January 2013
In This Issue:
Lessee Not Entitled to Set-off of Maintenance Dues for Unit Damage
Lien for Leasehold Owner’s Unpaid Assessments Doesn’t Attach to Interest of Fee Simple Owner
Developer Not Liable for Failing to Build Clubhouse
Insurer Must Pay Association’s Loss Claim
Developers Barred from Enforcing Mandatory Arbitration Provision After Project Completed
Renting Property to Unrelated Renters Doesn’t Violate Single Family Restriction
Developer Properly Reserved Right to Expand Condominium Without Owners’ Consent
Owners Entitled to Damages for Common Area Construction Defects Which Caused Unit Damage
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Lessee Not Entitled to Set-off of Maintenance Dues for Unit Damage

170 West End Avenue Owners Corp. v. Turchin, No. L & T 85298/2011, N.Y. Civ. Ct., Nov. 29, 2012

Assessments: The Civil Court of New York City ruled in favor of a cooperative association in its suit against an apartment lessee for failure to pay maintenance dues and rent.

Leah Turchin leased Apartment 20A in the 170 West End Avenue Cooperative in New York City from 170 West End Avenue Owners Corp. (association) in March 2002. In April 2009, there was a leak in the neighboring unit, Apartment 23A, which resulted in water damage to Turchin’s apartment. At the time of the leak, Turchin was not at home; when she returned, she did not see any water or visible damage to the apartment.

In July 2009, Turchin noticed mold growth in the apartment and contacted the building manager. The association’s insurance carrier retained RTK Environmental Group to inspect the unit. RTK took air samples from the unit in July, September, and October 2009, and issued written findings and recommendations. Samples taken from the bedroom and living room in July showed acceptable levels of mold; nevertheless, RTK recommended mold remediation in the living room. After testing in September, RTK found unacceptable levels of mold in the bedroom and living room, and once again recommended mold remediation. When the October inspection was performed, the wood floor throughout Turchin’s unit had been removed, and RTK found no unacceptable levels of mold. All remediation was complete, and no further recommendations were made. During the three inspections, RTK did not make any recommendations that would indicate Turchin could not or should not remain in the apartment.

After remediation was completed, the association hired Pro Line Finishing to do repair work, which included filling holes in the walls, installing new sheetrock, and preparing the walls for painting. Pro Line’s work was completed by late November 2009. Afterward, Turchin hired someone to paint the walls. When painting was finished, new floors were installed. The work was completed by mid-December 2009.

In 2010, Turchin sued the shareholders of Apartment 23A and the association, alleging that her unit suffered severe water damage in April 2009 as the result of a leak from a pipe that burst in Apartment 23A. Turchin claimed the water damage ultimately resulted in her constructive eviction (necessary eviction when the premises are rendered uninhabitable) from the unit. Her complaint against the association was based on its negligence in addressing the leak and resulting water damage.

In November 2010, the association filed a separate proceeding against Turchin for unpaid maintenance assessments and rent in the amount of $16,350. Turchin moved to consolidate this case with the water damage proceeding. The court denied her motion, finding that the apartment lease had a no-setoff provision (provides that the lessee has no right to reduce the amount of rent paid based on some alleged amount due by the lessor to the lessee) to enable the cases to proceed separately.

In May 2009, Turchin got married and moved to her husband’s residence in Long Island. Although she testified at trial that she had remained in New York City to monitor the work being done to Apartment 20A, during which time she used the apartment for her law practice, the court found her testimony lacked credibility and was unsubstantiated by other evidence.

The building manager testified that the leak from Apartment 23A was stopped when he closed the water flow to the toilet. The remediation company worked at Turchin’s apartment approximately two weeks. Additional remediation was needed after the initial work was done because Turchin had not removed all of her belongings from the apartment. A total of seven apartments were damaged as a result of the leak and required mold remediation. The building manager testified that access to Turchin’s apartment was limited because she was often absent or unavailable, delaying the work to her unit. Despite his urging, the building managers claimed Turchin took an excessively long time to remove her belongings so that remediation of the unit could be completed.

The court found Turchin failed to establish: (i) that the apartment’s condition was due to the association’s negligence or was a breach of the lease; (ii) that the apartment’s condition had required her to vacate the unit for any period of time; or (iii) that she actually abandoned or failed to use the apartment as a result of any condition caused by the leak.

Moreover, the no set-off provision of Turchin’s lease provided that the “Lessee will pay the rent to the Lessor upon the terms and at ties herein provided, without any deduction on account of any set-off or claim which the Lessee may have against the Lessor.”

The court found that Turchin failed to establish that she resided in the unit during the relevant period and that her occupancy was primarily for use as her law office. At best, she lived in the unit on a part-time basis. It is well settled that breach of the warranty of habitability (a promise that the residential property will be fit for people to live in) does not apply to a cooperative apartment that the shareholder does not reside in or resides in part time. Moreover, the court noted that the association took prompt action to correct the mold condition that was discovered, while Turchin limited and delayed access to the apartment and failed to cooperate with recommended procedures, which prolonged and may have exacerbated the original condition.

Based on the foregoing, the court dismissed Turchin’s counterclaims and rendered a final judgment in the amount of $12,930.20 to the association for all rent due through September 2012.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Lien for Leasehold Owner’s Unpaid Assessments Doesn’t Attach to Interest of Fee Simple Owner

Fairway Estates Association of Apartment Owners v. Young, No. 68152-4-I, Wash. App. Ct., Dec. 3, 2012

Assessments/Covenants Enforcement: A Washington appeals court affirmed a ruling that an association’s lien against a condominium unit for the leasehold owner’s unpaid assessments did not attach to the underlying fee simple ownership interest in the property.

Sand Point Country Club, Inc. (Sand Point) is the owner of real property located in Seattle, Wash. In 1973, it leased the property to Fairway Estates to construct apartment buildings. Under the lease, Sand Point received periodic lease payments and Fairway Estates accepted responsibility for all costs and expenses, such as taxes, insurance, repairs and maintenance.

In 1974, following construction of 84 apartment units, Sand Point and Fairway Estates decided to market the apartments as individual condominium units. Together, they recorded a condominium declaration that submitted the units and all improvements to the jurisdiction of the Horizontal Property Regimes Act (HPRA). The declaration provided that, “[a]ll of the owners of apartment units submitted to this Declaration shall constitute the Association of Apartment Owners . . . .” A modified lease recorded the same day converted the property from traditional fee simple estates (where one owner has complete ownership of a building and all its units) to condominium estates (where various owners have ownership of individual units and a percentage of common area property, subject to condominium bylaws and covenants). The modified lease also converted Fairway Estates’ interest from a lessee’s interest in real property to a lessee’s interest in condominium units, as well as intended for Fairway Estates to transfer its leasehold interest (the right to hold or use property for a fixed period of time without transfer of ownership, on the basis of a lease contract) incrementally to individual purchasers by specific assignment.

After Fairway Estates assigned its leasehold interest in all of the units to individual unit purchasers, Fairway Estates Association of Apartment Owners (association) was created, and the unit purchasers/assignees became members of the association. Sand Point, which was not such an assignee, is not a member of the association.

In 1996, the association amended and restated the original declaration. The amended declaration defined terms left undefined in the original declaration—significantly, the term “owner” was defined as “assignee(s) of [Fairway Estates’] leasehold interest.”   

In 2011, the association sued Robert and Zella Young, both deceased at the time, to foreclose on a lien against their unit for unpaid assessments. Pursuant to the declaration, the assessments were considered the “separate or joint and several personal debts and obligations” of the Youngs. In its foreclosure action, the association asserted that the lien was also attached to Sand Point’s underlying fee simple ownership of the unit.

The court dismissed the association’s claim against Sand Point, ruling that its interest in the unit was superior to the association’s lien and, therefore, not subject to elimination by foreclosure. The association appealed.

On appeal, the association relied on portions of its declaration, the Condominium Act and the HPRA as evidence that Sand Point’s interest in the unit was subject to the association’s lien. It argued that any assessment amount was considered a lien against the unit itself—which is defined in the declaration as a “physical portion of the Condominium designated for separate ownership.” Although the court accepted this argument, it pointed out that the declaration intended that all apartment units were to be owned as leasehold interests. Sand Point’s fee simple interest in the units was excluded from the declaration’s definition of “owner.” 

Furthermore, the declaration specified that that it was the declarant’s intent to assign only the Fairway Estates’ leasehold interest to individual purchasers. Only assignees of Fairway Estates’ leasehold interest were entitled to membership in the association. Sand Point did not possess membership rights and was not subjected to the obligations of the association members. Moreover, Sand Point was not obligated to repair or maintain the premises or pay any association assessments levied against the members.

If the association were correct that Sand Point was the “owner” of the Youngs’ unit, it would also be true that the association had been improperly constituted under the HPRA. If members of the association were mere “tenants,” then the association would not have power to levy assessments because that power arose by virtue of its status under the HPRA. 

Accordingly, because the declaration stipulates that the association is comprised of persons owning their units by way of leasehold, the association’s lien for unpaid assessments must be construed as attaching only to the Youngs' leasehold interest.

If, despite the declaration’s intent, the statute were interpreted to require that the association’s lien be attached to Sand Point’s interest in the unit, Sand Point could be divested of its property through no fault of its own and would not receive notice regarding the unpaid assessments.

Concluding that the Legislature could not have intended such a result, the court held that when a condominium declaration clearly states individual units are assigned leasehold interests in property, the condominium association’s statutory lien for unpaid assessments attaches solely to the owner’s leasehold interest in the unit.

The trial court’s judgment was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Developer Not Liable for Failing to Build Clubhouse

Gold Strike Heights Homeowners Association v. Financial Pacific Insurance Company, No. C066240, Cal. App. Ct., July 13, 2012

Developer Liability: A California appeals court found that a developer who failed to build a clubhouse—which was planned for the second phase of an unfinished subdivision—was not liable for damages to the homeowners association.

Westwind Development, Inc. (Westwind) designed and built Gold Strike Heights subdivision in San Andreas, Calif. A declaration of restrictions was filed in Calaveras County in 2002, and provided that the project be constructed in at least two phases. Pertinently, the declaration states that “[t]he first phase consists of residential Lots 1 through 42 and 48 to 50 and Common Area Lot H . . . .” It also provides that the “Declarant reserves the right at its discretion to establish the order of phases, the number of Common Area Lots or Residential Lots in a phase, the number of phases, or the building types in a phase.” The recorded subdivision map shows that a clubhouse was planned for Lot 43, which is not listed in the declaration as one of the lots to be developed during the first phase.

Before Westwind was allowed to mention the clubhouse in marketing phase one, the California Department of Real Estate (DRE) required Westwind to secure a surety bond (a promise by a surety to pay a certain amount to a second party if the first party fails to meet some obligation) for its completion. In 2002, Westwind secured the bond from Financial Pacific Insurance Company (Financial Pacific) in the amount of $319,647. Attached to the bond was a “Planned Construction Statement,” which indicated planned common area developments that included landscaping and a “Recreation Area with Equipment.” The recreation area with equipment referred to a clubhouse and was listed as having an estimated cost of $200,000.

When Westwind failed to build the clubhouse, Gold Strike Heights Homeowners Association (association) sued Westwind and Financial Pacific. A jury awarded the association $319,157, based on the “Planned Construction Statement” attached to the bond. However, the trial court granted judgment notwithstanding the verdict (JNOV) to Westwind and Financial Pacific on the ground that the association failed to present evidence of the actual cost to build the clubhouse. The association appealed.

JNOV is the practice whereby the presiding judge in a civil jury trial may overrule the jury’s decision and reverse or amend the verdict. This intervention permits the judge to exercise discretion to avoid extreme and unreasonable jury verdicts. Reversal of a jury’s verdict occurs only when the judge believes there are insufficient facts on which to base the jury’s verdict, or if the judge believes the verdict did not correctly apply the law.

On appeal, the association argued that the trial court erred by granting the defendants’ JNOV motion. It contended that Westwind breached its obligation to build the clubhouse during phase one of the development, in turn causing the association to incur $319,647 in damages.

The appeals court observed that a breach of contract is actionable only if there is “an unjustified failure to perform a material contractual obligation when performance is due.” Conversely, if no performance is due, there can be no liability for breaching an obligation.

In this case, no competent evidence established that Westwind’s obligation to construct the clubhouse had gone into effect. In the absence of a duty to build the clubhouse, Financial Pacific had no corresponding obligation to pay the amount of the surety bond.

The association submitted a marketing map used to sell homes in phase one that indicated a clubhouse was to be built on Lot 43. However, the same map included Lots 44 through 47, which were also excluded from phase one of the development. Nothing on the marketing map indicated when or in which phase any of the lots were to be developed.

DRE’s public report expressly informed prospective buyers that the clubhouse was to be built as part of phase two and that phase two might never be built. The map showed to prospective buyers also indicated the clubhouse stood on a lot that was not slated for development during the first phase.

Finally, the association relied on testimony from a Westwind sales agent, who stated Westwind promised that a clubhouse would be built on Lot 43 in phase one before December 2006. However, the court noted that such oral representations are not recognized in the sale of real property. An oral promise to build real estate fails to satisfy the statute of frauds, which requires real estate contracts to be in writing.

The appeals court concluded that no competent evidence had established that Westwind was obligated to build the clubhouse for the Gold Strike Heights subdivision. Consequently, no damages could be awarded for failure to build or fund the clubhouse. Thus, the trial court reached the correct result in granting the motion for JNOV.

The trial court’s judgment was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Insurer Must Pay Association’s Loss Claim

Kings Ridge Community Association, Inc. v. Sagamore Insurance Company, No. 5D11-1051, Fla. App. Ct., July 6, 2012

Contracts/Association Operations: A Florida appeals court reversed a ruling that had originally found that damage to a clubhouse owned and maintained by a homeowners association was not covered under its “all-risk” policy with the insurer.

Kings Ridge Community Association, Inc. (association) owns and maintains the clubhouse in the Kings Ridge community in Lake County, Fla. In 2010, the clubhouse’s exterior doors collapsed, causing a substantial depression in the roof adjacent to the heat and air conditioning unit. The drop ceiling was significantly damaged.

The clubhouse was insured under an “all-risks” business owner’s policy that was issued by Sagamore Insurance Company. The policy provided that the insurer would pay for direct physical loss or damage to the premises resulting from a “Covered Cause of Loss.”

The association and the insurer hired expert engineers to inspect the property, and their findings were virtually identical. Each found that the first 11 roof trusses had failed, causing the roof above the trusses and the ceiling to drop.

The engineers noted that the top chord of the original trusses had been modified at the time of construction, and the air conditioning unit on top of the building had been replaced by one that weighed more than the original. Additionally, rainwater regularly pooled on the roof. The engineers concluded these factors contributed to failure of the trusses. They also found that the structure was in a dangerous and unsafe condition.

The association submitted a claim under the Sagamore policy. Sagamore sued, seeking a determination of the extent, if any, of its duty to provide coverage for the claimed loss. The pertinent policy provision provided:

5.d. Collapse

(1)   With respect to buildings:

(a) Collapse means an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose;

(b) A building or any part of a building that is in danger of falling down or caving in is not considered to be in a state of collapse;

(c) A part of a building that is standing is not considered to be in a state of collapse even if it has separated from another part of the building;

(d) A building that is standing or any part of a building that is standing is not considered to be in a state of collapse even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.

Relying on section 5.d, the court concluded that the clubhouse was not in a state of collapse within the terms of the policy and, therefore, Sagamore had no duty to cover the association’s loss. The association appealed.

In interpreting insurance contracts, courts are bound by the plain meaning of the text. If the language is plain and unambiguous, the courts must allow the policy terms and conditions to be enforced as it is written. However, if the language is susceptible to more than one reasonable interpretation, a court will resolve the ambiguity in favor of the insured party.

On appeal, Sagamore argued the policy did not cover the claim because the roof had not “fallen” and the building was still standing. Although photographs showed that the roof had not fallen to the ground, the loss nevertheless appeared to meet the requirements in section 5.d for a “collapse.”

The record showed that when the trusses failed, the roof above the trusses deflected downward, meeting not only the policy’s definition of “falling down,” but also the definition of “caving in.” All the roof’s parts descended freely by the force of gravity and dropped to a lower position. The policy was not written in terms of how far a part of a building must fall, or to what degree a part of a building must cave in, to constitute a “collapse.”

The record also established that the building was structurally unsafe and could not be occupied for its intended purpose. The policy did not clearly require total destruction for a “collapse” to occur. The court determined that the policy was too ambiguous to be interpreted as requiring that the roof fall to the ground for coverage to apply. Moreover, “standing” is defined as “upright on the feet or base, remaining at the same level, degree, or amount for an indeterminate period.” The court noted that immediately after the incident, the ceiling, roof and trusses were no longer upright on their base; they were no longer at the same level, degree or amount of height they had previously maintained. Since, by definition, they were not standing, section 5.d(1)(d) did not apply, even though the roof showed evidence of bending or sagging.

The court concluded that the policy language was susceptible to more than one reasonable interpretation. Therefore, it resolved the ambiguity in favor of the association.

The judgment of the trial court was reversed and the case was remanded for further proceedings.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Developers Barred from Enforcing Mandatory Arbitration Provision After Project Completed

Promenade at Playa Vista Homeowners Association v. Western Pacific Housing, Inc., No. B225086, Cal. App. Ct., Nov. 8, 2011

Developmental Rights/Covenants Enforcement: A California appeals court upheld an order that developers of a condominium complex were barred from enforcing a mandatory arbitration clause contained in the condominium’s declaration because the restrictions were a servitude that ran with the land and the developers no longer had any ownership interest in the property.

Western Pacific Housing, Inc. and Playa Capital Company, LLC (developers) constructed, marketed and sold a 90-unit condominium complex located in Playa Vista, Calif. Before the Promenade at Playa Vista Homeowners Association (association) was created or any units were sold, the developers recorded a declaration of covenants, conditions and restrictions (declaration) that contained a mandatory arbitration clause, which required that any disputes between the developers and the association or individual unit owners be submitted to binding arbitration. Only the developers signed the declaration, and according to its terms, the provision could not be amended without the consent of the developers. The declaration named the Federal Arbitration Act (FAA) as applicable in interpreting and enforcing the arbitration provision.

Unit sales began in 2004. Each unit purchase agreement contained a mandatory arbitration provision requiring that post-closing disputes between the developers and purchasers be submitted to binding arbitration. Unlike the declaration, the purchase agreements were signed by both the developers and the purchasers.

Initially, the association’s board was appointed by the developers. Ultimately, the developers sold all the units and no longer had any ownership interest in the complex. The owners replaced the initial board members with elected unit owners.

In 2009, the association filed suit in court against the developers for alleged construction defects. The developers filed a motion to compel arbitration, relying on the declaration’s provision and the individual purchase agreements.

The association filed an opposition, arguing that the declaration was not subject to arbitration because it was an equitable servitude instead of a contract; alternatively, if the declaration was a contract, enforcement of the arbitration clause was barred because of unconscionability (the doctrine of denying enforcement of an unfair or oppressive contract). Equitable servitudes are land use restrictions which may be enforced in equity (based on principles of fairness rather than a particular law). Equitable servitudes may be broader than covenants on the land.

The association also asserted that 30 of the original purchasers had sold their units, and the arbitration provision in their purchase agreements did not apply to subsequent purchasers. The trial court denied the developers’ motion to compel arbitration, and the developers appealed.

On appeal, the parties focused primarily on whether the declaration was unconscionable (unusually harsh and “shocks the conscious”). The developers stated they no longer relied on the arbitration provision in the purchase agreements; rather they based their right to arbitrate solely on the declaration.

The association argued that the developers could not enforce the declaration, however, because it consisted of equitable servitudes and was not a contract; therefore, the declaration was not enforceable by the developers, who had no ownership interest in the condominium.

Under the FAA, in any contract regarding commerce, a written provision requiring the parties to settle any controversy arising out of such contract or transaction through arbitration is valid and enforceable. However, the court pointed out that this case involved an equitable servitude, not a contract, making the FAA inapplicable.  

The California Supreme Court has previously held that a declaration or the operative document that creates a common interest development is a collection of covenants, conditions and servitudes that govern the project. Restrictive covenants run with the land (meaning that covenants are still applicable to the next owner with the sale or transfer of land) and, thus, bind successive owners. Restrictive covenants must relate to the use, repair, maintenance or improvement of the property, or to the payment of taxes or assessments. The instrument containing the restrictive covenants must be recorded against the land.

Restrictions that do not meet the requirements of covenants running with the land may be enforceable as equitable servitudes, provided the person bound by the restrictions had notice of their existence.

By choosing equitable servitude law as the standard for enforcing declarations, the California Legislature showed it was in favor of having declarations enforced. Covenants and restrictions are enforceable as equitable servitudes and “inure to the benefit of and bind all owners of separate interests in the development.” The owners and the association—both as a group or individually—may enforce the declaration unless the declaration provides otherwise. However, the appeals court determined that the developers could not enforce the declaration once they had completed the project and sold all the units.

Since the developers no longer owned any property in the Playa Vista complex, they had no standing to enforce the declaration, including the arbitration provision.

Accordingly, the trial court properly denied the developers’ motion to compel arbitration, and its order was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Renting Property to Unrelated Renters Doesn’t Violate Single Family Restriction

South Kaywood Community Association v. Long, No. 00691, Md. Ct. Spec. App., Nov. 26, 2012

Covenants Enforcement/Use Restrictions: A Maryland appeals court upheld a ruling that found a covenant that restricted home usage to single-family residences did not prohibit owners from renting their homes to persons not related by blood, marriage or adoption.

Rodney and Melinda Long purchased two homes in the South Kaywood subdivision in Salisbury, Md., in 2006. One of the houses is leased to a married couple with two children. The other is leased to three female undergraduate students who attend Salisbury University. The students are not related to each other by blood, marriage or adoption.

Upon learning of the familial status of the students, the South Kaywood Community Association (association) notified the Longs that renting their house to unrelated occupants constituted a violation of its covenants.

The covenants provide:

Not more than one private dwelling house or residence . . . shall be erected . . . and such house or residence shall never be used or occupied for any purpose except for that of a private residence exclusively, nor shall any part or portion thereof ever be used or occupied except solely as a single-family residence. . .

The Longs sued the association, seeking a declaration that the covenant did not require all individuals residing in a unit to be related. In its answer to the Longs’ complaint, the association asked for a declaration that the covenant meant that homes were to be used or occupied solely by single-family residents.

The Longs admitted that the students were not related. Under the lease, each of the students was individually liable for any damage to the property during their tenancy, and they were also collectively responsible for cleaning and maintaining the home’s interior. In addition, the properties are in the R-1 Zoning District of Wicomico County, which is reserved for single family residences.

The definition of “family” that governs property in the R-1 District is as follows:

FAMILY

Means either (q) one person, or two unrelated persons and the children of either of them, or (b) two or more persons related by blood or marriage, or (c) a group of not more than four persons not necessarily related by blood or marriage. In any case, the group must be living together as a single housekeeping unit. In all cases, foster children placed by an agency licensed to operate in Maryland housed on the premises are considered as members of the family.

The court observed that three unrelated college students living together in a residence would not violate the zoning ordinance, so long as the students lived together as a “single housekeeping unit.”

The court concluded that the covenant did not require residents of a unit to be related by blood, marriage or adoption, and three unrelated college students living in a single unit conformed to the covenants’ provisions and was consistent with Wicomico County Zoning Regulations. The association appealed.

The appeals court relied on Hill v. The Community of Damien of Molokai, 911 P.2d 861 (N.M. 1996), in which the court found that while the zoning statute was not directly applicable to private covenants, it indicated the type of groups that might logically, as a matter of public policy, be include within the concept of a “single family.”

The appeals court agreed with the analysis in Hill, finding that the term “single family” could mean that the property was restricted to use by persons related by blood, marriage or adoption; but the term could logically also have a broader meaning, such as the definition set forth in the Zoning Code.

The court issued a judgment affirming the trial court’s order and declaring that the South Kaywood restrictive covenant did not prohibit landowners from renting their property to persons not related by blood, marriage or adoption.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Developer Properly Reserved Right to Expand Condominium Without Owners’ Consent

The Villas at Woodson Bend Condominium Association, Inc. v. South Fork Development, Inc., No. 2010-CA-000578-MR, Ky. App. Ct., Dec. 7, 2012

Developmental Rights/Covenants Enforcement: A Kentucky appeals court affirmed a finding that a condominium master deed had reserved the right for the developer to add future units and reallocate percentage interests in the common elements without approval of a majority of unit owners.

South Fork Development, Inc. purchased a parcel of land containing approximately 160 acres on Lake Cumberland in Pulaski County, Ky. It developed a condominium complex—The Villas at Woodson Bend—and filed a master deed establishing the condominium regime pursuant to Kentucky’s Horizontal Property Law. Approximately 48 acres were to be utilized for the condominium project, an additional 20 acres were dedicated for a sewage treatment facility, and the remaining acreage was retained by South Fork for uses other than the condominium project.

All but three of the condominium units were sold between July 2002 and November 2008. By 2009, 61 condominium units had been constructed, along with a clubhouse, swimming pool and boat dock for the condominium residents.

In accordance with the Horizontal Property Law, unit owners were automatic members of The Villas at Woodson Bend Condominium Association, Inc. (association). In 2009, the association sued South Fork, seeking to enjoin it from undertaking future development within the project without the consent of a majority of the existing unit owners.  

The association claimed that the language in the master deed required South Fork to complete all construction within a period of four years from the date the master deed was recorded. The association also claimed that when the four-year period concluded, South Fork was required to turn the property over to the association and take no further unilateral action with respect to development.

South Fork argued that the master deed’s language did not set a time limitation on the development’s construction phase; rather, the language placed restrictions on the total number of units that could be constructed within the project boundaries. South Fork asserted it had reserved the right to amend the master deed at any time to increase the number of units and reallocate interests in the condominium common elements up to the maximum number of units specified in the master deed.

The trial court granted partial summary judgment in favor of South Fork, finding that although South Fork could not unilaterally amend the master deed beyond the initial four-year period (the marketing period), the master deed could be amended to include up to 200 units or 475,000 square feet, and South Fork was not restricted in constructing units after the marketing period expired. The association appealed.

The sole issue on appeal was the proper interpretation of the master deed to determine whether South Fork maintained the right to undertake additional construction, or if its right ended when the marketing period expired.

The appeals court found that the master deed contained specific provisions relating to future development, which were consistent with other amendment provisions to shift and reallocate the unit owners’ interests in the common areas. Further, it authorized South Fork, “without any requirement to obtain the consent of any unit owner or other person,” to amend the master deed upon completion of construction to ensure each unit owner’s percentage interest in the common areas conformed “to the square feet and percentage interest of those units as built.” Additionally, such percentage interest “shall remain constant,” and adjustments of the percentages are prohibited without “prior written approval of all unit owners.”

The court found that the master deed contained clear and specific language concerning the owners’ consent to future development and the shifting and reallocation of their interests in the common areas. Unit purchasers accepted this method when they accepted the conditions set forth in their respective deeds. Thus, the trial court correctly concluded that any amendments to the master deed for the limited purpose of developing additional units—and thus altering the owners’ percentage interests in the common areas as a necessary consequence of future development—could be done by South Fork without further consent by the unit owners.

The trial court’s judgment was affirmed.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Owners Entitled to Damages for Common Area Construction Defects Which Caused Unit Damage

Wyman v. Ayer Properties, LLC, No. 11-P-1046, Mass. App. Ct., Dec. 12, 2012

Developer Liability: A Massachusetts appeals court ruled that an award of compensatory damages for negligent construction of a condominium’s common areas of was not barred by the economic loss rule.

In 2002, Ayer Properties LLC purchased a vacant mill building in Lowell, Mass. The four-story brick building was constructed in 1858 and was a protected structure within the city’s downtown historic district. It had been vacant for at least 10 years before Ayer purchased it.

Ayer began converting the building into residential and commercial condominium units in 2003 and continued the work for nearly three years. The master deed recorded in December 2003 established the condominium trust, with Ayer as the sole initial trustee and declarant. As the conversion continued, Ayer surrendered control of the board of trustees to unit purchasers but retained ownership of the five commercial units on the first floor. Sale and occupancy of the 22 residential units proceeded during the three-year construction period.

Soon after transfer of control, the trustees became concerned about the building’s condition. They hired an engineer to perform an inspection and prepare a report based on his findings.

Three categories of common area damage emerged from the reports: (1) 22 window frames suffered from excessive weather damage and leakage that extended beyond the common area into window bodies, sashes and panes of individual units, which required repair or replacement; (2) the exterior brick masonry façade was deteriorating; and (3) the roof was absorbing water and leaking, causing consequent damage to insulation under the roof and to four residential units.

The trustees sued Ayer in 2005, alleging negligent design and construction of common areas. Ayer asserted the defense of the economic loss rule. The economic loss rule establishes limits on damages that can be recovered in a negligence action.

The trial court awarded the trustees $140,000 in compensatory damages. The trustees appealed.

The trustees argued on appeal that the court misapplied the economic loss rule by excluding certain damages and improperly reducing the measure of the established damages. Ayer cross-appealed on the ground that the economic loss rule precluded all claimed damages.

Massachusetts adheres to the rule that purely economic losses are unrecoverable in strict liability actions that are absent of personal injury or property damage. Economic loss includes damages for inadequate value, repair and replacement costs of a defective product, or consequent profit loss without any claim of personal injury or damage to other property. The rule applies not only to the purchase and sale of products, but also to negligence claims against builders of houses or other realty structures.

The trustees argued that Ayer had waived the right to assert the rule because he failed to raise it at trial. The court ruled it was the trustee’s responsibility to show property damage beyond pure economic loss; it is not a defense that must be asserted by Ayer.  

The trial court viewed the converted building as two separate properties: the common areas and the privately owned units. It reasoned that the common area defects caused damage to the interior of the private units; this consequential physical damage satisfied the requirement for seeking monetary damages because there was harm beyond the damage to the original structure. The trial judge did not find that the masonry façade had harmed the individual units; hence, the trustees could not recover economic losses due to the deteriorating masonry because the damage did not affect other properties.

Ayer insisted that the rule protected him from having to pay any damages at all because the converted structure was constituted of a single integrated product, and evidence showed that there was no harm to property interest other than the structure.

The court concluded that the rule did not require a court to leave a wronged claimant without a remedy and that an overly mechanical application of the rule would defeat its purpose, which is to serve as a barrier against awards of undetermined and potentially excessive consequential damages.

The court affirmed the trial court’s judgment in favor of the trustees, awarding them compensatory damages for harm to common area windows and the roof areas. It reversed the trial court’s order to dismiss the trustees’ claim for compensatory damages for harm to the common area masonry and entered judgment in favor of the trustees in the additional sum of $64,000 plus interest. Although no secondary harm was shown as a result of the deteriorating masonry, the economic loss rule does not prohibit compensatory damages for negligently designed or constructed condominium common areas. The trial court’s judgment was affirmed as modified.

Editor’s Note: The Editor thanks Thomas O. Moriarty of Marcus Errico Emmer & Brooks, P.C., Braintree, Mass, for contributing this case for publication.

©2013 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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