October 2012
In This Issue:
Owners Established that Covenant is Unconscionable
Challenge to Bylaws Not a Derivative Claim
Owner Must Modify Home Violating Height Limit
Memo to Owners Doesn’t Constitute Libel
Association Liable Under Consumer Protection Act
Renovation Policy Doesn’t Violate Fair Housing Act
Covenant to Arbitrate Construction Defect Disputes Enforceable
Association Can Lease and Operate Marina
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Owners Established that Covenant is Unconscionable

Bergman v. Spruce Peak Realty, LLC, No. 2:11-cv-128, U.S. Dist. Ct., Dist. Vt., March 20, 2012

Assessments/Developmental Rights: A Vermont district court denied a developer’s motion to dismiss claims that alleged one of the association’s covenants—which required residential unit owners to share the costs of hotel amenity use—was unconscionable.

Stowe Mountain Lodge Condominium is a resort in Stowe, Vt., that was originally developed by Spruce Peak Realty, LLC. The development consists of residential units, commercial units and a shared amenities unit, owned by Spruce Peak. This area includes the lobby, pool, parking garage, reservation desk and landscaped outdoor areas.

Spruce Peak began marketing Stowe Mountain Lodge in 2006, prior to its construction. The public offering statement (a legal document that provides information about new condominiums) contained drafts of the condominium declaration, a Hotel Access and Services Covenant (covenant), and a projected annual budget prepared by Stowe Mountain Lodge Condominium Owners Association, Inc. (association). The offering statement explained that residential unit owners would pay assessments to the association and to a master association. Unit owners would also be granted access to certain facilities and amenities in the hotel and would be charged an access and services fee to use them, as provided in the covenant. The offering statement warned prospective purchasers that the budget was based on estimates that were subject to change.

The projected association assessment for the first year of operation was $2,866 for a studio unit and $11,465 for larger units. The master association assessment was estimated to be $483 for a studio unit and $2,415 for larger units. The covenant provided that hotel services fees for hotel amenities would accrue nightly based on actual use, and the maintenance and operation assessment would be invoiced quarterly. Spruce Peak would have complete control over the budget—which would be used to calculate these assessments—and residential unit owners would be responsible for any difference in the amount assessed and the actual shared expenses.

Stowe Mountain Lodge, LLC, as successor developer, revised the offering statement, the covenant and the projected annual operating budget several months before nine residential unit owners (plaintiffs) closed on their units in 2008. Under the revised covenant, the hotel services fee would be an annual cost charged to unit owners rather than a nightly charge based on unit occupancy. However, residential units would remain responsible for the actual shared amenities expenses, regardless of the budget. The developer also continued to retain complete control over the shared amenities budget.

This change in the method of assessing the shared hotel services meant that, rather than pay $41 per night while a smaller unit was occupied, a studio unit owner would now be billed $6,892 per year, regardless of occupancy. And rather than paying $123 per night while a larger unit was occupied, the owner would now be billed $20,676 per year, regardless of occupancy. Consequently, residential unit owners could not limit their occupancy to reduce their bills for shared services. The plaintiffs were given copies of the revised documents prior to closing but were not given the opportunity to cancel their purchase agreements.

At a budget presentation in February 2010, the plaintiffs learned that the developer had violated the covenant by allocating and assessing residential unit owners for the shared amenities unit.

After unsuccessful mediation arranged by the association, the plaintiffs sued Spruce Peak and Stowe Mountain Lodge in a class action, asserting that they (1) illegally and fraudulently allocated expenses and voting rights in order to favor their commercial units; (2) illegally charged residential unit owners fees that Stowe Mountain Lodge should be paying; (3) illegally charged residential units for more than their share of the utility bills; and (4) fraudulently imposed exorbitant charges for shared amenity services.

The plaintiffs sought a declaration that the covenant was void and unenforceable. Alternatively, they asked to reform the covenant to comply with Vermont statutory and common law. As a further alternative, the plaintiffs sought to rescind their purchase agreements and receive monetary damages for breach of the covenant, fraud and violations of state and federal laws. The developer defendants moved to dismiss the suit in its entirety for failure to state a claim.

To survive a motion to dismiss a suit for failure to state a claim, the complaint must contain sufficient facts to state a claim for relief. The developers argued that the plaintiffs were barred from bringing suit individually rather than through the association.

Under Vermont law, terms of a contract are unconscionable if they are procedurally or substantively unfair. Thus, unequal bargaining power coupled with lack of meaningful choice plus unreasonable contract terms may supply grounds for finding a contract unconscionable. The plaintiffs argued that the covenant was an adhesion contract (a contract that heavily restricts one party while leaving the other free); that residential unit owners had no opportunity to negotiate its terms; that significant features of the covenant were buried within hundreds of pages of documents; that residential unit owners could only pursue a claim by causing the association to act on their behalf, whereas the developers controlled the association by virtue of the voting rights allocations; and that the developers could initiate a law suit against a residential unit owner for failure to pay the assessment, but the residential unit owner could only act through the association.

The court concluded that although the plaintiffs might or might not prevail at trial, they had adequately stated a claim for breach of an implied or statutory covenant of good faith and fair dealing. Additionally, the court found that they had adequately stated a claim of unconscionability and were entitled to present evidence to prove their claims. Therefore, the court denied the developers’ motion to dismiss the claims.

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

Challenge to Bylaws Not a Derivative Claim

Ewer v. Lake Arrowhead Association, Inc., No. 2011AP113, Wis. App. Ct., May 24, 2012

Covenants Enforcement/Association Operations: A Wisconsin appeals court reversed the dismissal of a property owner’s challenge against a covenant that allowed an association to collect different assessment amounts, holding that the suit was properly brought on behalf of the individual owner and was not considered a derivative claim.

Gilbert Ewer owns a consolidated site (two or more abutting residential lots treated as one lot) in Lake Arrowhead subdivision, which is located in Rome, Wis., and governed by Lake Arrowhead Association, Inc. (association).The association charges consolidated-site owners 25 percent more for annual assessments than it charges single-site owners for annual assessments. Ewer sued the association, seeking a declaration that the covenants didn’t authorize the association to charge consolidated-site owners the higher assessment.

The association contended that Ewer’s claim should be dismissed because it was a derivative claim under Wisconsin law, and Ewer had failed to satisfy the requirements for a derivative claim. A derivative claim is a civil suit brought on behalf of a corporation by one or more members having five percent or more of the voting power or by 50 members, whichever is less. A right of action (the legal right to bring a particular case before a court) that belongs to the corporation cannot be brought as a direct claim by an individual member. The court ruled in the association’s favor and dismissed the case. It found that the covenants’ construction was a matter of concern to all Lake Arrowhead property owners; and, therefore, the action was a derivative claim. Ewer appealed.

The fundamental inquiry for the appeals court was which party had the right to bring the lawsuit. If the only injury was to the association, then the right to bring the suit belonged solely to the association, even if the injury to the association had a subsequent impact on the members. In contrast, if the suit was based on the impairment of members’ individual rights, it would properly be brought as a direct individual claim.

The association relied on the following provision in the bylaws:

All annual assessments for corporate areas and corporate facilities which pertain to inactive owner memberships shall be one-fourth (1/4) of the amount of such assessments which would be due on such owner memberships if the same had not been declared inactive; provided that if the owner membership made inactive is one which appertains to a residential lot which is a part of a consolidated site as is described elsewhere in this Declaration, no such annual assessments shall be charged with respect thereto, except that at least one (1) full annual assessment or one (1) one-fourth (1/4) annual assessment, as the case may be, shall be charged with respect to every consolidated site. [Emphasis added.]

Ewer argued that the association’s construction of the bylaws affected consolidated-site owners differently from single-site owners. The association contended that Ewer was subject to the bylaws, and the association enforced the bylaws equally on all members. The association maintained that every member had an interest in the proper construction of the bylaws because all members would be affected if the bylaws were incorrectly construed; therefore, only the association, collectively, had a right to bring the action.

The bylaws provide for owners to pay assessments that are collected by the association. The court noted that Ewer had a contractual obligation to pay the assessment for a consolidated site authorized in the bylaws as well as a corresponding right, which was also contractual, not to pay assessments greater than those authorized by the bylaws. These rights were individual to each parcel owner because the assessments were imposed on each owner individually. Because Ewer had an individual right to pay no more in assessments than the bylaws authorized, he suffered a direct injury, individually, if he paid more than the bylaws authorized.

The court concluded that Ewer’s action was an individual claim, because it was based on direct injury to a right that was individual to him and each of the association’s members. It reversed the trial court’s order and remanded the case for further proceedings.

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

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Owner Must Modify Home Violating Height Limit

Greenbank Beach and Boat Club, Inc. v. Bunney, No. 66308-9-I, Wash. App. Ct., May 29, 2012

Covenants Enforcement/Architectural Control: A Washington appeals court affirmed a ruling that homeowners must modify their homes to comply with a restrictive covenant that limits the height of dwellings to 15 feet.

Dallas Bunney purchased a lot in Holmes Harbor Estates, Division 1, located in Island County, Wash., and governed by Greenbank Beach and Boat Club, Inc. (association). The property is subject to a covenant that limits dwellings to a height of 15 feet. The association also adopted rules to clarify how the height of a dwelling is measured. Bunney submitted construction plans to the association for approval in 2007. The association rejected his plans because the house would exceed the 15-foot limit by at least six feet. The association made efforts to convince Bunney to comply with the height restriction before the foundation for his house was poured; however, he proceeded to build the house as planned and completed it in November 2008.

The association sued Bunney in May 2008 for violating the height restriction. The trial court found that Bunney did not make a good faith effort to resolve the concerns of the association. Instead, he chose to construct his home with full knowledge that his plan exceeded the height restriction and had been rejected by the association. The home also blocked the view of others in the neighborhood.

Despite evidence that some other homes in the subdivision were higher than 15 feet, the court determined that the restriction had not been abandoned (rendered invalid due to nonenforcement). It concluded that Bunney acted in bad faith and proceeded at his own risk to build his home in accordance with the original rejected plan. The court entered judgment ordering Bunney to modify his home to comply with the height restriction. Bunney appealed.

Bunney argued that the trial court erred in its judgment because the association’s suit was not a “suit to enjoin the construction” of Bunney’s home. The covenants provide that the height restriction cannot be enforced against a noncompliant homeowner unless a lawsuit to prohibit a home’s construction” is commenced before the work is completed. The court rejected Bunney’s argument as overly technical, stating that a lawsuit could not be a “suit to enjoin the construction” unless it contains the words “injunction” and “enjoin.” It observed that the association filed its suit well before Bunney completed construction of his home.

The court considered that the purpose of the covenant was to make homeowners aware that the association was serious about enforcing the height restriction, and by violating the covenant, the owner runs the risk of being ordered to tear down or modify the structure. The association’s complaint fulfilled this purpose.

Bunney argued that the trial court erred in awarding attorney’s fees to the association because the award was without legal basis. The association argued that the award was justified on the equitable ground of pre-litigation misconduct.

Pre-litigation misconduct is one of three recognized types of bad faith conduct. It may serve as the basis for an award of attorney’s fees in cases where the enforcement of judicial authority (i.e. contempt of court) has caused the opposing party to incur counsel fees. In such cases, the award is similar to a fine for civil contempt. For a judge to sanction a party to pay the other party’s attorney’s fees for pre-litigation misconduct, the alleged pre-litigation misconduct must involve some disregard of judicial authority.

Here, the appeals court found that Bunney did not disregard judicial authority. Until he lost this lawsuit, there was no judicial ruling establishing that the association was clearly in the right. To allow an award of attorney’s fees based on bad faith in this suit would not be consistent with the rationale behind the rule.

Bunney argued that the covenant limiting the height of dwellings to 15 feet had been abandoned by selective enforcement and that the method of measuring the height was unclear. However, the court determined that litigants (parties engaged in a lawsuit) are not ordinarily required to pay attorney’s fees for making losing arguments. In finding that Bunney did not disobey the court or thwart its authority, the appeals court concluded that the award of attorney’s fees was not proper.

The judgment ordering Bunney to modify his home to comply with the height limitation was affirmed, but the trial court’s order of attorney’s fees was reversed.

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

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Memo to Owners Doesn’t Constitute Libel

Mendez v. Kavanaugh, No. 13-11-00622-CV, Texas App. Ct., Aug. 21, 2012

Miscellaneous Association Operations: A memo posted to homeowners by the former association president indicating that the current president and treasurer were under investigation for embezzlement did not constitute libel.

Acacia Lake Townhouses in Brownsville, Texas, are governed by Acacia Lake Townhouses Homeowners’ Association (association). Paul Kavanaugh was president of the association prior to the election of Jaime Mendez in 2007.

While Kavanaugh was president, he started investigating the actions of the association’s treasurer, Sandra Walsdorf, because of perceived financial irregularities. When Mendez became president, Kavanaugh asked Mendez to cooperate with the investigation by providing certain banking and financial records. Mendez refused. Kavanaugh subsequently pressed charges with the police against Mendez and Walsdorf for embezzlement, fraud and other fiscal offenses. The district attorney declined to pursue a criminal prosecution.

In 2007, Kavanaugh wrote a memorandum to association members, which he posted on the association’s bulletin board. The memo stated that he had filed charges with the police against Walsdorf and Mendez for embezzlement, fraud, conspiracy to illegally use association funds and making false presentations of association finances to association members.

Mendez sued Kavanaugh for libel (a published statement that is false and damaging to a person's reputation). Kavanaugh filed a motion for summary judgment (a determination made by a court without a trial), asserting that he was entitled to judgment as a matter of law, based on the affirmative defense of qualified privilege (allowing a person to make statements about issues in which he or she has an interest that would be considered slander and libel if made by anyone else). Qualified privilege is inapplicable if the statement is made with malice.

Mendez pointed to a statement in Kavanaugh’s testimony where he said that, to his knowledge, “Mr. Mendez did not ever directly embezzle funds from [the association].” Mendez also claimed that Kavanaugh had an ongoing history of intimidating and harassing  him and other association members. The trial court granted Kavanaugh’s motion, and Mendez appealed.

Mendez argued that Kavanaugh failed to establish that he acted without malice when he posted the memo. Kavanaugh argued that his memo could not have been defamatory because it did not state that Mendez actually committed crimes; rather, it stated that Kavanaugh had filed charges with police alleging that Mendez committed crimes. He stated that because of the evidence he possessed, he still believed that Walsdorf committed fraud against the association.

A libel defendant can prove he or she had not acted with malice by presenting evidence that he or she did not knowingly publish false information or recklessly disregard the truth. Kavanaugh testified that he conducted an investigation of the association’s financial records when he was elected president. He became suspicious of irregularities uncovered in his investigation, including that Walsdorf did not pay her share of property insurance or maintenance fees for 2005. He stated that Mendez refused to cooperate with his investigation by providing access to banking and financial statements and that Mendez constantly sided with and protected Walsdorf.

The appeals court found that Kavanaugh’s testimony conclusively disproved that he doubted the truth of his publication. Mendez provided no evidence that suggested Kavanaugh did not believe his allegations against Mendez and Walsdorf.

Mendez argued that Kavanaugh failed to establish that the memo was “only communicated to another party having a corresponding interest or duty,” because it was posted on the communal board at Acacia Lake Townhouses, which was open to the public. 

The court noted that the memo was specifically addressed to association members. Moreover, a person who is privileged to publish defamatory matter may use a method of communication to announce the defamatory matter that incidentally may be seen by persons not involved in the matter if the communication method is standard in the industry or required by necessity. Accordingly, the court overruled Mendez’s argument.

The appeals court affirmed the trial court’s grant of summary judgment in Kavanaugh’s favor.

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

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Association Liable Under Consumer Protection Act

MRA Property Management, Inc. v. Armstrong, No. 93 Sept. Term, 2007, Md. App. Ct., April 30, 2012

Association Operations/State and Local Legislation and Regulation: A Maryland appeals court held that the Maryland Consumer Protection Act could apply to disclosures made in resale certificates given to prospective condominium purchasers by the condominium association.

Tomes Landing Condominium is located in Port Deposit, Md., and governed by Tomes Landing Condominium Association, Inc. (association). Twenty-five unit purchasers sued the association, alleging multiple violations of the Maryland Consumer Protection Act (CPA) and the Maryland Condominium Act in connection with construction defects. The impetus for the suit was a special assessment imposed on unit owners to cover repair costs for water damage to the building caused by improper construction.

The purchasers claimed that the association committed fraud when it provided its operating budgets to prospective purchasers as part of a resale package. Specifically, they alleged that even though the association knew the estimated cost of the extensive repairs needed, it did not include this information as a line item in the budgets. The association indicated that it had corrected “any defective conditions in units,” when it knew the steps taken to correct the problems were ineffective. Further, the association indicated there were no known health or building code violations at Tomes Landing, and the operating budgets suggested repair expenses were declining at a time when they were actually climbing.

The association maintained that it had met specific disclosure requirements imposed by the Condominium Act, which discharged it from any legal liability.

The trial court awarded one million dollars against the association on the ground that the budgets in the resale package had the capacity, tendency and effect of misleading buyers. By using misleading budgets, the association committed an unfair or deceptive trade practice in violation of the CPA. The association appealed.

The association’s appeal rested on the premise that it was not a “seller,” as defined in the CPA. The purchasers argued that even if it the association was not the direct seller, the CPA should apply because the association prepares a resale certificate as mandated by the Condominium Act. Since a buyer relies upon the resale certificate, any deceptive information can so impact the real estate transaction, causing an unfair trade practice to a consumer.

The purchasers argued that the association knew the operating budgets in the resale certificate materially understated the cost of anticipated repairs and did nothing to correct or note this, which mislead the purchasers. Further, the association could not discharge its duties by merely complying with the Condominium Act, if doing so violated the CPA. The court held that it is possible that a non-seller can commit deceptive trade practices that could influence a sale or offer for sale in a way that the law would deem the deceptive trade practice had been committed “in the sale or offer for sale.”

The court determined that the association could have sufficiently involved itself in the entire transaction in a way that would impose liability under the CPA, given that the purchasers would not have bought their units if the budgets provided by the association had disclosed the expenses necessary to correct the problems. Moreover, the statutory obligation (an obligation arising from the law, not a contract) to provide materials to prospective buyers makes the association a central participant in the sales transaction because, if it failed to provide the materials, the purchase agreement would be unenforceable.

The test for an unfair or deceptive trade practice under the CPA is whether the false or misleading statement or representation has the “capacity, tendency, or effect of deceiving or misleading consumers.”

The association argued that the Condominium Act’s disclosure obligations insulated it from liability for false or deceptive practices. However, the court found that the Condominium Act creates duties for the association in the sale of a condominium unit. The CPA, on the other hand, establishes boundaries beyond which the association may not go, unless it wishes to be liable for deceptive or unfair trade practices. The Condominium Act is intended to provide minimum standards for the protection of consumers.

The court did not agree with the trial court that the operating budgets were deceptive as a matter of law. An inference could be drawn from a declining repair budget either that the property was in good condition, since little money needed to be spent, or the property was in poor condition since little was being spent. Therefore, the court concluded that the trial court’s entry of summary judgment (a determination made by a court without a trial) as a matter of law was inappropriate.

The court reversed the trial court’s summary judgment and remanded the case for further proceedings in accordance with this opinion.

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

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Renovation Policy Doesn’t Violate Fair Housing Act

Nicolari v. Harbour Landing Condominium Association, Inc., No. 3:09cv1553 (JBA), U.S. Dist. Ct., Dist. Conn., July 24, 2012

Federal Law and Legislation: A Connecticut district court ruled that a condominium association’s refusal to allow an unmarried owner to renovate her unit did not constitute discrimination on the basis of gender or sexual orientation.

Harbour Landing is a condominium development in New Haven, Conn., governed by Harbour Landing Condominium Association, Inc. (association). Patricia Nicolari purchased unit 56 in 2006. At the time, a strong odor of cat urine emanated from the unit and contaminated surrounding units. The association issued a “Special Notice to Buyer” that required any prospective buyer of unit 56 to take care of the mold and cat urine contamination in unit 56, the adjacent units 54 and 48, and the common hallway. The notice provided that, “The Board will not permit any repairs or upgrades to unit #56 until the three units and the hallway have been inspected both by an environmental specialist and members of the Harbour Landing Board of Directors or their designees to certify that all corrective actions [...] have been completed....”

Nicolari undertook extensive renovations to her unit, essentially gutting it by removing all flooring, subflooring, drywall halfway up the wall, tile and plumbing fixtures. She submitted an inspection report prepared by a restoration service to the association. The report stated the demolition had “most of the cat urine problem solved,” but the association advised her to cease renovating the unit until a thorough inspection and testing of material samples determined that the unit and adjoining units were no longer contaminated.

In March 2008, the board issued a decision declaring it would solicit bids to repair joists in unit 48 that had been damaged by Nicolari’s contractor, and Nicolari would be responsible for the repair costs. The board’s decision also declared that Nicolari would pay fines of $25 per day from the date she purchased unit 56 through December 7, 2007—a total of 452 days—for failure to remediate the odor; pay for an air purification system to remediate unit 54; pay a $50 fine for each unauthorized renovation to unit 56; pay all of the association’s associated legal fees and all costs of inspection and cleanup of units 56, 54 and 48; and that the board would not approve any renovations to unit 56 until the joists in unit 48 were repaired and an engineer hired by the association confirmed that decontamination of unit 56 was complete. The fines totaled $68,760.

When Nicolari refused to pay, the association sued her to collect the fines and other costs. The trial court awarded the association $9,035 plus taxable costs for engineering services, but noted that the association was not entitled to the fines it sought because it failed to give Nicolari “notice and opportunity to be heard.”

Nicolari sued the association in 2009, alleging it violated the Fair Housing Act by discriminating against her on the basis of her gender, marital status and sexual orientation. The association moved to dismiss all her claims.

Under the Fair Housing Act, it is unlawful to discriminate against any person in the sale, rental terms, conditions or privileges of a dwelling because of race, color, religion, sex, familial status or origin. To prove such discrimination, a party must demonstrate that the defendant has shown animosity towards a protected group.  

The court found Nicolari’s evidence insufficient to establish a case of discrimination. Although she presented affidavits from other married heterosexual owners at Harbour Landing who had performed renovations to their units and testified that they witnessed instances of her being treated differently by board members, none of those owners had done renovations under circumstances remotely similar to hers.

It was undisputed that Nicolari was aware of the contamination and the requirement imposed by the notice. Due to the condition of Nicolari’s contaminated unit compared to the relatively minor alterations performed by other residents weren’t comparable, no jury could infer discriminatory animosity solely from the notice’s terms. Nor could a reasonable jury, in light of Nicolari’s failure to abide by the terms of the notice, infer that the association’s refusal to allow her renovations or its imposition of fines constituted discrimination.

The association presented testimony that the board never discussed Nicolari’s sexual orientation or marital status; thus, there was no evidence that Nicolari’s gender, sexual orientation or marital status were significant factors in the association’s decision-making about unit 56.

The court concluded that Nicolari failed to establish a case of discrimination and, therefore, granted the association’s motion for summary judgment (a determination made by a court without a trial).

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

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Covenant to Arbitrate Construction Defect Disputes Enforceable

Pinnacle Museum Tower Association v. Pinnacle Market Development (US), LLC, No. S186149, Calif. Supr. Ct., Aug. 16, 2012

Covenants Enforcement/State and Local Legislation and Regulations/Developmental Rights: The California Supreme Court ruled that a covenant requiring arbitration of construction defect disputes was not unconscionable and was enforceable against the association.

Pinnacle Market Development (US), LLC developed a mixed-use residential and commercial common interest community in San Diego, Calif. known as the Pinnacle Museum Tower Condominium (project). The project is governed by Pinnacle Museum Tower Association (association).

The association sued Pinnacle, seeking reimbursement for property damage caused by construction defects. Pinnacle moved to require arbitration based on a clause in the declaration that requires the association and individual owners to resolve any construction dispute with the developer through binding arbitration in accordance with the Federal Arbitration Act (FAA).

The court found that the arbitration clause constituted an agreement between Pinnacle and the association to arbitrate construction disputes. Nonetheless, the court invalidated the agreement, finding that it was unconscionable (unusually harsh and “shocks the conscious”). The court of appeal affirmed the trial court’s ruling. The supreme court granted Pinnacle’s petition for review.

To determine whether the arbitration clause was binding, the court considered the rules governing the arbitration claims, the principles relating to the contractual nature of restrictive covenants pursuant to the Davis-Stirling Act (that specifies how common interest communities are governed and operated), and the doctrine of unconscionability.

Both the trial court and the appellate court determined that the FAA governed the issue because the project’s construction materials were manufactured in other states. The FAA provides that a provision in a written contract to settle a controversy is valid, irrevocable and enforceable, unless grounds exist to revoke the provision.

To ensure that arbitration agreements are enforced according to their terms, the FAA pre-empts state laws that require claims to be resolved in a judicial forum. Likewise, the FAA prevents a court from construing an arbitration agreement differently from the manner it would otherwise construe non-arbitration agreements under state law.

Nonetheless, it is a cardinal FAA principle that arbitration is a matter of consent, not coercion. In California, general principles of contract law determine whether parties have entered into a binding agreement that can be arbitrated. The party seeking arbitration bears the burden of proving the agreement to arbitrate exists, and the opposing party bears the burden of proving any defense.

The appellate court held that the arbitration clause was not binding on the association because the association did not exist at the time the declaration was recorded. Therefore, Pinnacle was the only party to the agreement. The supreme court, however, found that various legal theories allow for delegated authority to consent to the agreement. A statutory scheme (a systematic plan of action that is detailed in the statute) is crafted by the Davis Stirling Act that allows a developer to create a condominium subject to covenants and restrictions governing its operation and use. Under the act, each owner either has expressly consented or is deemed by law to have agreed to the terms in a recorded declaration. The owners have every right to expect that the association will abide by the covenants, including a covenant to invoke arbitration as a judicially favored method to resolve any construction dispute. That a developer and unit owners should hold an association to an arbitration covenant is not unreasonable; it is the unit owners who would pay assessments to cover the expense of resolving a dispute. The court determined that including the arbitration clause in the declaration was consistent with the act as a prerequisite to construction defect litigation.

The supreme court concluded that, even though the association did not bargain with Pinnacle over the declaration terms or participate in its drafting, statutes governing common interest developments reflected that agreements contained in a recorded declaration are enforceable against the association.

To invalidate an arbitration agreement, it must be proven to be both procedurally and substantively unconscionable, but they need not be present in the same degree. The more substantively oppressive the provision, the less evidence of procedural unconscionability is required to conclude that the provision is unenforceable, and vice versa.

To show something is procedurally unconscionable requires proof of oppression or surprise. Oppression occurs where a contract a lack of negotiation opportunities and meaningful choice; surprise exists where the allegedly unconscionable provision is hidden within the printed material. Here, the trial court perceived a high degree of procedural unconscionability in the arbitration agreement because the declaration was drafted and recorded by Pinnacle before any unit was sold and before the association was formed. The trial court determined the agreement was oppressive because the association did not have an opportunity to participate in drafting the declaration.

That the declaration was recorded before any unit was sold was a circumstance dictated by the act, its intent being to permit landowners to develop and market their properties to purchasers as condominium developments operating under certain restrictions. If an association could avoid an arbitration covenant because it did not negotiate the covenant, it would follow that the association would not be bound by any of the covenants.

Thus, the supreme court found that the arbitration provision in the declaration was not substantively unconscionable. The association did not show that the provision failed to conform to minimum regulatory standards that protect the public interest. In fact, the Department of Real Estate reviewed and approved the condominium governing documents before issuing the public report. Additionally, the association failed to identify any aspect of the arbitration agreement that was overly harsh or so one-sided that it “shocks the conscience.”

The supreme court concluded that the declaration’s arbitration agreement was consistent with the act, was not unconscionable, and was, therefore, enforceable. It noted that the act ensures that the covenants of a recorded declaration, which manifest the intent and expectations of the developer and purchasers, will be honored and enforced unless proven unreasonable. The court overturned the appellate court judgment.

In a dissenting opinion, Judge Kennard said he would affirm the lower court judgment on the ground that under the act, whether parties in common interest developments are bound by alternative dispute resolution procedures requires “the voluntary consent of the parties.” Thus, consent by the developer alone is insufficient. By compelling arbitration, which offers no right to a jury, the court deprived the association of its constitutional right to have its construction defect dispute decided by a jury.

Editor’s Note: The Editor thanks Linda Cummings, Attorney at Law, Rancho Santa Margarita, Calif., for contributing this case.

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

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Association Can Lease and Operate Marina

Roats v. Blakely Island Maintenance Commission, Inc., No. 66514-6-I, Wash. App. Ct., July 2, 2012

Powers of the Association/Assessments: A Washington appeals court affirmed that a homeowners association had the authority to lease and operate marina facilities and assess homeowners for operating costs and losses.

Gary Roats owns two lots in San Juan Aviation Estates, a residential development located in Blakely Island, Wash. Blakely Island Maintenance Commission, Inc. (association) is a homeowners association that governs the subdivision and maintains non-residential property as well, including an airport landing strip, tennis courts, all common roads, a fire station, water treatment system, Horseshoe Lake, two parks and a beach access lot.

Since 2006, the association has leased and operated a privately-owned marina that consists of a dock, fuel dispensers and a general store. It began leasing the marina when the owner announced that it would cease operating the facilities and offered to lease them to the association. A majority of the association’s members approved a resolution authorizing the board to negotiate the lease. Thereafter, the board formed a limited liability company to enter into the lease.

In early 2009, the association sent annual assessment statements to its members. The assessment included the marina-related expenses, estimated to be $1,123.70 per lot. Roats refused to pay the portion allocated to marina expenses, and the association threatened to file a lien against his property based on the unpaid assessment.

In 2009, Roats sued the association. He sought declaratory relief (a judge's determination of the parties' rights under a contract) regarding the Blakely Island Covenants’ validity, and argued that the association did not have the authority to lease and operate the marina and levy the related expenses. He asserted a claim for open meetings violations pursuant to the Washington homeowner associations statute and sought a temporary restraining order to prohibit the association from filing a lien against his property as well as a declaration to clear title to his property since the association threatened to file a lien.

Roats’ motion for a temporary restraining order was vacated by the court after he deposited the estimated amount of the overdue assessment with the court. The court also dismissed his claim for declaratory judgment regarding the validity of the covenants.

The association sought dismissal of Roats’ claim that alleged it did not have the authority to lease and operate the marina and levy assessments for the related expenses. Roats sought an order declaring that the association and board members violated the open meetings statute by failing to provide the mandatory notice for 28 specific board meetings. The association moved to have the claim dismissed and sought a ruling that no additional remedies (the way a right is enforced by a court) were available to Roats based on that claim.  

The court dismissed Roats’ claim regarding the association’s scope of authority to operate the marina; however, it did not dismiss the claim of open meetings violations. Instead, the court granted Roats’ motion for partial summary judgment (a determination made by a court without a trial) on that claim, declaring that the association failed to give proper notice to its members for an undetermined number of board meetings. Both parties filed additional motions for summary judgment.

The court ruled that the association had violated the open meetings statute with regard to 18 meetings, concluding that the other asserted violations were time barred. The court ordered it would not grant further relief to Roats on the open meetings violations claim and denied his request for attorney’s fees. The court denied the association’s motion for summary judgment but awarded attorney’s fees and costs to the association on the basis that it was substantially the prevailing party in the litigation. Both parties appealed.

On appeal, Roats contended that the governing documents did not grant the association the authority to operate the marina or to levy assessments for costs related to such operations. The court found that the covenants and bylaws expressly granted the association the authority to levy assessments against its members “for maintenance and necessary capital improvements.” Roats argued that the association was not authorized to create a subsidiary company to lease and operate the marina; however, the court found that the broad authority granted within the covenants permitted such activities. Moreover, the covenants allowed the board, after obtaining the approval of the members, “to acquire and own real or personal property.”

Nevertheless, Roats contended that the majority of the association’s members could not impose financial obligations related to marina operations upon the minority. The court held that the association had asserted its authority, pursuant to its governing documents and with the approval of its members, “in a manner consistent with the general plan of the development.”  

The court reasoned that the association neither owned the marina nor possessed access or easement rights for its use. Thus, a person of suitable wealth could acquire the marina and exclude the association’s members from its use. The association’s governing documents, by granting the association the authority to enter into legal arrangements such as the lease challenged by Roats, provided a means by which the association could maintain its members’ access to the marina amenities. Therefore, 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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