December 2011
In This Issue:
Condominium Unit’s Contract of Sale May Be Revoked
Insured Owners Can't Recover Replacement Costs
HOA Can't Purchase Amenities with Assessments
“Other Insurance” Clause Dictates Insurer’s Obligations
Assessments, Fees Part of HOA's Bankruptcy Estate
Arbitration Agreement Not Part of Ambiguous Settlement
Party Responsible for Maintaining Stairway Unclear
HOA Entitled to Foreclose on Unit for Unpaid Assessments
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Condominium Unit’s Contract of Sale May Be Revoked

Berkovich v. Vue-North Carolina, LLC, 3:10-cv-618-RJC-DSC, U.S. Dist. Ct., W. Dist. N.C., Oct. 24, 2011

Federal Law and Legislation: A North Carolina district court ruled that the purchaser of a condominium unit was entitled to rescind his sales contract and recover his escrow deposit because the agreement did not contain a recordable legal description of the condominium, as required by the Interstate Land Sales Full Disclosure Act.

In December 2008, Lawrence Berkovich purchased a penthouse unit in a condominium located in Charlotte, N.C., from Vue-North Carolina, LLC. The sale was governed by the Interstate Land Sales Full Disclosure Act (act). At the time of the sale, the condominium was not yet built, and the project did not qualify for any of the act’s exemptions.

In October 2010, Berkovich sent a “Notice of Cancellation of Contract” to Vue-North Carolina, invoking the act’s two-year revocation option. He sued Vue-North Carolina to rescind the purchase agreement and recover his escrow deposit, alleging that the agreement did not contain a recordable legal description of the condominium, as required by the act. He argued that the legal description was not recordable because the parties’ signatures were not notarized and the description did not include a physical location, or refer to a plat or particular declaration of condominium, metes and bounds or prior deed.

Berkovich sought a declaration that (1) he had two years from the date of the contract to cancel the agreement; (2) he validly cancelled the agreement and was entitled to recover his earnest money deposit; and (3) Vue-North Carolina’s counterclaim for specific performance of the sales contract was invalid.

The district court assigned the case to a magistrate judge to find facts and receive recommendations. The magistrate judge found that Berkovich failed to establish his right to rescind the contract and recommended that the court grant Vue-North Carolina’s counterclaim for specific performance (a court order that requires a party to execute a contract according to the precise terms agreed upon). Both parties objected to the magistrate judge’s memorandum (short written statement outlining the terms of an agreement) and recommendation.

The act provides that any sales contract that does not provide a recordable description of the lot may be revoked at the option of the purchaser within two years of the date of signing. North Carolina law requires that a legal description of a condominium include the name of the condominium, the recording data for the declaration and the identifying number of the unit; otherwise it must comply with North Carolina’s general recording requirements. Berkovich’s purchase agreement described the condominium unit to be purchased as follows:

BEING all of that Unit 5102 of the VUE Charlotte, a Condominium, as described in the Declaration of Condominium (the “Declaration”), recorded in Book _____, Page _____ in the Office of the Register of Deeds for Mecklenburg County, North Carolina, as shown on the plat and plans for the Condominium recorded in Unit File No. _____ in the Office of the Register of Deeds for Mecklenburg County, North Carolina; TOGETHER with the percentage interest in the Common Elements appurtenant to said Unit, as set forth in the Declaration.

The description did not reference the condominium declaration’s recording data as specified by North Carolina law, and it could not otherwise comply with the state’s recording requirements because the unit did not yet legally exist.

Before a condominium unit legally exists, the developer must record a declaration that legally establishes the condominium building and all the units therein. Vue-North Carolina had not yet completed the Vue condominium building and did not promise that construction would be complete until December 2011. Therefore, the unit to be purchased by Berkovich had not yet come into legal or factual existence, and thus, no description could be recorded.

The court ruled that Berkovich had validly revoked the parties’ sales contract and ordered Vue-North Carolina to return his deposit. It also dismissed Vue-North Carolina’s cross claim for specific performance as moot.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Insured Owners Can't Recover Replacement Costs

Buckley Towers Condominium, Inc. v. QBE Insurance Corporation, No. 09-13247, U.S. App. Ct., 11th Circuit, Sept. 14, 2010

Risks and Liabilities: A U.S. appeals court found that a condominium owner was not entitled to replacement costs for hurricane damage because its insurance policy required that the owner make the actual repairs before seeking to recover the costs.

Buckley Towers Condominium, Inc. is the owner of two condominium buildings in Miami-Dade County, Fla. It purchased hurricane insurance from QBE Insurance Corporation. When Hurricane Wilma struck South Florida in 2005, QBE did not pay or reject Buckley’s claim, determining that it was a request for replacement cost value (“RCV”) damages. After determining that QBE was unlikely to pay its claim, Buckley sued to recover losses from the hurricane damage. The jury awarded Buckley $20 million in damages. QBE filed a post-trial motion for judgment as a matter of law (a claim that the opposing party has insufficient evidence to reasonably support its case), a motion to amend or alter the judgment and motion for a new trial.

Buckley’s insurance policy clearly required that the property owner repair the damage caused by the storm before seeking RCV damages. Although Buckley made no such repairs, the district court held that the doctrine of prevention of performance (a common-law principle that states a contracting party has a duty not to do anything that prevents the other party from performing its obligation) permitted it to recover RCV damages. QBE argued that this was a reversible error (a legal mistake that results in an unfair case, in which the original judgment must be overturned) under Florida law. The insurance company further argued that it was an error for the court to allow Buckley to be awarded actual cost value (ACV) damages because there was no evidence that it ever submitted a proper claim. QBE claimed that the most fundamental error by the court was applying the doctrine of prevention of performance, thereby allowing Buckley to claim RCV damages, even though, under the express policy terms, Buckley had failed to repair or replace the damaged property.

The appeals court found that the district court erred in applying prevention of performance in this case for several reasons. The insurance policy unambiguously required that the insured repair its property before receiving RCV damages. The policy contained no allowances for advance payments to fund the repairs. Both parties agreed that Buckley never completed the repairs, thus, it was barred from recovering RCV damages under the plain terms of the insurance contract.

Applying the doctrine would impermissibly rewrite the insurance contract on the equitable theory that it would be too costly for Buckley to comply with the terms of the contract. Under Florida’s law, however, courts are not free to rewrite insurance contract terms  when the policy is clear and unambiguous on its face. Inconvenience or the cost of compliance with the terms, though they may make compliance a hardship, cannot excuse a party from complying with the contract requirements.

The court held that it was an error for the district court to award Buckley RCV damages and granted QBE’s motion for judgment as a matter of law on RCV damages.  The court, however, upheld the district court’s award for ACV damages, finding that the jury had sufficient evidence that Buckley had made a proper request and was entitled to ACV damages. The court also affirmed the district court’s denial of QBE’s motion for a new trial and remanded the case for further proceedings.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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HOA Can't Purchase Amenities with Assessments

Fairfield Harbour Property Owners Association, Inc. v. Drez, No. COA11-205, N.C. App. Ct., Nov. 15, 2011

Powers of the Association: A North Carolina appeals court ruled that a homeowners association did not have the authority to purchase recreational amenities with assessments collected from owners.

Peter and Marguerite Drez and Neal and Helen Gumpel are property owners in Fairfield Harbour, a large residential community located in Craven County, N.C. All property owners in Fairfield Harbour are members of Fairfield Harbour Property Owners Association, Inc. (association), and are charged annual assessments to maintain the recreational amenities and common areas of the community.

The association proposed to purchase several of the recreational amenities in Fairfield Harbour from MidSouth Golf, LLC, the owner of the amenities, because it believed MidSouth’s service was not adequate. The association met with homeowners about the issue, sent a survey to the owners about the amenities, formed a negotiating committee and met with potential management companies.

In July 2010, the Drezes and Gumpels sent a letter to the association, stating they objected to the purchase and asserted that the restrictive covenants did not authorize the association to purchase amenities that would be paid for with the lot owners’ assessments.

The association sued the homeowners, seeking a judicial declaration that it could purchase the amenities with increased or additional annual homeowner assessments. The Drezes and Gumpels filed a motion for dismissal and a motion for judgment on the pleadings.

The trial court granted the homeowners’ motion for judgment, concluding that Fairfield Harbour’s governing documents did not give the association any right to utilize the assessments for the purchase, lease or any other means to assume control over the recreational amenities owned by MidSouth, LLC. The association appealed.

On appeal, the association first argued that its governing documents authorized it to purchase the amenities with assessments collected from homeowners. The governing documents all contained identical provisions stating that “ . . . amenities may be conveyed to the Association, which conveyance shall be accepted by it, provided the same is free and clear of all financial encumbrances.” Thus, the court concluded that although the governing documents allowed recreational amenities to be “conveyed to”  the association and allowed the association to “acquire title”  to the recreational amenities, they did not authorize the association to use the assessments collected from the owners to purchase or finance the amenities. Rather, the master declaration provides that the assessments “shall be used exclusively . . . and for the improvement and maintenance” of property that has been conveyed to or acquired by the association.

The association next argued that its power to purchase the recreational amenities was demonstrated through the rights of first refusal (the right to purchase something before other parties are given the chance) to buy the recreational amenities, as well as through disclosure statements made by the developer pursuant to the Interstate Land Sales Full Disclosure Act. The court disagreed.

The association argued that the rights of first refusal and the disclosure statements demonstrated the developer’s intent for the association to have the right to purchase the recreational amenities. However, the court noted that they were executed years after the association’s primary restrictive covenants were implemented, and thus, were irrelevant to the parties’ intent regarding the association’s right to purchase recreational amenities.

Lastly, the association argued that the N.C. Planned Community Act and the Nonprofit Corporation Act authorized the association to purchase the recreational amenities and to finance the purchase through borrowed assessments.

A community that has not adopted the Planned Unit Community Act may make contracts and incur liabilities, assign its right to future income—including the right to receive common expense assessments—and exercise all other powers necessary and proper for the governance and operation of the association. Fairfield Harbour was created prior to 1999 and has not adopted the Planned Community Act.

Pursuant to the Nonprofit Corporation Act, every nonprofit corporation has the power:  “To purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property . . .  The association is a nonprofit corporation. “

The court noted, however, that none of the statutory provisions gives a homeowners association the right to collect assessments from owners to purchase real or personal property. Nor do the provisions give a homeowners association the right to finance the purchase of real or personal property through borrowed assessments. Accordingly, the court found no merit in this argument.

The court found that the trial court properly granted judgment on the pleadings to the Drezes and Gumpels. The judgment was affirmed.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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“Other Insurance” Clause Dictates Insurer’s Obligations

Fieldston Property Owners Association, Inc. v. Hermitage Insurance Company, Inc., 920 N.Y. S.2d 763 (N.Y. App. Ct. 2011)

Risks and Liabilities/Contracts: A New York appeals court determined that although a suit against a homeowners association for injurious falsehood was covered both by a general liability policy and a directors and officers liability policy, the general liability policy’s primacy on the claim preempted any obligation the directors and officers liability insurance policy had because the policy was in excess of other valid insurance.

Hermitage Insurance Company, Inc. issued a commercial general liability (CGL) policy to Fieldston Property Owners Association, Inc. (association) for the period of July 5, 2000 to July 5, 2001.

Federal Insurance Company issued a directors and officers liability (D&O) policy to the association for the period of February 13, 1999 to February 13, 2002. The D&O policy was a “claims made” policy (an insurance policy providing coverage only for claims that are filed during the policy period) that provided coverage for “wrongful acts” committed by directors and officers of the association. The policy contained an “other insurance” clause that provided that its coverage was considered excess coverage when “any Loss arising from any claim made against the Insured is insured under any other valid policy(ies).”

In 2001, the association’s officers were accused of making false statements and fraudulent claims regarding a neighboring subdivision’s right to access its property from adjacent public streets. The neighboring subdivision sued the association and its officers in district court.

Some of the facts and events described in the complaint were related to events that occurred during Federal’s D&O policy period, but not during Hermitage’s CGL policy period. Hermitage demanded that Federal acknowledge its coverage obligations to defend the suit, stating, “ . . .  only the cause of action for injurious falsehood (a fallacious statement that causes intentional commercial or economical damage to another party) might trigger a defense obligation under [the CGL policy].”

Relying on its “other insurance” clause, Federal refused to provide coverage for defense costs. Thereafter, Hermitage agreed to defend the association under a full reservation of its rights.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited. 

The suit was dismissed in federal court and the plaintiff filed suit against the association in state court. One of the causes of action in the case was an injurious falsehood claim. As in the federal action, some of the events occurred when the D&O policy, but not the CGL policy, was in effect.

Again, Hermitage reserved its right to deny coverage, specifically advising the association that only the injurious falsehood claim was potentially covered under its policy. However, Hermitage once again agreed to defend the association, subject to a full reservation of its rights, including the right to seek reimbursement from Federal.

The trial court granted the association’s motion to dismiss certain aspects of the claims, including the injurious falsehood claim. After the dismissal was affirmed on appeal, Hermitage demanded that Federal provide a defense for the remaining claims in the suit. Federal conceded and assumed the defense.

Subsequently, the association sued both insurers, seeking to establish their respective defense cost responsibilities. The trial court concluded that the “other insurance” clauses in the respective policies rendered Hermitage the primary insurer and Federal the excess insurer as to the defense costs of the federal action. Hermitage appealed.

Hermitage also sued Federal, seeking reimbursement for costs incurred in defending the state action. The trial court concluded that neither Hermitage nor Federal had demonstrated their positions as a matter of law. Both parties appealed and the ruling was reversed.

The appeals court declared that Federal was required to reimburse Hermitage for its equitable share of defense costs in the federal action and granted Hermitage’s motion for summary judgment in the second action, finding that Hermitage was entitled to recover its equitable share of defense costs of the state action from Federal, except to the extent that those costs related to the injurious falsehood claims. Federal appealed.

If the plain language of an insurance policy is determinative, the courts cannot rewrite the contract by disregarding the language. The parties conceded the possibility that both policies covered the injurious falsehood claims in the two underlying actions. Thus, based on the “other insurance” clauses, Hermitage’s CGL policy was primary to Federal’s D&O policy because the primacy of Hermitage’s policy on the injurious falsehood claim triggered a primary duty to defend against the remaining causes of action in the two complaints and preempted any obligation by Federal.

The court found that based on the broad duty to defend, and upon the conceded possibility that Hermitage’s CGL policy covered at least one cause of action in each of the two underlying complaints, Hermitage had a duty to defend the entirety of both complaints against the association. The court reinstated the trial court’s judgment in Action No. 1 (that Hermitage was the primary insurer and responsible for covering the association’s defense costs) and granted Federal’s motion for summary judgment in Action No. 2.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Assessments, Fees Part of HOA's Bankruptcy Estate

In re Stone Creek Village Property Owners Association, Inc., No. 10-54343-C, Chapter 11, U.S. Bankruptcy Ct., W. Dist. Texas, July 27, 2011

Federal Law and Legislation: The bankruptcy court for the Western District of Texas held that assessments and management fees collected by a homeowners association were considered property of the association’s bankruptcy estate and subject to an automatic stay of prosecution triggered by its Chapter 11 bankruptcy filing.

Stone Creek Village Property Owners Association, Inc. (association) is a residential planned unit development in San Antonio, Texas. The association filed a Chapter 11 bankruptcy petition in November 2010. Upon filing, an automatic stay (an automatic injunction that stops creditors from colleting debts from a debtor who has declared bankruptcy) arose under federal law, preventing the commencement or continuation of any judicial, administrative or other proceeding against the association commenced before the filing.

At the time of the filing, there was a judgment in state court pending against various defendants, including the association. The judgment assessed monetary damages against the association and included a mandatory injunction directing the association to remove a certain structure that was said to be encroaching on the plaintiff’s property, and to cease all further encroachment on the plaintiff’s property.

The association’s automatic stay was applicable during time the action was filed against the association; however, the state court allowed the action to proceed against all the defendants anyway. The bankruptcy court entered an order in January 2011, finding that the judgment was null and void with respect to the association. The association filed a motion seeking a declaration of the scope and extent of the automatic stay.

The court identified four categories of potential property rights: (1) the Stone Creek Village common area; (2) the various assessments (regular, extraordinary and special); (3) rents collected from the various tenants of apartment units; and (4) fees and dues and reimbursements due the association for property management and rent collection services and certain common utilities.

The court determined that the common area was not property of the bankruptcy estate because, while the association was charged with numerous duties relating to the common area, it had no fee interest in the property; instead, the common area was held by the homeowners as tenants-in-common. Therefore, the automatic stay did not prevent the state court plaintiffs from seeking to enforce their injunction with respect to the Stone Creek Village common area.

Regarding assessments collected by the association, the determinative question for the court was how much control did the association exercise over the funds received. The evidence showed that the declaration of covenants, conditions and restrictions placed no restrictions on its use of the funds, other than that they be used exclusively for the common good of the community. The declaration provided that the association should establish a working capital fund to meet unforeseen expenditures and authorized it to establish checking and savings accounts in its name.

Thus, it could not be construed that the association held the assessments in trust (in which one party holds another person’s property for protection) for the homeowners; rather, the association had the broad authority to use the assessments to pay the association’s creditors as necessary for upkeep of the property. The court, therefore, determined that the assessments were considered property of the association’s bankruptcy estate and the funds were subject to the protection of the automatic stay.

The court concluded that rental payments collected by the association on behalf of property owners did not constitute as part of the bankruptcy estate. The party’s intentions with respect to the rental payments supported the court’s conclusion that the payments were held in trust for the benefit of the apartment owners. The association served merely as a conduit for the rental payments and had no equitable interest in them. Therefore, the court concluded that they were not property of the bankruptcy estate and not protected by the automatic stay.

Last, the court determined that fees and reimbursements due to the association for management and collection services and utility payments constituted property of the bankruptcy estate. Accordingly, any attempt to enforce a judgment against the association’s income was precluded by the automatic stay.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Arbitration Agreement Not Part of Ambiguous Settlement

Lillie v. Channel View Condominium Association, No. B224330, Calif. App. Ct., Feb. 23, 2011

Contracts: California appeals court ruled that the ambiguous language in a settlement agreement was insufficient to compel the arbitration of future disputes.

Charles Lillie owns a condominium unit in Channel View Terraces located in Playa del Rey, Calif. Soon after he closed on the sale of his unit in December 2003, he discovered extensive mold caused by leaks in the water pipes, heating system and windows, all of which were common elements operated by the Channel View Condominium Association (association). Although Lillie claimed to have obtained permission from the association to repair the leaks and remove the mold, when his contractor attempted to begin the work, the contractor was prevented from entering the property by two members of the association’s board of directors. The association claimed that Lillie had not obtained approval to make repairs to the common areas and refused to allow him to make the repairs, urging him to move out of the unit.

The parties mediated the dispute in October 2006 and executed a settlement agreement. Even after the agreement, however, Lillie and the association continued to disagree about the repairs. In 2008, Lillie sued the association, alleging breach of fiduciary duty, breach of contract, negligence and nuisance, moving for declaratory and injunctive relief.

In 2010, Lillie filed a motion to compel arbitration (a request made to a court in a pending litigation matter to force a party to submit the dispute to arbitration—a non-judicial, dispute resolution procedure). He argued that the settlement agreement constituted an agreement to arbitrate future disputes. The association opposed the motion, contending that the settlement agreement was too vaguely worded to be enforceable; the petition was barred by laches (an unreasonable delay pursuing a right or claim) because Lillie filed the motion more than three years after the agreement was executed; the mediator was not a neutral arbitrator because he had served as mediator of the earlier settlement; Lillie’s breach of the settlement agreement precluded him from enforcing it; and Lillie waived his right to arbitrate by filing the present suit.

The trial court denied Lillie’s motion to compel arbitration, finding that he failed to demonstrate the existence of a written agreement to arbitrate the controversy. Lillie appealed. In support of his argument, Lillie submitted a heavily edited copy of the settlement agreement to the court. He relied on paragraph I of the agreement, which states, “In the event of any dispute arising under or out of this agreement, the parties shall submit same to Robert S. Mann for binding decision on such procedural basis as he may determine to be appropriate.”

The agreement was so edited it was impossible for the court to determine whether the dispute that was settled was the same dispute involved in the present action. Further, the language of the agreement did not clearly indicate that the parties agreed to resolve any future disputes through binding arbitration. The court considered the term “binding decision” used in paragraph I of the agreement to be vague and ambiguous, making it unclear what type of procedure Mann, the listed arbitrator, was “authorized” to make binding decisions about.

Finally, the agreement did not clearly provide that the parties were giving up their rights to pursue civil claims or have a trial by jury. On this basis alone, the appeals court denied Lillie’s motion to compel arbitration.

The court also noted that Lillie had previously taken steps inconsistent with those of someone intending to invoke arbitration by participating in multiple mediation sessions and subsequently filing the civil action. In addition, he had unreasonably delayed seeking arbitration from May 2008 until February 2010, so the court inferred that he was attempting to arbitrate the dispute only because the informal settlement efforts fell through. Also, because the association had disclosed confidential information to Mann (the party listed in the original settlement agreement to act as an arbitrator between Lillie and the association), the court concluded it would be inappropriate for him to serve as a neutral arbitrator of the dispute.

The court held that the trial court properly denied Lillie’s petition to compel arbitration of the settlement agreement and awarded attorney’s fees and costs to the association.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Party Responsible for Maintaining Stairway Unclear

Moody v. Soundview Condominium Association, No. CV095013200, Conn. Super. Ct., Feb. 4, 2011

Risks and Liabilities: A Connecticut court denied summary judgment to a condominium association in a negligence case because a genuine issue of material fact existed as to whether the association controlled the stairway, a limited common element of the condominium, where the accident took place.

Soundview Condominium Association (association) is located in Old Lyme, Conn. Patricia Moody was injured on association grounds when she slipped and fell on an outdoor stairway that led to a second story condominium unit owned by John and Russell Sharp. She sued the association, alleging that they owned and maintained the stairway. She also alleged that she slipped and fell on the stairs because the association negligently failed to inspect the stairs regularly, and failed to repair and properly maintain the stairs, causing them to be shaky and slippery.

The association filed a motion for summary judgment, arguing that Moody’s negligence claims were unfounded because the association owed no duty of care to her. In order for a duty of care to exist, the association must have had possession and control over the premises where the incident occurred. The association argued that the stairs were a limited common element assigned to the unit owners. It claimed that it did not have possession or control of the stairs at the time of the incident.

The existence of a duty of care is an essential element of a claim for negligence. A duty of care may arise from a contract, from a statute or from circumstances under which a reasonable person would anticipate that harm was likely to result from their actions or from their failure to act. In general, liability for injuries caused by defective premises does not depend on who holds title to the property, but rather who has possession and control of the property.

In analyzing the issue of control in the context of “common elements” of a condominium, the court held that a condominium association’s relationship with unit owners is equivalent to a landlord’s relationship with a tenant. The court found there was no binding legal authority that discussed the duties a condominium association may have, specifically in regard to limited common elements; however, Connecticut courts have held that in determining whether to impose a landlord’s duty of care on a condominium association, courts may consider whether the association conducts itself toward its members as a landlord would toward its tenants.

To determine the allocation of duties, the court referred to the condominium declaration, bylaws and regulations. Although the declaration provided that “each Unit owner shall be responsible for removing all snow, leaves and debris from all patios and balconies which are Limited Common Elements appurtenant to his or her Unit,” it did not state who was responsible for repairs or maintenance of the stairs. The declaration also provides that the association “shall have the right of access to all portions of the Property for purposes of correcting any condition threatening a Unit or the Common Elements, and for the purpose of performing installations, alterations or repairs.”

The court concluded that the question of whether the association or the owners exercised control over the stairs remained a genuine issue of material fact (a factual issue that can’t be conclusively decided upon by referencing other undisputed facts), and the issue would have to be determined in light of the intentions of the parties and surrounding circumstances. Therefore, the court denied the association’s motion for summary judgment.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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HOA Entitled to Foreclose on Unit for Unpaid Assessments

Village Green Homeowners Association, Inc. v. Leeder, No. 04-10-00522-CV, Texas App. Ct., March 2, 2011

Assessments/Covenants Enforcement: A Texas appeals court ruled that a homeowners association was entitled to foreclosure of its lien for unpaid assessments.

Diane Leeder owned a home in the Village Green Association, Inc. (“association”), located in Boerne, Texas. Under the association’s declaration, Leeder was required to pay quarterly assessments that were established by the association’s board of directors.

When Leeder failed to pay the assessments, the association sued her, seeking actual damages, interest, attorney’s fees, court costs and foreclosure on the lien it held against the property. The trial court granted summary judgment in favor of the association, awarding damages, interest and attorney’s fees, but it refused to grant foreclose or an order of sale. The association appealed.

On appeal, the association contended that the trial court abused its discretion by denying its ability to foreclose on its assessment lien. The Texas Supreme Court has held that a homeowners associations’ lien is superior to the homeowner’s homestead right if the homeowner takes title after the declaration is filed. If the declaration is filed before the homeowner takes possession, the assessment lien runs with the land, and the association has the right to foreclose on a unit if assessments are not paid.

Because all of the obligations that were intended to be secured by the lien in this case were included in the declaration, and because the homeowner had notice of the obligation and existence of the lien at the time she purchased the property, the court found that foreclosure was available to the association as a remedy. Although the court noted that foreclosure was a harsh remedy when the assessment debt was significantly less than the value of the property, the court felt it necessary to “enforce the agreements into which homeowners entered concerning the payment of assessments.” Therefore, the court reversed the trial court’s finding and remanded the judgment so that the trial court could issue an order of foreclosure.

©2011 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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