a defendant, but moved forward in the litigation acting under the notion that the association had the right to enforce the claim on both the property and the person residing on the property, even if the resident was not the owner.

The association's primary claim against Carol Mahoney was a breach of contract claim because she failed to pay association fees and violated the duties of an owner as stated in the association's declaration. However, the association failed to present any evidence that there was a contract binding the association directly to Carol Mahoney. Finding no contractual grounds for Carol Mahoney to pay the claims, the appeals court ruled in favor of Carol Mahoney and reversed the trial court's decision.

The association's second claim rested upon the theory that there was an implied contract with Carol Mahoney because she resided in the townhome and benefited from the services the association maintains in the common area. However, this quantum meruit theory required not only that the association establish reasonable expectation of compensation for its services, but also that there was no existence of an express agreement for the same services. Since the association has an express contract in the form of the community declaration, the quantum meruit argument had no base.

The appeals court ruled in favor of Carol Mahoney because her husband was the sole owner of the townhouse. He, alone, had the contractual obligation to pay the association fees.

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Association Has No Duty to Insure Personal Property Located Outside Unit

Costa Del Sol Association, Inc. v. State of Florida, 987 So. 2d 734 (Fla. Dist. Ct. App. 2008)

Association Operations: Items that are purchased, installed, removable and usable only by individual unit owners are not condominium property, and do not have to be insured by an association merely because they are located outside individual units.

The Florida appeals court reversed a declaratory statement by the Department of Business and Professional Regulation, Division of Florida Land Sales, Condominiums and Mobile Homes ("department") that items, such as Jacuzzis, trellises and elaborate screen enclosures, which are purchased, installed, may be removed and are usable only by individual unit owners are condominium property. The department also noted that, as condominium property, the items must be insured by the association because they are located on the patio outside, rather than inside, the individual unit.

The court noted that no legal basis existed for the distinction the department drew between items that were placed outside units and those that were placed inside units. The court determined that the department's ruling effectively made the condominium association the owner of such items rather than the individual owner. The court labeled the ruling "a clearly erroneous assessment of the facts…and entirely contrary to any acceptable interpretation of the statutory language the administrative agency in question is charged with enforcing." Finally, the court described the consequence of the ruling as an unfair financial burden upon association members who derived no benefit from the insured items and that the ruling was contrary to previous rulings of the department.

In its decision, the court noted that it is "bad enough to compare apples and oranges; it is much worse to find that apples are oranges."

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State Department of Transportation Must Consider All Owners and Property in Condemnation Action

Department of Transportation v. Fernwood Hill Townhome Homeowners' Association, Inc., 185 N.C. App. 633 (2007)

State and Local Legislation and Regulation: When a department of transportation condemned a portion of a townhouse development for a highway project, a court ruled that all owners of townhouses were to be added as defendants and that all the lots together constituted a single, unified tract for the purpose of awarding damages or offsetting benefits.

In August 2004, the North Carolina Department of Transportation ("DOT") filed a complaint and declaration of taking in order to condemn a .14-acre portion of the common area of the Fernwood Hill townhouse development in Henderson, N. C., for a highway project. The parcel did not include any individually-owned property. The DOT also submitted a deposit of $5,300 that it estimated to be just compensation for the property. Fernwood Hill is governed by CC&Rs, and the common area is administered by the Fernwood Hill Homeowner's Association ("association").

The association answered the DOT's complaint and added all the individual townhouse owners as parties, and it filed a motion in August 2005, contending that the subject tract for determining just compensation consisted not only of the common area but the whole townhouse community, including the individually-owned properties. The trial court ordered that all the individual owners be added as defendants and concluded that the common area and all the individual lots possessed substantial unity of ownership, physical unity, and unity of use so as to constitute a single, unified tract for the purpose of awarding damages or offsetting benefits. The DOT appealed.

The appeals court agreed that the individual owners were necessary parties to the suit and also affirmed the trial court's order that the individual lots possessed substantial unity of ownership, physical unit and unity of use. The court noted that North Carolina courts look for the presence or absence of three unities to determine whether a condemned tract is part of a larger, unified tract; the factors most generally emphasized are unity of ownership, physical unity and unity of use; and unity of use is normally given the greatest emphasis.

The association argued that because unity of use was the most important factor, the presence of all three unities was not required, and there was no need to demonstrate unity of ownership. The court dismissed that argument, however, citing a North Carolina Supreme Court case that determined that unity of ownership was indispensable. The DOT argued that unity of ownership could not be demonstrated unless one of the parties possessed both an interest and an estate in the entire tract. However, the court determined that the condemnees (the association and the individual owners) possessed a sufficient unity of ownership because the townhouse owners possessed an interest in both the common area and all of the individual units. 

The claimed unity of ownership arose not out of the closeness of the relationship between the association and the individual owners, but rather was premised on each owner holding not only a fee simple estate in his or her unit but also (1) an interest in the common area by virtue of a general easement (with an easement being an interest in land); and (2) an interest in the other individual townhouses by virtue of the restrictive covenants.

Because each owner had both an estate and a property interest, both in the common area and in the other units, the court ruled that the association had established substantial unity of ownership across the entire development and affirmed the trial court's order.

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Lot Owners Do Not Have Access to Easement Across Their Lot

Gray v. McCormick, 167 Cal. App. 4th 1019, 84 Cal. Rptr. 3d 777 (2008)

Covenants Enforcement: In determining the "exclusivity of an easement," a California appeals court looked to evidence describing who may be excluded and the uses or area from which they may be excluded and determined that, although exclusive easements are allowed under California law, lot owners do not have access to the easement across their lot.

Douglas and Hope Gray and Daniel and Marilyn McCormick own neighboring multi-acre, residential properties in Coto de Caza in California. The Grays hold an exclusive access easement over the property owned by the McCormicks. The lots owned by the Grays and the McCormicks are subject to the master CC&Rs ("declaration"), recorded in 1984, and supplemental CC&Rs recorded in 1994 ("supplement").

Private streets provide access to the lots in the subdivision, and the declaration provides the property owners with a "nonexclusive appurtenant easements for vehicular, pedestrian and equestrian traffic over all [the] private streets." Olympic Way is a private street that provides access to the McCormicks' lot. The subdivision map denotes an easement across the McCormicks' lot, providing the Grays’ lot with access to Olympic Way, without which the Grays would be landlocked. The easement is 16 feet wide and approximately 90 feet long. The supplement states the easement is exclusive to the Grays' lot.

The easement is currently unimproved. However, the McCormicks use it to move horses, rubbish, feed and manure to and from the stables in their backyard to Olympic Way.

The Grays, who paid $2,995,000 for their unimproved six-acre lot, stated they plan to spend several times that amount on to construct a residence and make improvements to the easement with a driveway, perimeter wall and landscaping. They objected to the McCormicks' continued use of the easement. The McCormicks objected to the Grays' plans to deny them access to the easement and to place walls on it since they had designed their landscaping expecting to continue using the easement.

After litigation began, the matter was submitted to the court on a joint statement of undisputed facts. The McCormicks argued that the easement was labeled "exclusive" on the subdivision map to distinguish it from the other "nonexclusive" roadway easements meaning it would not be available to other property owners in the subdivision. They maintained that they, as the owners of the servient tenement, would be entitled to use the easement in any manner not inconsistent with the Grays' access, ingress and egress rights. They also asserted that exclusive easements are not permitted under California law.

The Grays contended that the easement was designated an exclusive easement, meaning that the Grays could exclude all other persons from its use, including specifically, the McCormicks. They also emphasized the supplement was clear with respect to the exclusivity of the easement; and an exclusive easement, in effect, prohibits the owner of the servient property from using the easement at all.

The trial court ruled that the McCormicks have the right to use the easement in any way that does not interfere with the Grays' uses. The court also enjoined any subsequent owners of this lot from using the easement in any way that interferes with the Grays' uses. The Grays appealed.

The appeals court defined easement as "a restricted right to specific, limited, definable use or activity upon another's property, which right must be less than the right of ownership." According to the court, the question in this case is the degree of exclusivity of the easement described in the supplement. According to the court, the term "exclusive" used in the context of servitudes means the right to exclude others.

The degree of exclusivity of the rights conferred by an easement is highly variable and includes two aspects: who may be excluded and the uses or area from which they may be excluded. At one extreme, the easement holder has no right to exclude anyone from using the easement. At the other extreme, the easement holder has the right to exclude everyone, including the servient owner, from making any use of the land within the easement boundaries.

The McCormicks conceded that the supplement created an exclusive easement over their property. However, they maintained it did not exclude them from the easement. They cited an exclusivity test described in Pasadena v. California-Michigan etc. Co., which states: 

Where the easement is founded upon a grant…only those interests expressed in the grant and those necessarily incident thereto pass from the owner of the fee. The general rule is clearly established that, despite the granting of an easement, the owner of the servient property may make any use of the land that does not interfere unreasonably with the easement.

According to the court, the question was whether the language of the supplement clearly intended the easement to be exclusive to the Grays, thus excluding all other owners of property in the subdivision, including the McCormicks.

The court noted that the supplement expressly defined the easement as an "exclusive easement of access, ingress and egress," and it specifically stated the easement was created for the benefit of the owner of Lot 6—the Grays. The supplement emphasized use of the easement by the owner of Lot 6 and such owner's family, guests, tenants and invitees was exclusive. In other words, the provision repeatedly used language of exclusivity.

The court also highlighted the fact that the supplement obligated the Grays to construct, install, maintain and repair improvements to the easement and pay all associated costs. Therefore, according to the court, it was inconceivable that owners who build out 90 feet of access-drive improvements would be expected to share that drive with a neighbor whose property abuts the street and to bear the costs of cleaning up manure and hay resulting from the neighbor's use of the easement.

According to the court, the easement’s exclusivity was underscored by the indemnification obligation in the supplement that required the Grays to defend, indemnify and hold harmless the McCormicks from any liability, loss or damage resulting from the exclusive use of the easement by the Grays. According to the supplement, this indemnification obligation made sense because the McCormicks had no right to use the easement.

The McCormicks emphasized the portion of the supplement that makes the indemnification obligation inapplicable to liability arising out of their misconduct or negligence. According to the McCormicks, this language proved they are entitled to use the easement. The appeals court disagreed. According to the court, the indemnification obligation in the supplement did not address acts performed on the easement. Rather, it pertained to liabilities arising from the misconduct or negligence of the Grays, without regard to where the acts of misconduct or negligence took place. Misconduct or negligence in portions of the McCormicks' lot immediately adjacent to the easement could give rise to liability, loss or damage affecting the easement.

As additional evidence that the easement was exclusive, the court asserted that the supplement contained no express reservation in favor of the McCormicks. Therefore, the language in the supplement did not meet the exclusivity test required in Pasadena.

The next issue the court addressed was whether California law prohibits exclusive easements. The court determined that it does not after analyzing Hirschfield v. Schwartz, 91 Cal. App. 4th 749, 110 Cal. Rptr. 2d 861 (2001). In Hirschfield, two Bel-Air owners had mistaken the boundary line between their residential properties for many years, and both had improved their yards extensively. Eventually, the parties learned that the boundary line was not where they had believed, and each had made use of a portion of the other's property.  The plaintiff asked the court to quiet title the parcels of land. The defendant had placed a block wall and landscaping on the smaller parcel. They had improved the larger parcel with a portion of a sand trap, extensive underground electrical and water lines, several motors to provide circulation for waterfalls and a swimming pool, and an underground iron and concrete enclosure for one of the motors.

The trial court in Hirschfield exercised its equitable powers to grant relief in the form of a judgment for what it termed an "exclusive easement," giving the defendants the exclusive right to use the property until they sold it or no longer lived there. The appeals court affirmed that decision, noting "exclusive easements, while rare, are possible."  However, it also stated the judgment did not violate the law of prescriptive easements because the right of exclusive use created by the judgment was not in reality a prescriptive easement. Rather, the trial court had created the right of exclusive use by employing its equitable powers to grant affirmative relief to an encroacher.

According to the appeals court, Hirschfield did not offer assistance in interpreting the scope of the easement in this case. It did, however, "help dispel the notion that the exclusive use of the property of another is prohibited under California law, as being tantamount to the taking of fee title by a neighboring property owner."

The exclusive use of a defined area of the servient tenement by the owners of the dominant tenement is not prohibited under California law. According to the court, the language of the supplement by which the easement was created clearly intended the easement to be used exclusive by the Grays. That language was sufficient to create an exclusive easement under California law.

On that basis, the court affirmed the trial court's decision and enjoined the McCormicks from using the easement in any way that interfered with the Grays’ use of the easement, and it ordered the McCormicks to remove certain encroachments from the easement. However, the appeals court modified the decision to clarify that any use of the easement by the McCormicks was inconsistent with the exclusive use granted to the Grays, precluding the McCormicks from using the easement.

The court awarded the Grays their costs on appeal.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Homeowner Cannot Construct Addition that Violates Setback Restriction

Kenny v. Rich, 186 P.3d 989 (Utah App. 2008)

Covenants Enforcement/Architectural Control/Attorney Fees: A Utah appeals court upheld a district court's order granting permanent injunction to prohibit constructing a home addition that violated setback restrictions.

John Rich owned a condominium unit in Thaynes Canyon Subdivision, a development in Park City, Utah. The property is subject to a Declaration of Protective Covenants that requires a 10-foot setback from side and rear lot lines.

On July 19, 2005, Michael DeCarlo, Rich's architect, submitted plans for an addition to Rich's home to James Stuart, a trustee of the Thaynes Canyon 1 Homeowners Association ("association"). The plans showed that the addition would be 6.8 feet from the adjoining property line. Stuart objected to the plans and, the following day, gave DeCarlo a copy of the declaration. At that time, DeCarlo told Stuart he would not comply with the declaration's setback requirements.

On July 21, 2005, the association board of trustees met and determined that the plans violated the set-back provision and they would not grant a variance. The next day the association's president notified Rich and DeCarlo by phone of the board's decisions. When construction started, the association advised Rich to cease construction. He responded that he intended to proceed with the construction.

On Aug. 29, 2005, the association received a letter from DeCarlo requesting that the association participate in arbitration to resolve the dispute. The next day, the association sent a letter advising him that arbitration had been waived due to untimely demand.

The association sued Rich, requesting a temporary restraining order ("TRO"). The judge granted the order and instructed the parties to submit to arbitration. The court acknowledged the association's argument that Rich had waived his rights to arbitration, but decided that arbitration would be a practical means to resolve the dispute.

While the parties prepared for arbitration, Rich proceeded to construct the addition to his house. His attorney signed the acknowledgement for arbitration with stipulated conditions. In response to Rich's violation of the TRO, the association requested and received an order from the court to cancel the arbitration; however, Rich and the arbitration panel proceeded with the arbitration hearing without the association's attendance or participation.

The arbitration panel ruled that Rich was entitled to a variance of the setback provision and issued an interim award in his favor. Rich then filed a motion to dismiss the case, citing the arbitration panel's ruling. The court denied his motion and vacated the arbitration award. Following a bench trial, the court granted a permanent injunction and an award of attorney's fees to the association. Rich challenged the award of attorney's fees on grounds that the declaration limited liability for attorney's fees to instances where association members pursued claims in bad faith, and the association's affidavit was deficient under Utah's Rules of Civil Procedure. The court rejected his interpretation of the declaration and determined that the association's affidavit in support of its claim for attorney's fees was generally sufficient. Rich appealed the decision.

In his appeal, Rich raised five issues: (1) the trial court abused its discretion in finding that he waived his right to arbitration; (2) the court erred in finding that service of process was proper and asserting jurisdiction over him; (3) the court erred in denying a trial by jury; (4) the court abused its discretion in failing to require the association to post a bond when the TRO was issued; and (5) the court erred by concluding that the declaration did not limit his liability for attorney's fees.

In addressing the first issue, the appeals court explained that, "when a party is contractually bound to follow certain procedures and timelines in order to invoke specified contractual rights, and the party fails to do so, the party waives those rights." The declaration provides that, "any party desiring to arbitrate any controversy shall file written notice…within 30 days after he discovers…such determination, decision or action…taken under or pursuant to any provision of this declaration." Rich had notice that the association would not grant him a variance on July 21, 2005, but he did not make his demand for arbitration until Aug. 26, 2005, 36 days later.

Rich claimed that he and the association entered into a second agreement to arbitrate their dispute when they signed the acknowledgment at the end of the arbitrator's engagement letter. He argued that the district court erred by vacating the arbitration award on the basis that there was no agreement to arbitrate. Utah law provides that district court may vacate an arbitration award in that situation. Arbitration is a contract matter; and, therefore, a party is not required to submit any dispute to arbitration that he does not choose to submit. The appeals court found that the association signed the acknowledgment because the court order mandated arbitration.

As to the second issue of his appeal, Rich claimed that the summons he received was defective because it allowed him 20 days instead of 30 days to respond. However, he failed to show the court how the mistake precluded actual notice of the association's action against him or how it otherwise prejudiced his position. Rich also claimed that the district court had no basis to assert personal jurisdiction over him by entering the TRO. The appeals court dismissed this claim because it considered the presence of his property and his use of it sufficient to warrant the district court's jurisdiction.

The third issue the court addressed was Rich's argument that the district court erred by holding a bench trial. The appeals court found that the district court properly dispensed with a jury trial because the action for injunctive relief to enforce the declaration was an equitable, rather than a legal, issue.

On the question of whether the district court erred by not requiring the association to pay a bond at the time it issued the TRO, the court found that it was not likely that any harm would occur if the TRO was issued wrongfully because construction of the addition had just begun and was, essentially, a vacant area.

Finally, Rich claimed that the declaration limited any liability he had for attorney's fees to a situation where he had acted in bad faith or with malice. The declaration provides:

Neither Declarant, the Association, the Board of Trustees of the Association, the Architectural committee nor any member, agent or employee of any of the same shall be liable to any party for any action or for failure to act with respect to any matter if the action taken or failure to act was in good faith and without malice.

Rich argued that, as a member of the association, he was covered by the limitations of the provision and was not required to pay the association's attorney's fees because his actions were taken in good faith and without malice. The court disagreed, however, and found that the declaration's reference to "any member, agent, or employee of any of the same" was consistent with its reference to members of the architectural committee but was not consistent with its reference to individual members of the association.

The court affirmed the district court's rulings and remanded the case for an award to the association for attorney's fees incurred in defending the appeal.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Mandatory Arbitration Clause Not Substantively Unconscionable

Reno v. Bethel Village Condominium Association, Inc., No. 08AP-10, Ohio App. Ct., Sept. 4, 2008

Contracts/Documents/Covenants Enforcement: An arbitration clause that compels one party to arbitrate while leaving the other party free to pursue additional remedies fails to support a claim of substantive unconscionability.

In 2005, Kelly Reno purchased a unit in a condominium development located in Franklin County, Ohio, managed by Bethel Village Condominium Association, Inc. ("association"). In 2006, the association eliminated parking on the street in front of Reno's unit. Reno sued the association to challenge the parking restriction. The association filed motions to compel arbitration and to stay the court proceedings pending a settlement because the condominium declaration provides that a unit owner must arbitrate a dispute before instituting court proceedings.

Reno objected to the motion, arguing that the declaration was unconscionable. Pursuant to Ohio case law, a person raising the issue of unconscionability must demonstrate both procedural unconscionability and substantive unconscionability. The trial court concluded that the arbitration provision was procedurally unconscionable because Reno became a party to the arbitration provision when she purchased her condominium unit and thus was in a weak bargaining position.  She did not draft the arbitration provision and could not negotiate to omit or modify it. The court found that the provision was substantively unconscionable because it allowed only the association to select the arbitrator and imposed the costs of arbitration on the unit owner without regard to the outcome of the arbitration. The association appealed the ruling on two counts: (1) the finding that the provision was unenforceable because of procedural unconscionability; and (2) the finding that the provision was unenforceable because of substantive unconscionability.

In determining substantive unconscionability, the court considered whether the arbitration provision was commercially reasonable. It examined the fairness of the terms, the cost of services rendered, industry standard and the ability to predict any future liability. It determined that under Ohio law, mutuality was not a requirement of a valid arbitration clause if consideration supports the underlying contract. Neither party disputed that the consideration supported the contract at issue. The court found evidence that a provision allowing one party alone to appoint the arbitrator does not demonstrate substantive unconscionability unless there is evidence of a relationship between the arbitrator and one of the parties.

The association conceded to the court that the arbitrator must be independent. If there was evidence of the arbitrator's bias, Reno was entitled to request that the arbitrator be removed and a new arbitrator appointed. The association also conceded that Reno could challenge the award in a common pleas court and have it vacated if there was evidence of the arbitrator's partiality. The court determined that these concessions by the association cured Reno's claim of substantive unconscionability.

Procedural unconscionability involves circumstances surrounding the parties' positions in negotiating an agreement, such as age, education, intelligence, business acumen and experience. It also depends on who drafted the agreement, whether alterations to the printed terms of the agreement are possible, and whether the parties have alternative sources of supply to the commodity that is the source of the agreement. However, because Reno could not demonstrate that the arbitration provision was substantively unconscionable, the court did not address whether it was procedurally unconscionable.

The court overruled Reno's first assignment of error by the trial court as moot and sustained the second assignment of error. It reversed the trial court's judgment and remanded the case for further proceedings consistent with its opinion.

Because he believed the trial court correctly found that the arbitration provision was unconscionable, one judge dissented. He was troubled by the fact that the provision authorized the association to go to court to resolve a dispute but required homeowners to submit any dispute to arbitration. He was troubled that the association got to choose the arbitrator because the word "independent" was not defined in the declaration, and he questioned how "independent" the arbitrator was required to be, i.e., someone who is not employed by the association, or an attorney who represents the association.

He said he could find no statutory basis for disqualifying an arbitrator before arbitration was conducted and reflected that the citation of Morris v. Vinray, Summit App. No. 18435, Ohio App. Ct., Jan. 7, 1998, would not be binding on the courts of Franklin County and, thus, was not a legitimate substitute for statutory authority for contesting an arbitrator selected by the association. Finally, he did not believe the trial court misinterpreted the provision about costs of arbitration. He noted that the provision states that the association and unit owner each "have rights of action," although, in his opinion, the unit owner's right of action was mandatory, binding arbitration, while the association's right of action was unlimited. He noted that the provision does not state that the association can be assessed costs, only that the unit owners can be assessed costs, indicating that the unit owners can be assessed the costs of arbitration that is forced upon them. For these reasons, he would have affirmed the judgment of the trial court.

©2009 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Amendment that Changes Approval and Enforcement Provisions Valid

Tezak v. Blanco, No. G03815 Cal. App. Ct., Sept. 9, 2008

Architectural Control: In an unpublished decision, a California appeals court held that an amendment to a declaration was appropriately approved and was not arbitrary. Any burdens placed on the owners as a whole did not outweigh the benefits to the association and the owners.

In June 1970, the CC&Rs for Tract 6918 in Fountain Valley, located in Orange County, Calif., was recorded. The declaration created Greenbrook Fountain Valley Homeowners Association ("association"). William Tezak purchased a home in Fountain Valley in May 2002 and discovered that other owners maintained storage sheds on their lots, which he believed violated the declaration. Tezak sued 120 fellow owners in January 2005, seeking injunctive relief to enforce the declaration against them.

In April 2005, the association sent information and ballots to the homeowners concerning two proposed amendments to the declaration. The proposed amendments would replace the declaration's provisions that allegedly were violated by the storage structures with a new approval process and a new enforcement provision that would allow only the owners of the actual property in question and their neighbors to enforce easements created by the declaration. As required by the declaration, the amendments were approved by a majority vote of the owners and were recorded in July 2005. The homeowners named in Tezak's suit asked the court for summary judgment, which Tezak opposed, arguing that the amendments had been improperly enacted and that they were unreasonable.

The trial court disagreed, ruling that the amendments had been properly enacted and were enforceable and that the remaining issues for trial were whether the storage sheds violated the declaration between May 2002, when Tezak had purchased his home, and July 2005, when the amendments were recorded, and whether Tezak suffered any damages during that three-year period as a result of any violations. The trial court ruled in favor of the homeowners, stating that Tezak had failed to prove that each of the alleged violations had been actual violations and his claimed damages had been caused by the alleged violations. Tezak appealed.

The appeals court responded to Tezak's contention that the trial court erred by (1) granting summary judgment to the owners; (2) limiting the issues to incidental damages suffered prior to the amendments; and (3) awarding attorneys fees. The court disagreed with all of Tezak's arguments and affirmed the trial court's decision. Noting that common interest development declarations are considered contracts, the court found that all the procedural requirements of creating, amending and enforcing the declaration had been met. Tezak argued that the amendments were considered to be unreasonable and invalid if the homeowners and/or board of directors had been malicious in enacting them.

Based on the California Supreme Court's interpretation of the Davis-Stirling Common Interest Development Act, the court found that principles of statutory construction compelled the conclusion that the amendments were effective, and the declaration was enforceable because, once amendments are properly made effective, there is a presumption that they are enforceable. Once that presumption was established, there is no requirement that the declaration had to be enacted in subjective good faith or be objectively reasonable.

The court found that the amendments were not arbitrary, and any burdens placed on the homeowners as a whole did not substantially outweigh the benefits to the association and the homeowners. The court noted that it was entirely legitimate for the association to take steps to avoid legal liability for its homeowners, and the goals and concerns of the entire development must be considered.

The court also rejected Tezak's public policy and constitutional claims that the association should have applied for and received approval from the City of Fountain Valley before amending the declaration. The court discarded that argument because neither the declaration nor the city's municipal code included such a requirement. Tezak also claimed that the amendments violated his constitutional rights, specifically his equal protection right. The court said it was absurd for Tezak to contend that other owners violated his constitutional rights.

Tezak claimed the amendments were motivated by hatred for him. The court found this "a novel theory of law," but there was no constitutional claim. The court therefore affirmed the trial court's decision and its award of attorney's fees of $264,549.60 to the owners.

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