March 2012
In This Issue:
Insurer Has Duty to Defend Negligence Suit
Owners Have Equal Interests in Beachfront Common Area
Declaration is Custodial Contract between Board, Owners
Board Canít Avoid Duties by Denying Special Assessment
Post-Petition Assessments Arenít Dischargeable
Fence Violates Restrictive Covenants
HOA Canít Detain Speeders
Leasing Boat Slips Violates Use Restrictions
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Insurer Has Duty to Defend Negligence Suit

Auto-Owners Insurance Company v. Madison at Park West Property Owners Association, Inc., No. 2:09-CV-00802-MBS, U.S. Dist. Ct., Dist. S.C., July 6, 2011

Risks and Liabilities/Developer Liability: A South Carolina district court ruled that an insurer was responsible for defending a homeowners association against a negligence suit filed by a group of its members.

Elizabeth O’Donnell, Mary Ann Neaton and John Buiel (homeowners) own units in the Madison at Park West condominium in Mt. Pleasant, S.C. The condominium was converted from an apartment complex in 2005 by Madison at Park West Tarragon, LLC (Tarragon) and is governed by Madison at Park West Property Owners Association, Inc. (association).

Auto-Owners Insurance Company issued a series of general liability policies to the association, in which it agreed to “pay all sums that the association becomes legally obligated to pay as damages because of  ‘property damage’ that is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’” The policies also included provisions stating specific circumstances that weren’t covered by Auto-Owners.

In a class action, the homeowners sued Tarragon and the association for damages allegedly caused by negligence and breach of warranties during the development, sale and maintenance of the condominium. They alleged that the design and construction defects caused water to repeatedly seep into their units and caused the external structural systems to fail. The homeowners also claimed the alleged negligence caused significant damage to the common elements and to their units’ interiors. The association notified Auto-Owners of the suit, and Auto-Owners agreed to defend the association pursuant to a reservation of rights (the right of an insurer to defend the insured’s case without an obligation to provide coverage if it is discovered during the trial that the incident is not covered by the insured’s policy).

In 2009, Auto-Owners sued the association and Tarragon, claiming that the policies issued to the association did not provide coverage for the homeowners’ class action. The association counterclaimed. It asserting that, if the court found the policies did not cover the damages alleged by the homeowners, the association was entitled to have the policies reformed to cover the damages.

Auto-Owners argued that the “owned property” exclusion barred coverage because, in accordance with the master deed, the association and the unit owners collectively held title to the common elements. However, it failed to present evidence that the association used any part of the property privately, and the court found that the exclusion did not apply.

Auto-Owners then contended that certain limitations in an endorsement (added insurance provision) attached to the first policy relieved it from any obligation to provide coverage to Tarragon. It argued that the endorsement amended the policy’s definition of an “insured” party, listing Tarragon as an “additional insured” party only in regards to its liability arising from having financial control of the association, or from incidences covered by the policy occurring on premises Tarragon owned, maintained or controlled.

Auto-Owners also argued that the endorsement excluded coverage because the association neither leased nor occupied the damaged common areas and units. Further, the homeowners alleged their damages resulted from their units’ construction, and the endorsement’s exclusion for structural alterations, new construction and demolition operations served as grounds for Auto-Owners to refuse coverage.

The court, however, concluded that the endorsement did not bar Tarragon’s coverage. The homeowners alleged that Tarragon was liable because of its control over the association, which meant Tarragon should be covered under the policies. The court found that Auto-Owners failed to show that Tarragon had engaged in structural alterations, new construction or demolition operations. To the contrary, the evidence showed that all work done to the property was cosmetic, consisting of new light fixtures, new countertops, new paint jobs, new carpeting, new faucets, and grading and sealing the parking lot.

Lastly, Auto-Owners argued that the “your work” exclusion barred coverage because the homeowners alleged that Tarragon was negligent. “Your work” is defined in the policies as “work or operations performed by an insured on its behalf and materials furnished in connection with such work.” This exception did not bar coverage because Auto-Owners failed to show that either Tarragon or the association performed work on the property that might have caused the damage alleged by the homeowners.

For the reasons discussed above, the court found as follows: (i) the “owned property” exclusion did not bar coverage for the association; (ii) the “owned property” exclusion could only be applied to exclude coverage for Tarragon in cases when it sought coverage for losses incurred due to damage done to units with an ownership interest; (iii) the limitations found in the “additional insured” endorsement did not serve to bar coverage for Tarragon; and (iv) because Auto-Owners failed to present evidence that either Tarragon or the association performed work on the property that caused the damages alleged in the class action suit, the “your work” exclusion did not bar coverage of the claims.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Owners Have Equal Interests in Beachfront Common Area

B. Investment LC v. Anderson, No. 20100071-CA, Utah App. Ct., Jan. 26, 2012

Covenants Enforcement: A Utah appeals court affirmed a ruling that lot owners and condominium owners each own equal, undivided interests in a beachfront tract of land designated in the declaration and plat as a limited common area.

Spinnaker Point is a waterfront development located around Bear Lake in Salt Lake City, Utah, containing both condominium units and single-family lots. The original subdivision plat (plan for an area of land) showed six condominium units in a first phase with a possible expansion area. After three condominium units were constructed on what is now Lot 2, Donald and Cathy Anderson took over ownership of Spinnaker Point.

In 2001, the Andersons recorded an amended plat and an amended declaration, dividing the property into five lots and designating Lots 1, 3, 4 and 5 for single-family dwellings. The amended plat depicted and designated a limited common area that consisted of a walkway between Lots 2 and 3 and a beachfront area next to those lots.

The Lot 2 condominium owners (condominium owners) sued the Andersons, Spinnaker Point Condominium Association and the owners of the single-family lots (lot owners) in a quiet title action suit (a lawsuit filed to establish ownership of real estate) to determine who owned the limited common area.

The condominium owners claimed they were the sole owners of the limited common area, subject only to the other lot owners’ rights of access to and from the beach. The lot owners claimed that both they and the condominium owners had equal shares in the limited common area.

The trial court ruled in favor of the lot owners, holding that each of the lot owners and each of the condominium owners held an equal share of the beachfront property. The condominium owners appealed.

Condominium declarations and condominium plats are governed by separate sections of the Utah Condominium Ownership Act (act). The section that governs declarations provides that “[e]ach unit owner shall be entitled to an undivided interest in the common areas and facilities in the percentages or fractions expressed in the declaration.” The section that governs plats focuses on boundaries, locations, encroachments, dimensions and other similar issues.

As required by the act, Spinnaker Point’s amended declaration allocates each unit an undivided interest in the common areas. In addition, Exhibit C of the amended declaration features a chart that defines the percentage of ownership of the limited common area, which specifies that the lot owners and the condominium owners each own an undivided 14.286 percent interest in the limited common area.

Other provisions of the amended declaration reinforced the court’s conclusion that the lot owners and the condominium owners own equal undivided interests in the limited common area. According to the amended declaration, the common areas, including the limited common areas, are “owned by the Unit Owners as tenants in common.” The amended declaration defines “unit owners” as both condominium owners and lot owners. Accordingly, the court inferred that both condominium owners and lot owners own the limited common area as tenants in common.

The condominium owners relied principally on a note that appeared on the amended plat stating, “Limited common ownership on this plat denotes access to and use of common area at the beach. Ownership of this limited common area remains with Lot 2.” Since Lot 2 belongs to the condominium owners, they claimed full ownership of the limited common area and argued that the lot owners held only a right of access over it.

The appeals court determined, like the trial court, that the amended declaration—and not the amended plat—governed the parties in this action. Thus, like the trial court, the court concluded that every unit owner, including each lot owner and each condominium owner, owned an equal and undivided interest in the limited common area. The trial court’s judgment was affirmed.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Declaration is Custodial Contract between Board, Owners

Hawkins v. Condominium Owners Association of Sand Cay, Inc., No. 8:10-cv-650-T-30TBM, U.S. Dist. Ct., M. Dist. Fla., Nov. 18, 2011

Association Operations: A Florida district court determined that a condominium association was liable for damages to a condominium unit incurred during building renovations because the condominium declaration contained a custodial contract between unit owners and the association.

John Hawkins owns a condominium unit at the Sand Cay Beach Resort in Tampa, Fla., which he purchased as a vacation property and rents out when he is at home in Rhode Island. In 2004, the association performed substantial renovations to the exterior of the condominium buildings, including repairing and replacing roofs, siding, walkways, windows and doors. Contractors and subcontractors hired by the association were required to enter individual units, including Hawkins’ unit, to complete the repairs.

As a result of the renovations, Hawkins’ unit suffered severe mold infestation. Hawkins sued the association, alleging that the damage incurred by his and other units was the result of substandard work. He alleged that his damages included, among other things, out-of-pocket losses and loss of potential rental income, and that he had to pay for mold removal and unit repairs and reconstruction. The association moved for summary judgment (a determination made by a court without a full trial) on all counts of his complaint.

Hawkins maintained that the association breached two separate contracts—a custodial contract (where a registered owner protects and maintains a property on behalf of an actual owner) and a rental contract. He claimed that, based on individual contracts with the unit owners, the association had a responsibility to rent, supervise and maintain certain individual units in exchange for a commission. Although Hawkins alleged that the rental contract was in full force and effect during the time renovations were happening, the association asserted that he had actually used the rental service only once. The court observed that, even if there were a long-term contract between Hawkins and the association, Hawkins presented no evidence that the association breached the contract, or that any damage to his unit was caused due to the alleged breach. The court, therefore, granted summary judgment on this issue to the association.

Hawkins alleged that he entered into a custodial contract with the association when he vacated his unit and surrendered it to the association for repairs during the ongoing renovations to the common elements. The association contended that no valid contract existed between the parties. The court disagreed.

The court noted that the condominium declaration strictly governs the respective duties and obligations between an association and the unit owners. The Sand Cay Resort declaration provides that, “All incidental damage caused to a unit by such [maintenance] work shall be repaired promptly at the expense of the association.”

The trial record also reflected that the association’s representatives acknowledged that Hawkins was entitled to damages as a result of the renovation project, and reflected facts that could lead a jury to believe that lost profits (rents) were foreseeable damages.

Accordingly, the court denied the association’s motion for summary judgment on this issue, ruling that a jury must decide the issue of whether the association breached its custodial contract with Hawkins.

Hawkins failed to present sufficient facts to establish his claims for negligent retention (when an employer fails to take action against an unfit employee), fraud and conversion. Therefore, the court held that the association was entitled to summary judgment as a matter of law on those claims.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Board Canít Avoid Duties by Denying Special Assessment

In re: Colony Beach & Tennis Club Association, Inc., No. 8:09-cv-2560-T-23, U.S. Dist. Ct., M. Dist. Fla., July 27, 2011

Assessments/Covenants Enforcement: A Florida district court ruled that a condominium association could not avoid its obligation to maintain common elements by refusing to vote to impose special assessments necessary to fund repairs.

The Colony is a condominium complex and resort hotel in Sarasota, Fla. Each unit owner is a member of Colony Beach & Tennis Club Association, Inc. (association) and is a limited partner in Colony Beach & Tennis Club, Ltd. (partnership). The partnership operates the hotel, and the condominium declaration governs the development and the association. The declaration provides that maintenance and operation of the common elements is the association’s responsibility.

The partnership agreement provides that each unit owner is entitled to 30 days rent-free use of his or her unit annually. The partnership operates each unit as a hotel accommodation during the rest of the year. Each limited partner is entitled to a share of the hotel’s annual profit and is not liable for any loss arising from the hotel’s operation.

A 1984 agreement authorized the partnership to use part of the limited partners’ hotel profits to pay for association repairs to the common elements. In 2004, the association acknowledged that the common elements were in urgent need of extensive repairs, and the estimated cost was $10 million. The partnership urged the association to pay for the necessary repairs, but the unit owners voted to reject a proposed emergency assessment to pay for the repair costs. In 2006, the unit owners rejected a second proposed assessment and elected new board members.

The new board stopped paying the partnership for operational expenses that the declaration had assigned to the association. In 2007, the partnership sued the association, seeking to force the association to assess (charge) the unit owners for necessary repairs to the property.

Shortly before the trial, the association filed a bankruptcy action. The partnership sought to remand (send to another court) the action it filed against the association on the ground that the partnership’s claims were not within the bankruptcy court’s jurisdiction. However, the court held a bench trial and denied relief on its claims. The partnership appealed.

The appeals court found that the bankruptcy court was not authorized to exercise jurisdiction over the partnership’s civil proceeding. The court also found that under the documents governing the association and the partnership, the association bore ultimate responsibility to pay for common element repairs and maintenance as a common expense. In turn, the declaration and the Florida Condominium Act empowered the association to assess unit owners for common expenses and impose liens for unpaid assessments.

The appeals court found the bankruptcy court had erroneously concluded that the declaration relieved unit owners who made their units available for rentals to the partnership from paying assessments. In the role of a limited partner, a unit owner would not be subject to assessments. However, each unit owner is both a limited partner and a member of the association, and therefore, the association was authorized to assess each member for maintenance of the common elements.

The bankruptcy court had also concluded that the partnership could not force the association to levy an emergency assessment that unit owners twice disapproved because such an assessment required owner approval. However, the appeals court determined that nothing in the governing documents prohibited the association from including the needed repair costs in an annual assessment. Thus, the bankruptcy court erroneously concluded that the association could not assess the unit owners for common element repairs unless a majority of the unit owners approved.

Finally, the court observed that even if a vote were required, the unit owners could not casually “vote away” the association’s obligation to maintain the common elements. Under Florida law and the condominium’s governing documents, a majority of unit owners may amend the declaration, but a simple majority of the unit owners may not vote, in effect, to nullify the declaration.

The court concluded that the association, rather than complying with the declaration’s steps to terminate the condominium ownership, stopped paying the partnership for maintenance of the common elements. Further, by allowing the development to deteriorate, the association illicitly altered the common elements to the detriment of minority members. Additionally, the condominium act requires an association to honor agreements with third parties, such as the partnership.

The court reversed each order of the bankruptcy court.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Post-Petition Assessments Arenít Dischargeable

In re: Spencer, No. 10-14413, U.S. Dist. Ct., E. Dist. Mich., Aug. 22, 2011

Assessments/Federal Law and Legislation: A Michigan appeals court ruled that a condominium association was entitled to assessment fees that accrued after a unit owner filed for bankruptcy because the owner retained title to his unit.

Ezroy Spencer owned a condominium unit on Red Maple Lane in Wixom, Mich. The condominium is governed by Maple Forest Condominium Association, Inc. (association), and the association levied regular assessments to cover maintenance and repairs of condominium common elements.

Spencer filed a bankruptcy petition in November 2009, by which time he owed several months of unpaid assessments. He vacated his unit shortly after he filed for bankruptcy, but retained title to the property because he owed more on his mortgage than the property was worth. Although Spencer indicated he was surrendering the property once the bankruptcy went through, the holders of the first and second mortgages failed to foreclose their liens and Spencer continued to own the property.

The association sued Spencer, seeking a ruling that the assessments incurred after the bankruptcy petition was filed were not discharged by the bankruptcy proceedings. Both parties filed motions for summary judgment (a determination made by a court without a full trial).

The bankruptcy court held that the association’s claim for assessments was a pre-petition claim (an event arising prior to a person filing for bankruptcy), regardless of whether the amounts were assessed prior to the bankruptcy petition or became due after the filing. Generally only pre-petition debts are dischargeable, and uncollectable, in a bankruptcy proceeding, and in this case, determining that the assessments were a pre-petition claim meant Spencer’s past-due assessments would be discharged. The association appealed. The sole issue on appeal was to determine whether Spencer’s condominium fees assessed after he filed for bankruptcy were discharged in the bankruptcy proceeding.

Pre-petition debts are discharged upon confirmation and completion of a bankruptcy plan. Under the Bankruptcy Code, debts arising after the petition date are not generally dischargeable in bankruptcy. Therefore, the outcome of the appeal ultimately depended upon whether the assessments constituted dischargeable pre-petition debts or non-dischargeable post-petition debts.

The appeals court determined that, regardless of whether the obligation to pay assessments is viewed as a contractual or property right, the past-due assessments were considered a post-petition claim because it is the debtor’s responsibility to free himself of further obligation to the collector once the petition is filed.

In this case, Spencer became liable for the past-due assessments that were assessed both before and after the petition date. New assessments arose not out of some pre-existing obligation to continue paying over a period of time, but as a result of continued ownership of the property. As a result, there was no pre-petition right to payment, which would create a pre-petition claim under the Bankruptcy Code. All Spencer had to do to stop incurring more assessment fees was to transfer the title of the unit because relinquishing ownership relieves him of all future liability.

A debtor is liable for assessments only while he or she retains ownership of the property. However, a debtor’s liability for a mortgage or other secured lien is considered an ongoing personal obligation that must be repaid, even when the collateral is taken away from the debtor or destroyed.

The court observed that Spencer took no action to remove himself from the unit’s title, and thus its subsequent obligations. Had he relinquished ownership of the property, he would have ceased to incur further assessment fees.

The district court reversed the bankruptcy court’s ruling on this issue, holding that the association fees assessed after Spencer’s bankruptcy petition was filed were to be treated as post-petition claims. In all other respects, the court affirmed the bankruptcy court’s findings.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Fence Violates Restrictive Covenants

Morgan Woods Homeowners’ Association v. Wills, No. 11 CA 57, Ohio App. Ct., Jan. 23, 2012

Architectural Control/Covenants Enforcement: An Ohio appeals court affirmed a trial court’s ruling that a lot owner violated restrictive covenants by constructing a fence on his property that was not approved by the subdivision’s architectural control committee.

In 2004, David and Sharon Wills bought a lot in Morgan Woods Homeowners’ Association (association), situated in Newark, Ohio. The association’s covenants established an architectural control committee (ACC) to maintain and preserve design standards for subdivision improvements, including fences. Pursuant to the restrictive covenants, any visible exterior improvements must be approved in writing by the ACC. The restrictions specifically prohibit any fence “with chain link or wire components.”

On Sept. 9, 2006, David Wills submitted a proposal to the ACC for construction of a fence to enclose his backyard. The ACC rejected Wills’ proposed use of a chain link and wire fence via a letter dated Sept. 15, 2006. The association’s letter contained the ACC’s criteria for approval and informed Wills that he was required to obtain written approval before he could install a fence on his property.

ACC members met with Wills on Sept. 26, 2006, and reiterated the ACC’s opposition to his fence. The next day, he sent a letter to the ACC stating that the proposed fence met design standards established in 2000, and that he intended to proceed with its installation. He argued that the design standards were changed in 2003, and the amended design standards did not contain criteria for fences. The ACC responded by sending Wills a copy of the design standards adopted in October 2006, which affirmed the 2000 fence design standards.

Wills proceeded to install the fence as proposed, and the association sued him, alleging that he violated the restrictive covenants. The association sought a court order that would require Wills to remove the fence and prevent him from erecting any unapproved fences on the property.

Wills filed a counterclaim, seeking a judicial declaration that the association had acted unreasonably, subjectively and unlawfully in its interpretation and enforcement of the restrictive covenants. He claimed there were no properly established guidelines for the approval or disapproval of erecting a fence, and he did not have notice of the requirements the association sought to enforce. The trial court ruled in the association’s favor, and Wills appealed.

In his appeal, Wills argued that the trial erred in finding that his fence violated the restrictive covenants. He cited changes adopted in 2003 to the design standards that did not incorporate the fence guidelines that were in effect in 2000.

The restrictive covenants provide that, if a property owner submits a proposal to the ACC, the ACC must approve or disapprove the submission within 14 days. If the ACC does not issue a decision within the 14-day time period, it shall be assumed that the proposed plans and specifications are approved.

Wills argued that the ACC failed to respond within 14 days to his fence proposal. He claimed that the ACC’s Sept. 15, 2006, letter merely directed him to guidelines that were no longer applicable.

The court observed that the ACC had adopted the 2000 design standards on July 25, 2006, Sept. 15, 2006, and Oct. 6, 2006, respectively. It was uncontested that neither of the parties knew of the 2003 changes to the design standards and each believed that the 2000 standards were still in effect. Furthermore, the restrictive covenants prohibit construction of exterior improvements without the express written consent of the ACC, including “walls, fencing, and screening.”

The court concluded that the ACC had expressly rejected Wills’ design plans on more than one occasion. He knew he did not have ACC approval to go forward with construction of the fence, but he chose to proceed anyway. The court affirmed the trial court’s judgment.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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HOA Canít Detain Speeders

Poris v. Lake Holiday Property Owners Association, Inc., No. 3-11-0131, Ill. App. Ct., Jan. 24, 2012

Powers of the Association/State and Local Legislation and Regulations: An Illinois appeals court ruled that it is unlawful for a homeowners association to stop and detain drivers for violating its speed regulations.

Kenneth Poris lives in Lake Holiday Property Owners Association, Inc. (association) in La Salle County, Ill. The association employs private security officers to enforce its rules and regulations. In October 2008, Poris was stopped for speeding by the association’s security officer. The officer activated his vehicle’s white and yellow oscillating light to pull Poris over. When Poris exited his vehicle, the officer instructed him to get back in his vehicle and stay there for safety reasons. Poris complied. The officer informed Poris their conversation was being recorded and issued him a speeding citation.

Poris sought a restraining order prohibiting the association from pursuing the speeding citation, but the request was denied. He then sued the association, seeking a judgment stating that the security department’s actions were unlawful. Poris alleged the association had breached its fiduciary duty, and showed willful and wanton conduct as well as committed false imprisonment. The association moved to dismiss all counts of the complaint. The trial court ruled in the association’s favor, and Poris appealed.

On appeal, Poris argued that the association had no legal authority to stop and detain drivers. The court noted that security guards occupy the same status as private citizens under Illinois law and may only make an arrest if there is reasonable cause to suspect that an offense is being committed. Therefore, it is unlawful for the security department to stop and detain drivers for violating the association’s traffic rules.

Poris also asserted that it was unlawful for the association to use of amber oscillating and flashing lights on its security vehicles. Illinois law prohibits the use of “amber oscillating, rotating or flashing lights,” with certain exceptions such as a security company, alarm responder or control agency. The association argued that its security department was a “security company” within the parameters of the law. The court determined that the association was not a commercial enterprise that was in the business of protecting people, but rather a property owners association created to promote the civic and special interests of its members. Therefore, the use of amber flashing lights on its security vehicles was unlawful.

Poris next argued that the association’s policy of having officers record their conversations with drivers they had pulled over was a violation of the Illinois eavesdropping law. The court found that the association did not violate the statute because the security officers immediately informed drivers their conversations were being recorded, and if a driver objected, the recording was stopped.

Poris then contended that the association was prohibited from using radar units to determine the speed of vehicles on association property. Although it is illegal to use video, photographs or other recording devices to determine vehicle speeds as a means to enforce laws or ordinances, the law did not prevent the association or any other entity from using radar equipment to detect speed. Thus, the association’s use of radar equipment was not unlawful.

Lastly, Poris asserted that the association committed false imprisonment when the officer pulled him over for speeding. A person commits false imprisonment when he unreasonably restrains another’s liberty against his will. To establish a claim for false imprisonment, a person must establish that he was restrained without reasonable grounds to believe he committed an offense.

False imprisonment claims arises when a person’s liberty is restrained, not necessarily when the person is actually placed under arrest. Here, the security officer activated his overhead lights, causing Poris to pull over and stop. The security officer, wearing a uniform and badge, instructed Poris to remain in his car and took possession of his driver’s license. Under these facts, the court concluded that Poris was restrained by the security officer.

The evidence established that Poris was pulled over and detained because he exceeded the speed limit set by the association; however, violating the association’s rule was not a felony or misdemeanor offense. Therefore, the court concluded that he established the elements necessary to support his false imprisonment claim, and that the trial court erred when it granted the association summary judgment (a determination made by a court without a full trial) on this count. The court reversed the trial court’s judgment and remanded (to send back to another court for further action) the case for entry of an order in Poris’ favor and the determination of damages.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited. 

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Leasing Boat Slips Violates Use Restrictions

Proctor’s Landing Property Owners Association, Inc. v. Leopold, No. 2011-CA-0668, La. App. Ct., Jan. 30, 2012

Use Restrictions/Covenants Enforcement: A Louisiana appeals court held that a company that constructed boat slips on its residential lot and leased the spots to tenants violated the subdivision use restrictions that prohibited “trade or business” of any kind.

Proctor’s Landing subdivision is located in the Shell Beach community of St. Bernard Parish, La. Leopold Holdings, LLC, owns a lot in the subdivision, where it constructed five boat slips (docking stations for boats). Leopold leased out four of the boat slips, and shared its launch and hoist facilities, ice machine, electricity and fish-cleaning area with its tenants.

Proctor’s Landing is governed by covenants and restrictions administered by Proctor’s Landing Property Owners Association, Inc. (association). Article VII of the covenants provides that, “Each lot . . . deemed as a residential Lot, shall be used for residential purposes only, and no trade or business of any kind may be carried on therein . . .” The association sued Leopold, alleging, among other things, that it had violated the covenants by conducting and operating a business on its property. The association demanded that the business be discontinued and prohibited from being run on association grounds. Leopold maintained that leasing its boat slips did not constitute a business activity prohibited by the use restriction.

The trial court found that the association failed to establish that Leopold was operating a business on its lot and denied the association’s claim for injunctive relief (a court order requiring a party to either perform or refrain from a particular act). The association appealed.

During the appeals trial, the association presented testimony that it received complaints from three of Leopold’s neighbors about activities on the lot. The neighbors complained of boats going in and out of Leopold’s lot, and of increased traffic that diminished the peacefulness of the surrounding area.

Leopold argued that the use restriction was ambiguous because it failed to define “business.” The appeals court concluded that the restriction prohibited business activity of any kind.

The court observed that Black’s Law Dictionary defines “to carry on trade or business” as follows: “To conduct, prosecute or continue a particular avocation or business as a continuous operation or permanent vocation.” Similarly, in discussing various meanings of “business,” the American Heritage Dictionary notes that it “pertains broadly to all gainful activity.” Reading the association’s use restriction in conjunction with its other covenant provisions, the appeals court concluded that the restriction’s purpose was to protect the lot’s residential nature by insuring that non-residential uses were prohibited. Thus, the phrase “no trade or business of any kind,” as used in the restriction, should be interpreted as the ban of all gainful activity on association property, except for permitted business activities that don’t result in regular traffic.

The court held that the trial court erred when it found that the association had failed to establish that Leopold was violating the subdivision’s use restrictions. Accordingly, it reversed the trial court’s judgment and remanded (to send back to another court for further action) the case to get a court order prohibiting Leopold’s business activities on the lot as well as prohibiting any future use of the lot for business purposes.

©2012 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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