September 2013
In This Issue:
Association Cannot Recover Pre-Foreclosure Assessments
Terminating Declaration Does Not Relieve Owners’ Obligation to Pay Assessments
Association Must Provide Unbiased Access to Association Media
Parking Covenant Is Unenforceable
Implied Warranties Apply to Common Area Infrastructure
Developer Violated New Jersey Condominium and Consumer Fraud Acts
Restrictive Covenant Is Unenforceable
Condominium Assessment Lien Is Superior to Non-Purchase Money Mortgage
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Association Cannot Recover Pre-Foreclosure Assessments

United States of America v. Bridgewater Community Association, Inc., No. 8:12-cv-1087-T-30TGW, U.S. Dist. Ct. (M.D. Fla. June 27, 2013)

Assessments: A Florida district court ruled that a homeowners association was not entitled to recover pre-foreclosure assessments.

Bridgewater community in Pasco County, Fla., is managed by Bridgewater Community Association, Inc., (association) and is governed by the Declaration of Covenants and Restrictions for Bridgewater (declaration).

Section 15.15 of the declaration provides that the association has a lien against each lot to secure unpaid assessments effective from and after the date the lien is filed, but the lien relates back to 2003 when the declaration was first recorded. However, Section 15.16 cancels liens for assessments that become due before a first mortgage is foreclosed, thereby exempting a subsequent owner from assessments that became due before the foreclosure. Section 15.16 also requires the mortgage holder to notify the association in writing if the mortgage is in default; the association has the right to cure the default.

In 2005, Wells Fargo Bank, N.A., obtained a mortgage on a lot in Bridgewater to secure a loan. On March 6, 2008, Wells Fargo filed a mortgage foreclosure action for the lot and named the association as a defendant. The association was served with a summons and complaint on May 6, 2008, but failed to respond. Instead, on August 6, 2010, the association filed a lien for unpaid assessments. The court entered a default judgment against the association, entered a final foreclosure judgment in February 2010 and awarded a lien for $164,213.41 to Wells Fargo, holding the lender’s lien was superior to all other claims, including the association’s interest in the property. In May 2010, Wells Fargo obtained title to the lot.

The U.S. Department of Housing and Urban Development (HUD) had insured the mortgage, so Wells Fargo applied to HUD for insurance benefits. As a result, Wells Fargo conveyed the lot to HUD in June 2010. HUD entered into a contract with a buyer for the lot and requested an estoppel certificate from the association. The estoppel certificate sent by the association on July 1, 2011, claimed a payoff of $10,181.64 for assessments and other costs owed before the February 2010 foreclosure judgment and before Wells Fargo obtained title to the lot as well as legal fees accrued post-foreclosure.

The association issued a second estoppel certificate on September 27, 2011, demanding $12,677.27. The association’s letter explained that the assessment subordination provision in Section 15.16 of the declaration did not apply because Wells Fargo did not notify the association that the mortgage was in default. After the closing was rescheduled seven times in an attempt to resolve the lien matter with the association, the buyer backed out of the purchase.

HUD sued the association, seeking a judicial determination that it was not liable for assessments that accrued before it acquired the property. The association counterclaimed for a judicial determination that HUD was liable for costs incurred in attempts to recover HUD’s unpaid assessments. The association moved for summary judgment (judgment without a trial), claiming that Wells Fargo breached the declaration by failing to provide written notice of the default and that the breach precluded HUD from enforcing the first mortgage lien as provided in Section 15.16 of the declaration.

The court concluded that the issue was clearly resolved by the foreclosure judgment, which provided that the property would be sold free and clear of all defendants’ (including the association) claims, except assessments that are superior pursuant to Sections 718.116 and 720.3085, Florida Statutes.

Any potential superior lien held by the association based on the declaration was extinguished by the foreclosure judgment. Florida Statute Section 718.116 was inapplicable because it dealt solely with condominiums. Therefore the only question that remained was whether Florida Statute Section 720.3085 required Wells Fargo to subordinate its lien to the association’s lien.

Section 720.3085 became effective on July 1, 2007, and provides that current and previous lot owners are jointly and severally liable for all unpaid assessments that were due before the title was transferred. One year later, the statue was amended to add an exception for lenders, providing that the first mortgage holder would be liable only for the previous 12 months’ unpaid assessments or one percent of the original mortgage debt, whichever is less.

The association argued that the new exemption should not apply since it did not become effective until after Wells Fargo filed the foreclosure. HUD also argued that Section 720.3085 should not be applied because the declaration gave first mortgage holders superior rights over association liens, and that benefit could not be removed by a statute that did not exist at the time it entered into the mortgage contract. The court agreed that applying the statute retroactively was an impermissible impairment of HUD’s contractual rights. Therefore, HUD was not liable for assessments and fees that accrued before Wells Fargo acquired title to the lot.

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

Terminating Declaration Does Not Relieve Owners’ Obligation to Pay Assessments

Fairfield Place Homeowners Association, Inc. v. Pipkin, No. 2120267 (Ala. Civ. App. July 19, 2013)

Association Operations/Covenants Enforcement: An Alabama appeals court held that lot owners were obligated to pay association assessments even though the declaration encumbering their property was terminated.

Billy and Sandra Pipkin purchased property in Unit 1 of the Fairfield Place subdivision in Baldwin County, Ala. Their deed provides that the conveyance is subject to the restrictive covenants recorded with the probate court and the “[t]erms, conditions, obligations and requirements” set forth in the Fairfield Place Homeowners Association, Inc.’s (association) articles of incorporation, also recorded in the probate records.

In late 2010 and early 2011, the Pipkins, along with a sufficient majority of other Unit 1 lot owners, filed documents with the probate court terminating the declaration of restrictive covenants for Unit 1 (declaration) encumbering their lots. The declaration specifically provides that it may be terminated by a vote of 60 percent of the Unit 1 lot owners. Thereafter, the Pipkins declined to pay assessments to the association, taking the position that terminating the Unit 1 declaration abrogated any responsibility they had to the association. The association filed an assessment lien against Pipkins’ property.

In August 2011, the Pipkins sued the association, seeking a declaration that the association did not have authority to impose assessments or file liens against them or their property and to cancel the existing assessment lien. The association filed a counterclaim, seeking a declaration that the Pipkins remained association members responsible for assessments and a money judgment for unpaid assessments. Both parties filed motions for summary judgment (judgment without a trial).

The trial court denied the association’s motion and entered judgment in the Pipkins’ favor, explicitly declaring that the association had no authority to impose assessments or file liens on the Pipkins’ property and canceling the existing lien. The association appealed.

The association contended that efforts by owners, including the Pipkins, to terminate the restrictive covenants for Unit 1 did not abrogate their duties to pay the association for maintaining the subdivision common areas. The association’s president testified that the association maintains a stormwater runoff retention lake that serves the entire subdivision, including Unit 1, and a significant portion of the assessments goes to maintaining that lake. The association also maintains two lots as a park and playground for all subdivision residents as well as “entrance statements” that purportedly benefit the entire subdivision.

The declaration provides that members’ responsibility to maintain and repair the common areas cannot be removed by amending the declaration, and any such attempted amendment will be void. The appeals court noted that, had the owners merely sought to amend the covenants, the foregoing provision would have prevented the members’ responsibility from being abridged. However, the declaration conferred a sufficient majority of owners with not only the power to make changes to the declaration, but also the power to terminate the declaration.

The association argued that language in the Pipkins’ deed expressly made the property subject to the association’s articles of incorporation. The Pipkins maintained that the declaration controlled in any conflict between the declaration and the articles of incorporation. The appeals court found no merit in the Pipkins’ argument since the Pipkins and other unit owners terminated the declaration’s effect. Further, the appeals court stated that it must give effect to all terms of the deed to the extent they are susceptible to enforcement.

The articles of incorporation provide that association membership is established by recording a deed transferring title to a lot within the subdivision. In addition, the articles state that association membership is appurtenant to (and can’t be separated from) lot ownership, and membership terminates only when a member ceases to own a lot. The articles also state that each member pays a portion of the total amount necessary for the association’s purposes, and defaulting  constitutes a lien against the member’s lot. Finally, the articles provide that the authority to establish liens is a covenant against the land.

The appeals court concluded that the articles of incorporation were intended to be a separate and distinct set of covenant provisions that bind Unit 1 lot owners and run with title to the Unit 1 property. Therefore, the trial court erred in concluding that the Pipkins were entitled to judgment as a matter of law solely because the restrictive covenants were terminated.

The trial court’s judgment was reversed, and the case was remanded for a judgment in the association’s favor.

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

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Association Must Provide Unbiased Access to Association Media

Wittenburg v. Beachwalk Homeowners Association, 217 Cal. App. 4th 654 (Cal. Ct. App. June 26, 2013)

Association Operations/State and Local Legislation and Regulations: A California appeals court ruled that a homeowners association violated California law when its board members advocated for a declaration amendment while denying opposing members access to association media.

Beachwalk subdivision is located in Orange County, Calif., and is managed and maintained by Beachwalk Homeowners Association (association). Paul Wittenburg and Raymond Dukellis (plaintiffs) are homeowners and association members. The community is subject to a declaration, which requires that two-thirds of the association’s voting members approve any common area improvement or alteration that costs more than $1,000.

The California Davis-Stirling Common Interest Development Act (act) governs homeowners associations, including election procedures. The act requires associations to ensure equal access to association media, such as a newsletter or association website, and free use of common areas by members who advocate a viewpoint in opposition to one advocated by the association’s board. The plaintiffs sued the association in 2010, alleging it removed one swimming pool and threatened to remove two more without obtaining the required two-thirds member vote (pool litigation).

Rather than obtain a two-thirds vote to remove the pools, the board pursued a declaration amendment that would increase the expenditure amount requiring member approval. The board sent ballots, a cover letter urging members to vote for the amendment and a one-page attachment, “Case for amending the CC&Rs.” The board specifically did not include opposing material.

Shortly after these materials were sent out, a homeowner asked to use the clubhouse at no cost for a “town hall meeting” to support board candidates for election whose opinions about the proposed amendment differed from the current board members’ opinions. The board rejected the request.

Another vote on the amendment was scheduled for April 2011. The board sent ballots to members in February that included materials advocating the amendment’s adoption.

The monthly newsletter exhorted members to vote “yes” for the amendment and promised to continue holding elections until the amendment passed. Non-board members were not invited to provide opposing viewpoints in the newsletter. Shortly after the February newsletter was published, a homeowner opposed to the amendment asked to publish a response to the board’s article. The board refused, stating that only board members were permitted to publish articles in the newsletter.

Around this time, another opposing homeowner asked to use the common area to hold a political rally. The board refused this request. Non-board members were also denied permission to post materials on the association’s glass-enclosed bulletin board.

The amendment failed to pass in April 2011. As promised, the board scheduled another vote for August 2011. When the board failed to receive the requisite votes to pass the amendment, it extended the voting deadline one week. Ultimately, the amendment passed. The plaintiffs sued the association alleging it violated the act by refusing to allow opposing members to use association media and denying them free access to the common areas.

The trial court ruled in the association’s favor, holding that the act’s equal-access requirement did not apply because the association was using its own media for informational purposes; therefore, it did not violate the act’s election provisions. The plaintiffs appealed.

The plaintiffs argued that the trial court misinterpreted the board member exception thus violating both the text and policy of the act. The appeals court agreed, finding that the statute’s text itself undermined the trial court’s interpretation. The appeals court noted the legislature’s particular concern that opposing viewpoints be heard. It found the trial court’s interpretation turned that concern on its head and ensured the board could use association media to the exclusion of opposing viewpoints.

The appeals court rejected the trial court’s conclusion that the board’s communications were purely informational. Both the association website and its newsletter contained clear advocacy statements. Having engaged in advocacy, the association was bound under the act to permit other association members equal access to association media.

The association argued that the alleged biased treatment was irrelevant because the incidents did not occur in connection with the August 2011 election. The appeals court found that the trial court’s definition of “campaign” was too narrow. Although most campaigns would last a single election, this case was unique because the board threatened to, and did, hold multiple elections in short succession until the amendment was passed.

The appeals court explained that the act creates a right of action for violations, providing that courts may either void the election results or impose civil penalties (the word “may” connoting a discretionary act). The appeals court sent the case back to the trial court with an instruction that the association’s violations of the act must be considered in deciding whether to void the results of the August 2011 election.

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

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Parking Covenant Is Unenforceable

Marino v. Clary Lakes Homeowners Association, Inc., No. A13A0299 (Ga. Ct. App. July 12, 2013)

Covenants Enforcement: The Georgia Court of Appeals held that an amended parking covenant, which was more restrictive than one in effect when homeowners purchased their property, was unenforceable unless the homeowners consented to the amendment.

Joseph and Patricia Marino own a home in the Clary Lakes subdivision in Cobb County, Ga., and are members of Clary Lakes Homeowners Association, Inc. (association).

The original Declaration of Protective Covenants, in effect since 1987, provided that each home must have a garage large enough to accommodate two vehicles, but it did not require residents to park their vehicles in the garage. The Marinos bought their home in 1994. Since the Marinos’ home does not have a basement, they use the garage for storage and park their cars in the driveway.

In 2003, the association adopted an Amended and Restated Declaration of Protective Covenants (amended declaration), which made numerous changes to the original declaration and replaced it entirely. The amended declaration also submitted the association to the Georgia Property Owners’ Association Act (POA Act).

The amended declaration requires residents to park vehicles in garages to the extent space is available. It also prohibits residents from regularly using garages for storage, thus making the garage unavailable for parking cars. The amended declaration permits a covenant committee to grant variances to residents who cannot comply with the garage covenant due to special circumstances.

The Marinos continued to use their garage for storage and to park their cars in the driveway after the amended declaration was recorded. They did not vote in favor of the amended declaration and did not give their written consent to the amendment.

In 2009, the association notified the Marinos that they were in violation of the new garage covenant. The Marinos requested a permanent variance from the covenant committee, but their request was denied. Thereafter, the association levied daily fines against them for the ongoing violation. When the Merinos refused to pay the accruing fines, the association sued to enforce the covenant.

The Marinos admitted that they used their garage for storage and parked their vehicles in their driveway; but they asserted the covenant was unenforceable against them because they had not consented to the amendment and because the amendment was not approved by two-thirds of the association members. Both parties filed motions for summary judgment (judgment without a trial). The trial court granted summary judgment to the association, and the Marinos appealed. While the appeals court disagreed with the Marinos that the statute of limitations had expired on the claim, it agreed with the Marinos that the garage covenant was not enforceable against them.

O.C.G.A. Section 44-5-60(d)(4) provides that a change in covenants that imposes a greater restriction on the use or development of the land will not be enforced unless agreed to in writing by the owner of the affected property. The association argued that it was exempt from this limitation because the POA Act specifically provides that O.C.G.A. Section 44-5-60 (d) does not apply to those communities subject to the POA Act. The appeals court did not agree.

Section 222 of the POA Act allows a community to become subject to the POA Act through an amendment that is adopted in accordance with the existing declaration. The association met this standard because the amended declaration was approved by a majority of the members, as required by the original declaration. However, POA Act, Section 235 requires the declaration to conform to the requirements of the POA Act. POA Act, Section 226 further requires a declaration amendment to be adopted by at least two-thirds of the members.

The appeals court explained that the POA Act provisions could not be interpreted in isolation and held that the exception to the two-thirds voting requirement applies only to amendments that conform the declaration to the POA Act, not to additional amendments that go beyond conforming the declaration to the POA Act, such as an amendment imposing a new restrictive covenant.

Since the garage use covenant was not approved by two-thirds of the members, as required by the POA Act, the association could not avail itself of the POA Act’s exemption to O.C.G.A. Section 44-5-60(d). Further, since the Marinos did not consent to the garage use covenant, the association could not apply O.C.G.A. Section 44-5-60(d) against the Marinos to prevent them from using their garage for storage. Accordingly, the trial court’s ruling in favor of the association was reversed.

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

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Implied Warranties Apply to Common Area Infrastructure

Maronda Homes, Inc. of Florida v. Lakeview Reserve Homeowners Association, Inc., Nos. SC10-2292, SC10-2336 (Fla. July 11, 2013)

Developer Liability: The Florida Supreme Court affirmed a ruling that implied warranties of habitability applied to defects in a subdivision’s infrastructure, roadways, drainage system and other common elements because such structures were essential to the habitability of the homes.

Lakeview Reserve subdivision, in Orange County, Fla., was developed by Maronda Homes, Inc., and T.D. Thomson Construction Company (collectively, developer). Lakeview Reserve Homeowners Association, Inc., (association) manages and maintains the subdivision common areas.

The developer built all subdivision infrastructure and performed all site work, including a stormwater drainage system and private roadways. After the association assumed management of Lakeview Reserve, residents began to report significant water and drainage problems. The stormwater system failed to drain properly and storm drain runoffs collapsed, causing flooding that impeded access to the homes. The drainage problems also caused soil erosion, depressions between homes, and buckling and splitting pavement. Excessive retention pond flooding created child safety issues and swampy, mosquito-infested conditions.

The association hired an independent engineer who found numerous structural and drainage defects that required extensive repair and remediation. Fifteen to 20 percent of pipes in the subdivision required repair, and it was necessary to install retention walls on 39 properties to halt progressive erosion.

The association sued the developer, alleging that the subdivision’s infrastructure design and construction were defective and the developer had breached implied warranties of fitness and habitability for residential home development.

Based on previous Florida case law—holding that implied warranties of fitness and habitability apply only to those services essential to the home’s habitability—the developer filed a motion for summary judgment (judgment without a trial), arguing that the allegedly defective structures and systems did not immediately support the residences. The trial court agreed that implied warranties were not applicable and entered judgment in favor of the developer. The association appealed to the Fifth District Court of Appeal.

The Fifth District Court of Appeal held that the common law warranty of habitability is applicable to this case and reversed the trial court ruling. Noting that its decision was in conflict with a decision by the Fourth District Court, the Fifth District Court certified the case for appeal to the Florida Supreme Court to resolve the conflict.

The Supreme Court affirmed the decision of the Fifth District and disapproved the prior decision of the Fourth District to the extent it is inconsistent with the present decision. The Supreme Court also embraced the reasoning of the Fifth District that implied warranties have application to property improvements that not only support the home in the structural sense, but also those that provide “essential services” for the home’s habitability. Those services essential to residential habitability include roads for ingress and egress, drainage systems to divert flooding, retention ponds to correct water flow, and underground stormwater and sanitary sewer pipes that are necessary for living accommodations. Items that are not “essential services” are those that provide mere convenience or aesthetics, such as landscaping, sprinkler systems, recreational facilities or security systems.

While the case was pending before the Supreme Court, the Florida Legislature enacted Section 553.835, Florida Statutes in an attempt to clarify retroactively the scope of implied warranties. The preamble to the statute indicates that the legislature’s intent was to reject the Fifth District’s decision in this case because it expands the implied warranty doctrine beyond what is necessary to protect a home purchaser.

While the Supreme Court did not overturn the statute itself, it did hold that applying the statute in this case would be unconstitutional. The Supreme Court found that the association’s rights to bring suit on an implied warranty theory were vested prior to the statute’s enactment. Both the U.S. and Florida Constitutions protect an individual’s due process rights from the retroactive application of a substantive law that adversely affects or destroys a vested right, imposes or creates a new obligation or duty in connection with a previous transaction, or imposes new penalties.

The Supreme Court found that the new statute was substantive in nature because it prescribes legal duties and rights. Accordingly, the Supreme Court affirmed the Fifth District’s judgment, concluding that the association could proceed with its case against the developer for defects in common areas based on an implied warranty theory.

However, Section 553.835 will apply to cases accruing after July 1, 2012. The statute provides that a home buyer or a homeowners association will not have a cause of action based on implied warranties of fitness and merchantability or habitability for damages to “offsite improvements.” Offsite improvements include streets, roads, driveways, drainage, utilities and other improvements not located on the residential lot as well as improvements and structures located on or under the lot that do not “immediately and directly support the fitness and merchantability or habitability of the home itself.”

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

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Developer Violated New Jersey Condominium and Consumer Fraud Acts

Belmont Condominium Association, Inc. v. Geibel, No. A-2584-10T3 (N.J. Super. Ct. App. Div. July 9, 2013)

Developer Liability: Construction defects and misrepresentations in the developer’s marketing materials and public offering statement violated the New Jersey disclosure and consumer fraud acts.

Belmont Condominium in Hudson County, N.J., was constructed between 1998 and 2000. Belmont Condominium Association, Inc., (association) is responsible for managing and maintaining the condominium common areas.

Dean Geibel is president of Monroe Station Associates, LLC, the developer. To satisfy the requirements of The Planned Real Estate Development Full Disclosure Act, the developer filed a public offering statement (POS). Although filed in 1999 before construction was complete, the POS represented that “[t]here are no known defects in the building (a part of which) you are purchasing, nor in the common area and facilities, that you could not determine by a reasonable inspection.”

The developer’s marketing materials stated that buyers would be getting a “Proven Developer and Construction Management Team that has overseen the building and renovation of Over 400 Single Family & Condominium Homes, and over 1,000,000 Sq. Ft. of Office/Commercial/Retail Development.” Actually, Belmont was the first building Geibel ever constructed. However, Geibel claimed that he had assembled a construction team with the combined experience represented in the marketing materials. One alleged construction team member denied being on the team (although he had been included in the original plan); the other team member had extensive construction experience.

Practically from the beginning, Belmont was plagued by water leaks, which caused numerous problems on the buildings’ interiors and exteriors. On several occasions, the association’s manager hired technicians to repair damage caused by the leaks. In 2006, the association invited the developer to inspect the building and help resolve the water infiltration problems. The developer’s inspector observed maintenance problems and stated that he could not determine the condition of the building “as built” since repairs and alterations had already been made by the association. As a result, the inspector opined that any suggestion of construction defects was merely speculation.

After the association received the inspector’s report, it stopped making repairs (the cost then amounted to $111,551). In 2007, the association sued the developer and some of its subcontractors for negligence and violations of the New Jersey Consumer Fraud Act (CFA).

The testimony at trial focused on the water infiltration’s origin and cause. The association’s experts attributed the problem to construction defects, while the developer’s experts blamed poor or inadequate maintenance. The jury returned a verdict in the association’s favor and awarded $2,186,675 in damages. The jury found the developer 80 percent responsible for the damage ($1,749,340) and two subcontractors each 10 percent responsible ($218,667.50). The jury also found the developer had made two deceptive marketing statements in violation of the CFA. The CFA imposes triple damages as a punitive measure, so the damages charged to the developer were increased by the trial judge to $5,248,020. The developer appealed.

The developer asserted that the association lacked standing to aggregate the loss of unit owners who did not purchase their units from the developer and thus could not have relied on any developer’s representations. The appeals court found that the association unquestionably had standing to pursue claims for common element damage since it was the sole party charged with maintaining and repairing common elements. Further, the CFA does not require a claimant to demonstrate reliance on misrepresentations.

There are three elements to a CFA claim: unlawful conduct by the defendant; an ascertainable loss; and a causal relationship between the defendant’s unlawful conduct and the plaintiff’s loss. The CFA specifically provides that an act may be deceptive and unlawful regardless of whether anyone has in fact been misled, deceived or damaged by the act. Therefore, the appeals court found it irrelevant that the association was bringing claims on behalf of unit owners who did not purchase from the developer. The developer argued that the CFA claims failed as a matter of law because the POS representations were true at the time they were made. The appeals court held that a false statement of fact is not an essential element of a CFA claim. Rather, the developer  may still violate the CFA if the overall impression created by the statement is misleading and deceptive to the average consumer. The appeals court found that the developer’s representation that there were no known defects in the building, while literally true at the time the POS was filed because construction was not complete, clearly had the capacity to mislead an average consumer.

The developer argued that the association lacked standing to seek damages for the windows because they were not common elements. The appeals court agreed. The condominium declaration simply did not address windows. The New Jersey Condominium Act also fails to include windows in its list of common elements. Therefore, the appeals court found that the trial court erred in concluding that substantial window components are included in the common elements.

The developer contended the association’s claim for interior damages failed because the association failed to demonstrate which construction defect caused what interior damage, and it failed to attribute damage to a specific defendant. A plaintiff must “prove damages with such certainty as the nature of the case may permit.” The appeals court found that all interior damage was directly caused by the exterior construction defect—the failure to properly seal or waterproof the building. The appeals court held that it was acceptable for the jury to apportion blame roughly, stating that it was unnecessary for the association to trace every drop of water to ascertain its entry point, as the developer suggested.

The case was affirmed in part and reversed in part and remanded with instructions to vacate the award for window replacement.

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

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Restrictive Covenant Is Unenforceable

Association of Apartment Owners of the Waikoloa Beach Villas v. Sunstone Waikoloa, LLC, No. SCWC-11-0000998 (Haw. June 28, 2013)

Developmental Rights/State and Local Legislation and Regulations: The Hawaii Supreme Court ruled that a restrictive covenant violated state law because it imposed limitations on an association’s right to sue a developer that were more restrictive than those imposed on other persons.

Sunstone Waikoloa, LLC, (developer), created Waikoloa Beach Villas Condominium in 2004 by recording the condominium declaration. The Association of Apartment Owners of the Waikoloa Beach Villas (association) comprises all condominium unit owners.

In 2007, the association commissioned condominium inspection reports that documented several construction defects. In 2009, the association contacted Sunstone to resolve the defects issues. Sunstone and the association participated in negotiations until March 2011, when the association sued Sunstone to compel mediation and arbitration.

The declaration authorizes the association to institute, prosecute, maintain or intervene in legal proceedings, subject to compliance with a number of conditions. Section R.2 of the declaration mandates the association obtain at least 75 percent owner approval prior to undertaking legal proceedings other than “operational proceedings.” Operational proceedings include a number of claims that would ordinarily involve unit owners, such as collection and covenant enforcement claims. Declaration Section R.3 requires that development controversies be handled through negotiation, mediation, and then arbitration or litigation. The declaration defines “development controversy” as a proceeding involving the association against the developer—other than a claim brought against the developer solely in its capacity as a unit owner.

Further, Section R.4 imposes conditions that must be met before the association engages in arbitration or litigation against the developer. The association must obtain a written opinion from an attorney licensed and residing in Hawaii who has a specified Martindale-Hubbell rating. The attorney’s opinion must state that the association has a substantial likelihood of prevailing in the case without substantial likelihood of a counterclaim by the developer, and the letter must contain a good faith estimate of legal costs. Based on the opinion letter, if two-thirds of the board votes to proceed, the association must distribute the letter to its members. The association is authorized to proceed with a claim against the developer if at least 75 percent of the owners vote to pursue the claim and to levy a special assessment or borrow to fund the litigation.

Section R.5 requires that disputes between unit owners and the developer be subject to final and binding arbitration. Finally, Section R.6 provides that no association reserve funds may be used to fund litigation other than an operational proceeding.

In its motion, the association did not claim that it had fulfilled the requirements of Sections R.2, R.4 or R.5. Instead, it argued that Section R violated H.R.S. Section 514B-105(a) and was unenforceable. H.R.S. Section 514B-105(a) provides that the declaration “may not impose limitations on the power of the association to deal with the developer that are more restrictive than the limitations imposed on the power of the association to deal with other persons.”

The trial court granted the association’s motion to compel mediation and arbitration, and the developer appealed to the Intermediate Court of Appeals (ICA). The ICA reversed the trial court’s order, holding that Sections R.2 and R.6 did not violate the statute because they limit the association’s power to initiate proceedings against any person and do not favor the developer. The ICA did not address Sections R.4 or R.5. The association appealed to the Hawaii Supreme Court.

The Supreme Court concluded that Sections R.2 and R.6 do not violate the statute because they do not apply uniquely to proceedings between the association and the developer. However, Section R.4 clearly violates the statute because it applies solely to proceedings against the developer. In addition, the disproportionate burdens imposed on the association are precisely the type of abuse the statute is meant to prevent. The Supreme Court found that nearly all the provisions in Section R.4 grant the developer an unfair advantage. The requirements imposed on the association to engage an attorney meeting certain criteria limits the attorneys available to the association but not the developer. Section R.4 also precludes meritorious suits by the association if the developer may have a viable counterclaim.

The Supreme Court found the requirement that the attorney opinion letter be distributed to all owners especially egregious since it would give the developer access to documents that should be protected by the attorney-client privilege and the work-product privilege. The attorney’s opinion of the association’s likelihood of success and expected costs provides the developer with a significant advantage in potential settlement negotiations or legal proceedings.

Although Section R.4 was deemed unenforceable, the other portions of Section R were not shown to violate the statute. The declaration provides that its provisions are severable, and the invalidity of one provision does not affect other provisions. Therefore, the remaining portions are enforceable against the association. Since the association did not establish that it had obtained 75 percent owner approval before filing its motion (in accordance with Section R.2), the trial court erred in granting the association’s motion to compel arbitration against the developer.

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

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Condominium Assessment Lien Is Superior to Non-Purchase Money Mortgage

Board of Managers of Parkway Towers Condominium Association, Inc. v. Carcopa, No. SC92805 (Mo. July 16, 2013)

State and Local Legislation and Regulations/Assessments: The Missouri Supreme Court upheld the constitutionality of lien priorities in Missouri’s Uniform Condominium Act.

Parkway Towers Condominium is located in Kansas City, Mo., and is managed by the Board of Managers of Parkway Towers Condominium Association, Inc. (association). In January 2004, Trish Carcopa purchased a unit in Parkway Towers and financed the purchase through a mortgage on the unit (purchase money mortgage). In June 2006, Carcopa refinanced the original purchase money mortgage and obtained a new adjustable rate mortgage in the amount of $164,200 (adjustable mortgage). The purchase money mortgage was released.

The unit owners approved a $2.7 million special assessment for major repairs to the common areas, including building structural components, heating and cooling systems and refurbishing non-structural elements. Based on her unit’s allocated interest in the common areas, Carcopa’s assessment share was $78,144.64. When Carcopa failed to pay the special assessment, the association recorded a lien on her unit.

In April 2010, the association brought a petition to foreclose its lien judicially, asserting it had a first lien on the unit prior to the adjustable mortgage, which was then held by Homeward Residential, Inc. (Homeward). The trial court entered judgment in the association’s favor, finding that its lien for condominium assessments was superior to the adjustable mortgage, and ordered the association’s lien to be foreclosed. Homeward appealed.

Missouri adopted the Uniform Condominium Act (UCA) in 1983. Section 448.3-116.2 provides:

A lien pursuant to this section is prior to all other liens and encumbrances on the unit except: (1) Liens and encumbrances recorded before the recordation of the declaration; (2) A mortgage and deed of trust for the purchase of the unit recorded before the date on which the assessment sought to be enforced became delinquent; (3) Liens for real estate taxes and other governmental assessments or charges against the unit;

In 1998, the following was added:

(4) Except for delinquent assessments or fines, up to a maximum of six months’ assessments or fines, which are due prior to any subsequent refinancing of a unit or for any subsequent second mortgage interest.

The lien priorities of Missouri’s UCA vary from the uniform act in two respects. First, Missouri substituted a purchase money mortgage in lieu of “first deed of trust or mortgage” as contained in the uniform act. Second, the limited lien was changed from six months due prior to foreclosure of a first deed of trust or mortgage to six months prior to any subsequent refinancing or second mortgage interest.

Homeward claimed that the lien priorities were unconstitutional because the 1998 UCA amendment was vague and ambiguous. Alternatively, Homeward argued that subsection (4) limits the association’s recovery to a maximum of six months assessments because the adjustable mortgage was a refinance of the purchase money mortgage. This was the first challenge to the constitutional validity of the statute.

The vagueness doctrine protects against the arbitrary and discriminatory application of laws. Vagueness is determined by asking whether a person of ordinary intelligence is able to understand the proscribed conduct. Acknowledging that condominium associations are granted super-priority status for assessment liens to ensure that the common elements are maintained and the value of the entire condominium is not diminished, the Supreme Court upheld the trial court’s ruling.

The Supreme Court determined that the statutory exemptions must be strictly construed, and the statute clearly provides that a condominium association lien is superior to non-purchase money mortgages. The Supreme Court found that subsection (4) contemplates “a situation where there is a pending assessment lien at the time the owner refinances.” When Carcopa refinanced her unit, there was no pending assessment lien. Therefore, Homeward did not meet any of the statutory exceptions to establish a lien priority.

Since Homeward failed to demonstrate that the statute was “clearly and undoubtedly” unconstitutionally vague and ambiguous, the trial court’s judgment was affirmed.

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