March 2014
In This Issue:
Association Cannot Recover Pre-Foreclosure Unpaid Assessments
Association Must Compensate Owner for Floor Repair
Association Judgment Is Not an Encumbrance on Lot Title
Declarationís Disclaimer Does Not Immunize Association from Liability for Its Own Negligence
Whether Insurer Is Obligated to Replace Roofs Is Jury Question
Insurer Not Required to Pay for Roof Replacement
Foreclosure Does Not Extinguish Associationís Lien
Association Has Standing to Sue Developer
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Association Cannot Recover Pre-Foreclosure Unpaid Assessments

U.S. v. Forest Hill Garden East Condominium Association, Inc., No. 13-80513-CV, U.S. Dist. Ct. (S.D. Fla. Jan. 3, 2014)

Assessments: A Florida district court ruled that the condominium act’s imposition of liability on a foreclosing mortgagee does not trump the condominium declaration’s exemption for foreclosing mortgagees from unpaid pre-foreclosure assessments.

Forest Hill Gardens East is a 284-unit condominium in West Palm Beach, Fla., that is managed and maintained by Forest Hill Garden East Condominium Association, Inc. (association).                          

Wells Fargo Bank, N.A. held a first mortgage on Unit 203. MidFirst Bank held a first mortgage on Unit 205. Both unit owners defaulted on their mortgage payments and failed to pay their condominium assessments. Both banks foreclosed on the mortgages.

The mortgages were insured and guaranteed by the U.S. Department of Housing and Urban Development (HUD). Thus, upon foreclosure by the banks, HUD paid insurance benefits and became the successor and assignee of both first mortgages. HUD requested estoppel certificates from the association to determine its liability to the association. In response, the association claimed that HUD was liable for unpaid assessments, interest, attorney’s fees and other costs incident to the collection process.

The liability of a foreclosing mortgagee for assessments is addressed in Section 718.116(1)(b)(1) of the Florida Condominium Act (act): the first mortgagee who acquires a unit by foreclosure is liable for unpaid assessments that accrued before the unit was purchased, but the amount is limited to the lesser of: (1) unpaid common expenses and regular periodic assessments that accrued during the 12-month period immediately preceding the acquisition of title (purchase); or (2) one percent of the original mortgage debt. This section has been described as a “safe harbor” that provides a statutory cap on liability for foreclosing mortgagees.

The dispute between HUD and the association focused on the first option—whether interest, late fees, collection costs and attorney’s fees are included under “common expenses” or “regular periodic assessments.” The act defines the term “common expenses” broadly to encompass costs that benefit the condominium as a whole. Section 718.115(1)(a) provides that common expenses include the costs “of operation, maintenance, repair, replacement, or protection of the common elements.” The necessity that common expenses represent a benefit to the condominium as a whole is underscored by a requirement that funds for paying common expenses are to be collected by assessments against all condominium units.

The court concluded that individual charges such as interest, late charges, collection costs and attorney’s fees simply did not fit within the statutory or common sense understanding of “regular periodic assessments.” The court observed that by limiting a foreclosing mortgagee’s liability to certain, readily verifiable figures, the Florida Legislature smoothed the way for the prompt sale of a condominium unit following foreclosure.

Furthermore, the Forest Hill Gardens East declaration of condominium provides that when the mortgagee of a first mortgage obtains title to a unit as a result of foreclosure (or deed in lieu of foreclosure), the acquiring mortgagee “shall not be liable for the share of common expenses or assessments by the association pertaining to such unit, or chargeable to the former unit owner … which became due prior to acquisition of title as a result of the foreclosure.”

The association maintained that this provision was nullified by implication when the Legislature amended the act in 1991 to include the safe harbor provisions. The court rejected the association’s argument because repeal or invalidation by implication of existing contract provisions will not be presumed absent a clear legislative intent. Additionally, the act provides that the provisions of the declaration are paramount to the act where permissive variances are permitted.

The court held that HUD had no liability to the association for any unpaid assessments that accrued prior to taking title to the units in 2010. Accordingly, the court granted HUD’s motion for summary judgment and denied the association’s motion for summary judgment.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

Association Must Compensate Owner for Floor Repair

Canyon Vista Property Owners Association, Inc. v. Laubach, No. 03-11-00404-CV (Tex. App. Jan. 31, 2014)

Covenants Enforcement/Association Operations: A Texas appeals court affirmed a damage award to a condominium unit owner due to the association’s failure to repair the unit’s subfloor.

Gerald Laubach owns a unit in the Canyon Vista Condominium in Austin, Texas. Canyon Vista is managed and maintained by Canyon Vista Property Owners Association, Inc. (association). The association sued Laubach to collect unpaid common expense assessments. Laubach counterclaimed, alleging breach of contract for the association’s failure to repair his unit’s subfloor.

Laubach claimed that, shortly after he purchased his second-floor unit, he noticed problems with the floor. Specifically, the floor produced unusually loud noises and flexed abnormally when walked on, causing the kitchen cabinets to shake. Laubach complained to the association a few months after he purchased the unit. Although the association inspected his unit and acknowledged the problem with the floor, it failed to take any corrective measures.

Laubach’s expert witness, Jeff Young, testified that to repair the subfloor, the living room and kitchen would have to be gutted and the carpeting, vinyl flooring, kitchen cabinets and a pony wall removed. The repairs would entail removing the floor decking, installing new joists to sandwich the existing ones, reinstalling insulation, attaching new decking, installing new carpet and vinyl flooring, rebuilding the pony wall, and replacing the cabinetry and counter tops. Young testified that he believed his proposal was the most economical way to properly repair the floor, and he estimated the cost would be more than $28,000.

An engineering report attached to Young’s estimate indicated that the problem was structural, the floor lacked “compression blocking” between the joists, and the joists were not properly installed.

The parties did not dispute that the subfloor fell within the common elements that the association was required to maintain. However, the extent and cost of the repairs as well as the extent to which Laubach was responsible for causing the damage to the subfloor were in dispute.

A jury awarded Laubach $19,413.63 for repair costs as well as $600 for rent for replacement accommodations while repairs were being made, $1,500 for moving and storage expenses, and $6,000 for loss of use. The court ordered the association to make the necessary repairs and to the extent the association paid a licensed contractor less than $19,413.63, it was ordered to pay Laubach the difference. The association appealed.

The association argued that Laubach did not have standing to bring the lawsuit because he had no individual cause of action for common element damage. Condominium common elements are owned by all unit owners as tenants in common. The appeals court explained that a co-tenant in a condominium project may proceed individually to recover damages for misuse of common property, absent any objection by the association that other co-tenants must be joined. Absent such objection, the co-tenant may proceed with the action, recovering only the amount to which he shows himself entitled according to his proportionate interest in the common property.

The association did not object to Laubach’s proceeding without other unit owners joining or to his recovering more than his proportionate share of damages. In fact, the association agreed to submit the damage question for Laubach’s loss to the jury.

The association next argued that there was no evidence to support the award of loss-of-use damages to Laubach in an amount exceeding $600. Laubach testified that the problems with his floor caused him to suffer six years of lost enjoyment of his property. The repairs would require him to move out of his unit temporarily. He estimated he could find lodging for $600-$750 for the estimated one month it would take to complete the repairs. He also had an estimate of up to $3,600 for moving and storage of his belongs, which the appeals court found was sufficient to support the jury’s award of $1,500.

The appeals court, however, in addressing the $6,000 “loss of use” damages, found that Laubach was able to continue living in his unit during the six years that the floor remained unrepaired. While he testified that his enjoyment and use of his unit were hindered by the condition of the floor, he presented no evidence that the value of his unit was diminished. Since there was no evidence of reduced value due to the floor, the jury could not award $6,000 for lost use.

The appeals court modified the trial court’s judgment by reducing its damage award to Laubach from $8,100 to $2,100 and affirmed the judgment as modified.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Judgment Is Not an Encumbrance on Lot Title

Ensberg v. Nelson, No. 69644-1-I (Wash. Ct. App. Dec. 16, 2013)

Contracts/Sale and Lease Restrictions: A Washington appeals court ruled that a judgment against a homeowners association did not constitute an encumbrance on title to a lot because the lot owner was not a judgment debtor.

In 2004, Erik Ensberg purchased a vacant lot in the Key Bay subdivision in Chelan County, Wash. Several years later, he sold the lot to Jason and Francine Nelson. The Nelsons made a small down payment and assumed the balance due on Ensberg’s mortgage (first mortgage). The Nelsons executed a promissory note and deed of trust (second mortgage) in favor of Ensberg for the balance of the purchase price.

At the time of sale, the title company found no judgment encumbering the lot; however, unbeknownst to the parties, there was a judgment of $523,474 against the subdivision developer and Key Bay Homeowners’ Association (association). The judgment did not appear in the warranty deed from Ensberg to the Nelsons.

Approximately six months after the Nelsons bought the lot, they listed it for sale. In October 2009, they accepted a purchase offer. After the sales contract was signed, a title commitment was obtained that listed the judgment against the association as a title exception. The prospective purchasers exercised their contractual right to disapprove any matter on the title report, and the Nelsons urged the title company to revisit the judgment issue. The title company removed the judgment from the title exceptions schedule but continued to list the judgment as a “Note” in the title commitment. Subsequently, the purchasers rescinded the sales contract, and the Nelsons made no further effort to sell the lot.

The Nelsons defaulted on the note, first mortgage and second mortgage. The first mortgage holder foreclosed on the lot in August 2010, which had the effect of removing the second mortgage against the property, but the balance of $50,012.34 on the promissory note was still due.

Ensberg sued the Nelsons for breach of the promissory note. The Nelsons counterclaimed, alleging that Ensberg breached the statutory warranty deed and failed to convey marketable title. The trial court ruled that the judgment against the association was an encumbrance on the lot’s title, and Ensberg breached the covenant against encumbrances, although the court also found that the judgment did not render the property unmarketable. Ensberg appealed.

A grantor conveying land by statutory warranty deed covenants that, at the time of the deed’s delivery, he has fee simple title to the property, free and clear from all encumbrances, he warrants to the grantee the quiet and peaceable possession of the property and that he will defend the title against all persons who may lawfully claim the same.

The Washington Supreme Court has defined “encumbrance” to mean “any right to, or interest in, land which may subsist in third persons, to the diminution of the value of the [property].”

The appeals court held that the judgment against the association was not an encumbrance against the property because the evidence failed to show that the judgment constituted a “right to, or interest in” the lot by the association or other judgment debtors. There was no dispute that Ensberg was not a judgment debtor and no dispute that when he conveyed the lot to the Nelsons, there was no lien on the property as a result of the judgment against the association.

The Nelsons argued that the possibility of a future assessment by the association on lot owners to pay the judgment was an encumbrance on the property. The appeals court rejected this argument. At most, the judgment could result in a future lien against lot owners. This failed to indicate a present breach of warranty against encumbrances at the time Ensberg conveyed the lot to the Nelsons. The appeals court also concluded that Ensberg did not provide unmarketable title for the same reason.

The trial court’s judgment was reversed and the case was remanded for further proceedings with instructions to award all attorneys’ fees to Ensberg.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Declarationís Disclaimer Does Not Immunize Association from Liability for Its Own Negligence

Kedvale Street Properties, LLC v. Kedvale Court Condominium Association, 2014 IL App. (1st) 123454-U (Ill. App. Ct. Feb. 11. 2014)

Covenants Enforcement: An Illinois appeals court ruled that an exculpatory clause in the declaration did not release the association from liability for damage to a unit caused by the association’s own negligence.

Kedvale Court Condominium in Chicago, Ill., is managed and maintained by Kedvale Court Condominium Association (association). Kedvale Street Properties, LLC (Kedvale Street) owns Unit E-1, which it leased. In July 2011, Kedvale Street’s general manager discovered that the lower level of the unit was flooded by water coming from the common area stairwell. He immediately notified the association and requested permission to have the leak repaired by a plumber who was then present at the unit. The association denied his request.

The tenant was not able to use the lower level, so they stayed in the upper level until they could find a new place to live. As a result, the tenant did not pay the August and September rent. On August 31, 2011, 43 days later, the association had the required plumbing work performed on the common area. The flooding caused insect infestation, stench and mold inside the unit. In September, Kedvale Street made repairs to the unit, including carpentry work, re-tiling, painting and carpet replacement. It re-rented the unit on October 1, 2011.

Kedvale Street sued the association, asserting that the association breached a duty to use reasonable care in management and operation of the premises when it failed to repair the plumbing in a timely manner. The association filed a motion to dismiss the case, arguing that the action was barred under the declaration and bylaws because Kedvale Street sought damages which were required to be covered by unit owner insurance. The trial court granted the association’s motion and dismissed the case. Kedvale Street appealed.

On appeal, Kedvale Street argued that the trial court erred because Section 4.5(d) of the declaration was the controlling provision, not Sections 5.8(g) and (i), as argued by the association.

The pertinent part of Section 4.5(d) provides that:

Nothing contained in this Declaration shall be construed to impose a contractual liability upon the Association for maintenance, repair and replacement of the Common Elements or the Units . . . but the Association’s liability shall be limited to damages resulting from negligence. The respective obligations of the Association and Unit Owners . . . shall not be limited, discharged or postponed . . . because they may become entitled to proceeds under policies of insurance.

The pertinent parts of Section 5.8 are as follows:

(g) Each unit owner shall be responsible for (i) physical damage insurance on the personal property in such Unit Owners Unit and elsewhere on the Property … ;

. . .

(i) Each Unit Owner hereby waives and releases any and all claims which such Unit Owner may have against … the Association … for any damage to the Common Elements, the Units, or to any personal property located in the Unit or Common Elements caused by fire or other form of casualty to the extent that such damage is covered by fire or other form of casualty insurance or would be covered by insurance for which such Unit Owner is responsible pursuant to Section 5.8(g).

The appeals court determined that the association had a duty under the declaration to maintain the common elements to protect units from damage and that the association breached that duty when it waited 43 days before making the necessary repairs. The association contended that the waiver provision of Section 5.8(i), in all instances, immunized it from any responsibility for damage to an individual unit, regardless of its negligence. In addition, the unit owner was required to carry insurance for all damage to the unit’s contents.

However, the appeals court observed that Section 5.8(i) was an exculpatory clause (release or disclaimer of liability) because it released the association from liability for damages required to be covered by insurance. Exculpatory clauses are not favored in Illinois, and they are strictly construed against the benefitting party. An enforceable exculpatory clause must spell out the parties’ intention with great particularity and will not defeat a claim not explicitly covered by its terms. Since Section 5.8(i) did not contain explicit language that released the association from liability for its own negligent acts, clearly Kedvale Street’s damage claim was not covered by the disclaimer.

Moreover, the appeals court found that Section 4.5(d) provides that the association is liable for damages caused by its own negligence. This section further provides that the association’s responsibility is not limited by the fact that insurance proceeds may be available. The appeals court held that a party cannot promise to act in a certain manner in one portion of a contract and then relieve itself from liability for breach of that promise in another part of the contract.

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

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Whether Insurer Is Obligated to Replace Roofs Is Jury Question

Trout Brook South Condominium Association v. Harleysville Worcester Insurance Company, No. 12-2888 (RHK/JSM), U.S. Dist. Ct. (D. Minn. Feb. 5, 2014)

Risks and Liabilities/Contracts: A Minnesota federal court ruled that a jury must decide whether an insurance policy obligating the insurer to repair or replace damaged roofs with “like materials” required that the materials match in color the undamaged portions of the roofs.

Trout Brook South Condominium Association (association) governs the Trout Brook Condominium in Elk River, Minn., which comprises 18 buildings, each containing between four and eight townhomes. The condominium buildings were insured under a policy with Harleysville Worcester Insurance Company. The policy provided coverage for “direct physical loss” to the property. It obligated Harleysville to pay the replacement cost, defined as the lesser of (1) “the cost of repair or replacement with similar materials for the same use and purpose, on the same site” or (2) “the cost to repair, replace, or rebuild the property with material of like kind and quality to the extent practicable.”

In July 2009, a hail storm caused damage to the Trout Brook buildings. The association submitted a claim to Harleysville. Harleysville determined that there was damage to the flashings, vents and valleys on the building roofs, but not to the roof shingles. The association, believing there was shingle damage, asked for a re-examination. On the day Harleysville’s engineer re-inspected the roofs, another hail storm struck the area and caused further damage.

The association submitted a second claim, and Harleysville’s engineer once again inspected the roofs, determining that there had been some insignificant damage to the roof shingles. He estimated total repair costs of $270,000, with $21,000 being allocated for roof repairs. Harleysville promptly paid this amount to the association.

The association challenged Harleysville’s damage assessment and hired its own expert, First Rate Construction, to evaluate the roof damage. First Rate documented “large hail impacts” that substantially damaged the roofs’ vents, flashings and shingles. It proposed entirely replacing the roofs at a cost in excess of $800,000. Harleysville disagreed with First Rate’s assessment, and the parties failed to reach an agreement. The association demanded an “appraisal” under the policy terms.

The policy provides that if parties cannot agree on the amount of a covered loss, either may demand an appraisal. The appraisal process provides that each party select an independent appraiser, and the appraisers jointly select an impartial “umpire.” The appraisers then submit their differences to the umpire, after which the written agreement of any two of the three establishes the amount of the loss.

After examining the buildings, the appraisal panel unanimously determined that the association was entitled to an additional $81,765.50 in damages. However, the award neither itemized the damages nor addressed how the award was calculated. The award did not specify whether the additional damages awarded were predicated on complete replacement of the roofs or repair of only the damaged shingles.

The association hired First Rate to make the roof repairs, but shingles matching the undamaged portions of the roofs were no longer being manufactured. The association purchased several of the new shingles for comparison, but the colors did not match. The association then advised Harleysville that the unavailability of color-matching shingles entitled the association to complete roof replacement. Although Harleysville informed the association it would not give further consideration to the issue, it subsequently offered to submit the matching issue to the same appraisal panel that rendered the prior award. The association refused.

The association sued Harleysville, seeking a coverage determination under the policy for full roof replacement, as well as damages for Harleysville’s alleged breach of contract. Harleysville moved for summary judgment (judgment without a trial). Harleysville argued the association failed to challenge the appraisal award within 90 days, in violation of the Minnesota Uniform Arbitration Act; thus, its court challenge was barred.

The court determined that the association’s claims raised an issue beyond the scope of the appraisal award. The association did not challenge or otherwise seek to overturn the award. Rather, it sought a declaration that Harleysville was required to pay for full roof replacement due to the color-matching issue, and it asserted that Harleysville breached its policy by failing to do so.

Harleysville argued that the policy did not cover the undamaged shingles on the roofs, even if they did not match the replacement shingles used for repairs. The court pointed out that using Harleysville’s logic, each individual roof shingle constituted “covered property,” undermining any obligation to pay for shingles not damaged by hail. However, the policy’s “Property Covered” section indicated that coverage extended to “buildings and structures.” Moreover, the policy’s “location schedule,” which defined the extent of the association’s property coverage simply listed Trout Brook’s 18 buildings. Accordingly, the policy suggested that “covered property” was each of Trout Brook’s buildings, and not individual items (such as shingles or siding) attached or appurtenant to them.

Harleysville argued that the policy obligated Harleysville to pay only for the cost of repairing the roofs with “similar materials” or those of “like kind and quality” to those already on the buildings. The court found that the terms “similar materials” and “material of like kind and quality” simply could not be defined, as a matter of law, to preclude consideration of color. Rather, a jury must determine whether the terms obligated Harleysville to pay for matching shingles.

Harleysville’s motion to confirm the appraisal award and for summary judgment was denied.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Insurer Not Required to Pay for Roof Replacement

Wright v. State Farm Fire and Casualty Company, No. 13-3727, U.S. App. Ct. (6th Cir. Feb. 18, 2014)

Risks and Liabilities/State and Local Legislation and Regulations: An Ohio court properly dismissed a suit against an insurer for failing replace a roof as required by subdivision design standards.

William and Jayde Wright own a home in Muirfield Village, an upscale residential golf club community in Columbus, Ohio. The community is managed by the Muirfield Association (association). The home is subject to deed restrictions and design standards that are enforced by the association. The design standards provide that “[a]ny roof that needs repair must be re-roofed in its entirety. Partial or patch roofing is not permitted.”

The Wrights obtained a homeowner’s insurance policy from State Farm Fire and Casualty Company. The policy provided coverage for “accidental direct physical loss to the property,” and limited the settlement of property damage to, “the cost to repair or replace with similar construction and for the same use … the damaged part of the property.” The Wrights purchased additional coverage which covered increased costs due to “the enforcement of a building, zoning or land use ordinance or law.”

In 2011, a storm damaged the Wrights’ wood-shake roof. The original wood shakes had weathered significantly over the years, and the roof could not be repaired to match the undamaged portion. Because of the design standards, the Wrights had to replace the entire roof at an estimated cost of $47,000. The Wrights filed a claim with State Farm seeking payment for the entire roof replacement cost. However, State Farm offered to pay only $747.03, the cost to repair the roof minus the deductible.

The Wrights sued State Farm, alleging breach of contract for its failure to reimburse the roof replacement cost and misrepresentation regarding the policy’s coverage scope. State Farm moved for summary judgment (judgment on the merits of the case without a trial).

The Wrights argued that State Farm owed them a fiduciary duty and that Ohio law required State Farm to cover their roof replacement. The trial court dismissed all the Wrights’ claims, holding that State Farm was entitled to judgment as a matter of law. The Wrights appealed.

Because there was no misrepresentation or bad faith on the part of State Farm, the appeals court held that the district court properly dismissed all the Wrights’ claims.

First, there was no misrepresentation regarding the actual scope of the policy coverage because the policy, unambiguously, did not cover roof replacement. The additional coverage covers only laws and ordinances, which the appeals court held means only rules enacted by a governmental authority. By contrast, the restrictive covenant and design standards which required roof replacement is a private agreement. Therefore, the additional coverage does not extend to the enforcement of a restrictive covenant.

Further, Ohio law did not require State Farm to cover roof replacement. Ohio statutes provide that “[w]hen an interior or exterior loss requires replacement of an item and the replaced item does not match quality, color or size of the item suffering the loss, the insurer shall replace as much of the item as to result in a reasonably comparable appearance.” The Wrights failed to produce sufficient evidence that the damaged wood shakes could not have been replaced with shakes that would result in a reasonably comparable appearance. It was uncontested that unweathered replacement shakes would match the old shakes after a reasonable amount of time. The appeals court, therefore, upheld the district court’s finding that Ohio law did not require State Farm to cover the roof replacement.

Therefore, all the Wrights’ claims were properly dismissed by the trial court at summary judgment. The trial court’s judgment was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Foreclosure Does Not Extinguish Associationís Lien

First State Bank v. Metro District Condominiums Property Owners’ Association, Inc., 2014 Ark. 48 (Ark. Feb. 6, 2014)

State and Local Legislation and Regulations: In a case of first impression, the Arkansas Supreme Court held that an association lien was not extinguished by foreclosure of a first mortgage, and the property purchaser was liable for amounts owing at the time of conveyance under the Horizontal Property Act.

In December 2008, Nock-Broyles Land Development, LLC and Henry Broyles borrowed $275,000 from First State Bank to purchase Unit 270 in the Metro District Condominiums in Fayetteville, Ark. The borrowers agreed to pay First State the principal amount plus interest by December 2, 2011. The loan was modified in 2010 to change the maturity date and add 270 Metro, LLC as an additional guarantor of the loan.

Prior to the maturity date, First State demanded payment in full under the terms of the loan agreement. It subsequently sued Nock-Broyles and 270 Metro, LLC for foreclosure, default and breach of the loan agreement. In addition, the bank named Metro District Condominiums Property Owners’ Association, Inc. (association) in the lawsuit and sought a judicial declaration that its lien was superior to all other liens and requested that any interest in the property claimed by the association be extinguished. In July, First State moved for summary judgment.

The association filed an answer asserting that its interest in the property was superior to that of First State. In September 2010, the association filed a notice of lis pendens (a notice filed on the public record to warn all persons that title to the property is in litigation and that they are in danger of being bound by an adverse judgment), asserting its right to collect fees and assessments past due and owing on Unit 270. The trial court denied First State’s motion for summary judgment. In February 2013, the trial court entered a $247,289.13 judgment against Nock-Broyles and Metro 270 in favor of First State and authorized First State to foreclose on the unit if the judgment was not timely paid. The trial court further found that the association’s lien for unpaid assessments would survive the foreclosure and would become the liability of whoever purchased the property at the foreclosure sale. Thereafter, First State purchased the property at the foreclosure sale for $148,000, by way of a credit against its judgment.

First State appealed the part of the trial court’s order that the association’s interest should not be extinguished and would survive foreclosure. It argued that the court erred in concluding that the Arkansas Horizontal Property Act (act) provided that the association’s interest for unpaid assessments would not be extinguished by foreclosure. First State claimed that the trial court’s ruling had the effect of elevating the association’s lien above the bank’s mortgage lien, in contravention of the act.

The act provides for mandatory pro rata contributions from property owners within a horizontal property regime for “the expenses of administration and of maintenance and repair of the general common elements.” The act states that when a unit is sold, all unpaid assessments must be paid out of the sales price first or by the purchaser in preference over any charges except unpaid taxes or unpaid mortgage payments. Section 18-13-16(d) of the act provides:

The purchaser of an apartment shall be jointly and severally liable with the seller for the amounts owing by the latter under subsection (a) of this section up to the time of the conveyance, without prejudice to the purchaser’s right to recover from the other party the amounts paid by him or her as the joint debtor.

First State argued that if this subsection made a purchaser of a foreclosure liable for unpaid assessments, it would nullify the special position given to a mortgagee under the Act. However, the appeals court found nothing in the plain language of the provision to support First State’s assertion that subsection (d) did not apply to a foreclosure sale. Thus, the appeals court found that the trial court did not err in refusing to extinguish the association’s lien.

The trial court’s judgment was affirmed.

©2014 Community Associations Institute. All rights reserved. Reproduction and redistribution by CAI members or nonmembers are strictly prohibited.

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Association Has Standing to Sue Developer

Market Lofts Community Association v. 9th Street Market Lofts, LLC, 222 Cal. App. 4th 924 (Cal. Ct. App. Jan. 7, 2014)

State and Local Legislation and Regulations/Developmental Rights: A California appeals court ruled that an association was entitled to sue developers to resolve disputes arising from parking license agreements.

Market Lofts is a mixed-use development in downtown Los Angeles, Calif. Retail units are located on the street level of the building, and 267 residential condominium units are located above. An adjacent parking structure contains 319 parking spaces for the condominium owners. Market Lofts Condominium Associations (association) governs the residential condominium units.

9th Street Market Lofts, LLC and affiliates (9th Street) developed the condominium, and CIM/830 S. Flower, LLC and affiliates (CIM) developed the adjacent parking structure. In May 2006, 9th Street and CIM entered into a parking license agreement for using the 319 parking spaces. At the time of execution, condominium construction was not complete and association had not been formed. The agreement granted a license to 9th Street for residents of the yet-to-be formed Market Lofts association to use the parking structure.

The license agreement specified that it was appurtenant to the Market Lofts property and would be a covenant running with the land (a covenant that passes with the transfer of title). The agreement also stated that the license for exclusive use of the parking spaces was perpetual and “at no cost” to 9th Street, except for the obligation to pay its proportionate share of common maintenance charges. The license agreement further provided that it was irrevocable, and, upon the first unit closing, 9th Street would assign or sub-license its rights and obligations under the agreement to the homeowners association.

The association was formed in January 2007, and the association and 9th Street entered into a parking sub-license agreement, which provided that the association would pay 9th Street $75 per month for each parking space, and the amount would be increased annually by 5 percent. The sub-license agreement also continued in effect for 49 years, and the association could renew for additional terms, but all rights expired at the end of 99 years. At the time, 9th Street controlled the association’s board of directors, and each director was simultaneously serving as an agent, employee, partner and/or member of the 9th Street or CIM entities. In 2011, control of the board was turned over to the unit owners, and the unit owners could then investigate the circumstances surrounding the parking agreements.

In 2011, the association sued 9th Street for breach of fiduciary duty, breach of the license agreement, concealment, unfair business practices, and rescission of the sub-license agreement. The association claimed that rather than assigning its rights under the license agreement to the association, 9th Street engaged in self-dealing by using the sub-license agreement to strip the association of its rights under the license agreement and impose on it financial and other obligations in direct contravention of the license agreement.

9th Street filed a demurrer (an assertion that the complaint does not establish an actionable claim upon which relief can be granted) to the complaint, which the association opposed. The trial court upheld 9th Street’s demurrer on the sole ground that the association lacked standing to bring suit (a plaintiff has to have sufficient stake in a controversy in order to bring suit). The trial court concluded that because the unit owners paid the alleged illegal parking fees and the association only collected them, the association could not show injury and thus had no standing. The association appealed.

The appeals court held that the association was an interested party because it was a named beneficiary of the license agreement and a direct contracting party to the sub-license agreement. While the license agreement did not name the association by its precise name, the agreement did reference the homeowners association to be formed for the Market Lofts, and it is clear that the association is such entity. If 9th Street’s argument were correct, the association would be powerless to seek a determination of its own rights under either contract. Thus, since the association alleged an actual controversy, it was entitled to seek a declaration of the rights imposed and the duties afforded under the agreements.

9th Street argued that the association understood its obligations under the sub-license agreement; however, the association did not ask the court merely to interpret the terms of the sub-license agreement; rather, it asked the court to reconcile the two license agreements. In other words, the association contended that the license agreement must govern the parking arrangements and the sub-license agreement was invalid.

The appeals court found that the association alleged an actionable dispute and had standing to seek a resolution of the dispute. Therefore, the trial court’s judgment sustaining 9th Street’s demurrer and dismissing the association’s claims was reversed. 

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