May 2014
In This Issue:
Purchaser Who Acquired Property at Tax Sale Is Not Liable for Unpaid Assessments
Reduced Tax Valuation of Common Area Is Improper
Owner Cannot Convert Golf Course to Residential Lots
Trial Court Must Determine Whether Association Is Authorized to Levy Special Assessment
Owners Not Required to Pay Assessments
Association’s Demand to Access Owner’s Unit Must Be Reasonable and Necessary
Construction Defect Case Barred by Statute of Limitations
Insurers Are Obligated to Pay for Repairs to Townhomes
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Purchaser Who Acquired Property at Tax Sale Is Not Liable for Unpaid Assessments

A to Z Properties, Inc. v. Fairway Palms II Condominium Association, Inc., No. 4D13-1267 (Fla. Dist. Ct. App. Mar. 19, 2014)

Assessments/State and Local Legislation and Regulations: A Florida appeals court ruled that the person who purchased a condominium unit at a tax sale was not liable for unpaid assessments because the lien was extinguished by the tax deed.

The Fairway Palms II Condominium in Martin County, Fla, is managed and maintained by Fairway Palms II Condominium Association, Inc. (association). In October 2010, A to Z Properties, Inc. (A to Z) purchased a Fairway Palms unit at a tax sale for $21,100. At that time, the prior unit owner owed the association $16,291.61 in unpaid assessments. Approximately two weeks later, A to Z sold the unit to Rafael Charre-Sanchez for $30,000.

In February 2011, the association recorded a lien on the unit for the unpaid assessments and subsequently sued A to Z and Sanchez to foreclose the lien and recover a money judgment for the unpaid assessments.

A to Z and the association both filed motions for partial summary judgment (judgment on the facts without a trial) to determine whether A to Z and Sanchez were liable for unpaid assessments that accrued prior to their purchases. The trial court determined that A to Z was liable for the unpaid assessments under the Florida Condominium Act. A to Z appealed.

A to Z argued that Chapter 197 of the Florida Statutes, the tax code, controlled over Chapter 718, the condominium act, and therefore extinguished the unpaid assessments. The association argued that liability for unpaid assessments under the condominium act does not attach until a person becomes a “unit owner;” therefore, Chapter 197 did not have any effect on the liability imposed by Chapter 718.

Section 197.552 provides that “[e]xcept as specifically provided in this chapter, no right, interest, restriction, or other covenant shall survive the issuance of a tax deed.” Generally, under Section 197.573, when a deed in the chain of title contains restrictions and covenants running with the land, the restrictions and covenants shall survive and be enforceable after the issuance of a tax deed. However, Section 197.573 applies only to the “usual restrictions and covenants” limiting the use of the property, and the statute specifically provides that it does not protect covenants creating a debt or lien against the property. Therefore, the appeals court found that under the tax code, neither covenants governing assessments nor liens for unpaid assessments survive the issuance of a tax deed.

By contrast, Section 718.116(1)(a) of the condominium act addresses liability for condominium assessments and provides that “a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title,” regardless of how title to the unit is acquired.

The appeals court determined that, although the condominium act imposes liability for unpaid assessments on a unit owner who acquires the property by “transfer of title,” it is well settled in Florida that acquisition of title by tax deed does not represent a transfer of title, but instead constitutes a “new, original and paramount” title. Therefore, the condominium act does not prevent liens for unpaid assessments from being extinguished under the tax code when unit owners acquire title by tax deed. Instead, unit owners “who acquire title by transfer, rather than by tax deed, remain liable for unpaid assessments.”

The appeals court concluded that the tax code controlled over the condominium act because the tax statutes were more specific as to the key issue. Any conflict must be resolved in favor of giving effect to a specific statute, and a general statute is given effect only to the extent it does not contradict the specific statute.

The appeals court ruled that Sections 197.552 and 197.573(2) extinguished any covenant that creates a lien or requires a grantee to pay debts accrued before the tax deed was issued. Both the lien and the grantee’s liability for the preexisting debt are extinguished when the tax deed is issued.

Accordingly, the appeals court reversed the trial court’s judgment.

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

Reduced Tax Valuation of Common Area Is Improper

County of Clark v. Sun City Summerlin Community Association, Inc., No. 607766 (Nev. Mar. 25, 2014)

State and Local Laws and Regulations: The Nevada Supreme Court held that the State Board of Equalization erroneously reduced the tax valuation of common area property that was encumbered by use restrictions.

The Sun City Summerlin community, located in Clark County, Nev., is managed and maintained by Sun City Summerlin Community Association, Inc. (association). The association owns five parcels in the subdivision designed for community use, including clubhouses, recreation centers, a maintenance facility and parking lots.

The taxable value of the land itself was $0 for the 2010-11 tax year. The Clark County Assessor (assessor) valued improvements on the properties at $19.5 million. On appeal, the State Board of Equalization (state board) reduced the taxable value because it determined that restrictions on how the property could be used limited, if not negated, the market value of the improvements. Therefore, the assessor’s valuation exceeded the full cash value in violation of Chapter 361 of the Nevada Revised Statutes and the Nevada Administrative Code (collectively, the tax code).

The state board reduced the taxable value to a nominal value of $500 per parcel because the chair asserted that was a standard nominal value. Other state board members admitted to simply making up other nominal values. One state board member asserted that the smallest possible value should be adopted because the improvements’ value was already reflected in the subdivision home values.

The assessor, the homeowners and the association (collectively, assessor) appealed the state board’s decision. The only issue on appeal was the taxable value of the improvements. The assessor argued that the state board’s decision was clearly erroneous because the board simply made up a value without any statutory or factual basis. Further, the tax code limits value determinations to certain specific criteria.

The tax code set forth a methodology for assessing property. First, the assessor must value the cost of improvements “by subtracting from the cost of replacement of the improvements all applicable depreciation and obsolescence.” However, after value is determined, the tax code mandates that it be reduced, if necessary, so as not to exceed the “full cash value” of the property.

“Full cash value” is defined as “the most probable price which property would bring in a competitive and open market under all conditions requisite to a fair sale.” Where there is no evidence of the price the property would sell for on the open market, the assessor should consider other methods, including cost and depreciation, to determine the market value and full cash value. To determine whether the taxable value exceeds the full cash value or whether obsolescence is a factor, the board of assessors may consider comparable sales, the estimated full cash value of the land and contributory value of the improvements and the capitalization of the fair economic income expectancy. The Supreme Court noted, however, that the word “may” in the statute suggests that assessors are not limited solely to these methods.

The Supreme Court observed a distinction between the value of the land itself and the value of improvements on the land. Although the assessor must consider legal restrictions in appraising improved land and those restrictions might render land valueless for tax purposes, improvements on the land may still have substantial value, even if neither the land nor the improvements would have value on the open market. The Supreme Court found that the state board failed to give due consideration to the tax code’s valuation methods and, therefore, erred in reducing the taxable value to a nominal value instead of using other workable valuation methods.

The trial court’s order was reversed and the case was remanded for further proceedings consistent with these findings.

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Owner Cannot Convert Golf Course to Residential Lots

In re: Heatherwood Holdings, LLC, Nos. 12-16020, 12-16021 (11th Cir. Mar. 27, 2014)

Federal Law and Legislation/Association Operations: A federal appeals court held that a golf club purchaser must continue to operate the property as a golf course due to an implied restrictive covenant.

United States Steel (USX) developed the Heatherwood subdivision in Shelby County, Ala., in the 1970s. A golf course was constructed in the heart of the subdivision, and all subdivision roads were given golf-themed names. The subdivision covenants, restrictions and easements contained numerous references to the golf course and contained golf-related restrictions, such as requiring each lot to have a golf cart storage area and prohibiting fences adjacent to the golf course.

When USX began selling lots in 1984, the initial purchasers had to become members of the Heatherwood Golf Club (club). USX’s marketing materials emphasized the benefits of club membership and living adjacent to the golf course, and the disclosure documents described the club’s amenities. The documents also disclosed USX’s plans to eventually sell the club and outlined three ways the sale could occur.

USX continued to own and operate the club until 1999, when the club’s equity members (which included subdivision residents as well as non-residents) offered to buy the club. The members formed HGC, Inc. (HGC) to purchase, operate and maintain the club.

The club was conveyed to HGC by special warranty deed, which included numerous exceptions; however, none of the exceptions restricted the use, maintenance or development of the golf course. The club needed substantial capital improvements, but HGC’s members were not willing to contribute their own money. As a result, HGC solicited proposals from various golf club management companies to assume the club’s operation and management.

Ultimately, HGC transferred the club to Pine Cone Capital, Inc. (Pine Cone), which was run by Jonathan Kimerling and William Ochsenhirt. HGC and Pine Cone entered into an asset purchase agreement whereby Pine Cone would spend at least $2.5 million on capital improvements and operate the golf course for the next 25 years.

Pine Cone assigned its rights to Heatherwood Holdings, LLC (Heatherwood), which was formed by Kimerling and Ochsenhirt to own and operate the club. In 2000, HGC and Heatherwood entered into a side agreement whereby Heatherwood agreed to operate the club for the next 25 years, which was recorded in the county land records. HGC conveyed the club to Heatherwood by a deed that, like the earlier deed, lacked any express restriction limiting the property to golf course use.

Heatherwood promptly closed the club for renovations and obtained a $4 million loan from First Commercial Bank (FCB) to finance the renovations and mortgaged the golf course property to secure the loan. FCB representatives assumed that if Heatherwood defaulted on the loan, FCB could redevelop the golf course as residential property. Heatherwood completed renovations and reopened the club in 2001.

Despite the renovations, the club lost money every year from 2001 to 2008, with six-figure losses in six of those years and losses exceeding $400,000 in four of them. The losses seemed to reflect the club’s inability to retain and extend its membership, partially due to course playability issues. Kimerling and Ochsenhirt also lost interest in the club once they acquired another area club. They swapped out the club’s better furniture for cheaper furniture from the other club and began spending less money on maintenance.

In 2008, Heatherwood sent a letter to club members announcing that it would cease operations, blaming the closure on “insurmountable obstacles” created by the “recent economic recession.”

In January 2009, Heatherwood filed for Chapter 11 bankruptcy and subsequently filed an adversary proceeding against HGC, seeking a determination that it could sell the property free and clear from liens, encumbrances and restrictions. Relying on the 1984 Arizona case, Shalimar Ass’n v. D.O.C. Enterprises, Ltd., HGC responded that the property was subject to an implied covenant running with the land that restricted its use to a golf course.

Since there was no clear Alabama precedent, the bankruptcy court asked the Alabama Supreme Court to clarify Alabama law by answering several questions. The Supreme Court answered one question by stating that Alabama law recognizes an implied restrictive covenant on a golf course constructed as part of a residential development, consistent with the facts in Shalimar.

The bankruptcy court then held a trial to determine whether there was an enforceable express or implied restrictive covenant encumbering the golf course. It found that the initial development and marketing of the subdivision, as well as signs, street names, easements, plats and actual use created an implied restrictive covenant restricting the property to golf course use. The bankruptcy court also found ample evidence that Heatherwood had actual as well as constructive notice of the implied restriction. It rejected claims that the implied restrictive covenant was terminated due to changed economic circumstances and that the 25-year agreement was merged into the deed. The bankruptcy court denied Heatherwood’s application to sell the property free and clear of liens, interests and encumbrances.

The bankruptcy court’s judgment was affirmed by the U.S. District Court. Heatherwood and FCB appealed to the 11th Circuit Court of Appeals.

The appeals court noted that the various marketing materials and the recorded plat and restrictions were substantial evidence that USX intended a common scheme of development that included the golf course. The appeals court held that the bankruptcy court did not err in holding that FCB and Heatherwood had actual, constructive and inquiry notice of the implied restrictive covenant. The bankruptcy court also did not err in finding that most, if not all, of the subdivision homeowners bought their homes with the expectation that the golf course would remain.

The appeals court also upheld the bankruptcy court’s finding that, based on the availability of public information, the estoppel-by-deed defense failed because this defense can be used only if the seller knowingly provides false information or conceals certain facts that another party relies on to its detriment.

Finally, the bankruptcy court correctly applied the changed-circumstances doctrine when it relied on factual findings to determine that the benefit homeowners would receive from the remaining covenant outweighed the detriment FCB and Heatherwood would bear.

Accordingly, the bankruptcy court’s decision was affirmed.

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

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Trial Court Must Determine Whether Association Is Authorized to Levy Special Assessment

Koler v. Grand Harbour Condominium Owners Association, No. E-13-046 (Ohio Ct. App. Mar. 28, 2014)

Assessments/Powers of the Association: An Ohio appeals court ruled that because the bylaws were ambiguous about an association’s authority to levy a special assessment without member approval, the trial court improperly granted summary judgment in favor of the association.

Grand Harbour Condominium is located in Erie County, Ohio. It is managed and maintained by Grand Harbour Condominium Owners Association (association).

In September 2011, the association notified the unit owners that a $1.3 million special assessment had been levied against the units in accordance with their ownership par value to fund a siding and roofing project. Later that month, Alex Koler and certain other unit owners sued the association, seeking money damages and a preliminary injunction prohibiting the association from enforcing the special assessment.

In February 2012, the trial court denied Koler’s application for injunction. The association moved for summary judgment (judgment without a trial), which the court granted in July 2013. Koler appealed, arguing that the association approved the project in violation of the bylaws.

Article IV of the bylaws provides that the association use the maintenance fund to pay for the following:

The cost of the maintenance and repair of any unit or limited common areas and facilities if such maintenance or repair is necessary, in the discretion of the association, to protect the common areas and facilities, or any other portion of a building, and the owner or owners of said unit have failed or refused to perform said maintenance or repair within a reasonable time after written notice of the necessity of said maintenance or repair delivered by the association to said owners, provided that the association shall levy a special assessment against such owner for the cost of said maintenance or repair.

The appeals court read this provision as granting the association power to levy a special assessment only in an isolated case of an individual unit owner who failed to maintain his or her unit.

Article IV, Section 2 of the bylaws further provided that the association has neither the authority to use the maintenance fund to pay for capital additions or improvements (other than to replace or restore the common area) that exceeded  $10,000 in any 12-month period, nor the authority to undertake such projects, without, in each case, the prior approval of members holding a majority of the votes in the association.

The association argued that the phrase about replacing or restoring the common areas authorized the association to move forward on the roofing and siding project without seeking member approval. However, the appeals court noted that the same provision seemed to prohibit the association from acting without a majority vote of the members.

Because the language was susceptible to two reasonable interpretations, the appeals court held that the provision was ambiguous; thus, the trial court erred in granting summary judgment to the association based solely on the wording of the bylaws.

The appeals court reversed the trial court’s order and remanded the case for further proceedings to determine the association’s authority.

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

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Owners Not Required to Pay Assessments

Ryan Ranch Community Association, Inc. v. Kelley, Nos. 12CA2312, 12CA2316 (Col. Ct. App. Mar. 27, 2014)

Developmental Rights/State and Local Legislation and Regulation/Powers of the Association: A Colorado appeals court ruled that a homeowners association was not entitled to collect assessments for lots that were not properly annexed to the declaration.

Ryan Ranch, located in Jefferson County, Col., was developed by Ryan Ranch, LLC (developer). The Official Development Plan (ODP) was filed with the county in 2001.

In early 2003, the developer’s principal verbally agreed to sell John and Kelly Kelley (Kelley) seven lots (Kelley Lots) to be developed later as part of Ryan Ranch Filing 2. In September 2003, the developer contracted to sell a majority of the property to The Ryland Group, Inc. (Ryland), excluding the Kelley Lots. In October 2003, the developer and Kelley signed a contract for the Kelley Lots, consistent with the verbal agreement, and closing was to take place when the Filing 2 plat map was approved. That same month, Ryland and Kelley signed an agreement providing that Ryland would record covenants that excluded the Kelley Lots from the homeowners association Ryland planned to form to govern its lots.

Ryland closed on the purchase of the Filing 1 property from the developer, and in November 2003, Ryland recorded the Filing 1 plat map. In March 2005, after Ryan Ranch Community Association, Inc. (association) was incorporated, Ryland recorded the Declaration of Ryland Ranch Community Association (declaration) encumbering the Filing 1 property. The Kelley Lots were not included in the property initially submitted to the declaration, but they were included in the description of the annexable property.

In May 2005, when the Filing 2 plat map was supposedly nearing approval, the developer and Kelley reaffirmed their contract by signing a second contract that called for closing on June 10, 2005. Ryland did not obtain final approval for the plat map when expected but in June 2005 agreed to waive that approval so it could proceed with closing. The developer and Ryland changed their agreement to provide that all the Filing 2 property (including the Kelley Lots) would be conveyed to Ryland, but Ryland would then reconvey the Kelley Lots to the developer.

On June 16, 2005, the sale of the Filing 2 property to Ryland was completed. The same day, Ryland executed a deed conveying the Kelley Lots back to the developer, but the developer did not record the deed.

On June 22, 2005, the developer signed a warranty deed conveying the Kelley Lots to Kelley but failed to record this deed as well. The Filing 2 plat map was approved and recorded in November 2005. In December 2005, the two unrecorded deeds were recorded. In June 2006, Kelley sold Lot 6 to a contractor, who built a home on it and then sold it to Rick and Lora Zimmerman.

In 2010, the association asserted for the first time that the Kelley Lots had been automatically annexed into the Ryan Ranch community since the conveyance to Ryland included the Kelley Lots. The association subsequently sued Kelley and the Zimmermans to recover unpaid assessments. Kelley counterclaimed, seeking a determination that Ryland had not annexed the Kelley Lots in accordance with the Colorado Common Interest Ownership Act (act).

The trial court ruled in the association’s favor, finding that the Kelley Lots had been properly annexed to the community because the deeds, plats, ODP and declaration, taken together, met the act’s annexation requirements. The Filing 2 plat, which included the Kelley Lots, noted that a homeowners association was to maintain various common properties. The trial court concluded that Kelley was on notice of the obligation since the plat was listed as an exception to title in Kelley’s deed. The trial court also held that it would be inequitable not to subject the Kelley Lots to the declaration since they had received the benefit of landscaping, snow removal and other services the association provided to property adjacent to the Kelley Lots. Kelley appealed.

The act provides that property may be annexed to the declaration through an amendment executed and recorded by the declarant. The appeals court held that a document that revises, adds to or changes another document already in existence must be executed and recorded by the declarant in order to satisfy the act’s requirements. The appeals court found that no such amendment pertaining to the Kelley Lots existed. The ODP indicated that there would be a mandatory homeowners association, but it does not contain any covenants or subject the property to future covenants.

Further, no language in the deed to Ryland actually subjects the property to the declaration. The deed merely excepted the covenants and conditions of record, if any, from the warranty provided by the title insurance policy. The deed is not labeled or described as an amendment, and it does not satisfy the act’s requirement that unit numbers be assigned and common elements or limited common elements be described. While the Filing 2 plat anticipates that the association would maintain property adjacent to the Kelley Lots, the plat note fails to satisfy the act’s amendment requirements. Finally, while the declaration describes the Kelley Lots as annexable property, the appeals court held that this statement simply means that the property may be or is susceptible to being annexed. It does not actually annex the property.

The appeals court reversed the trial court’s judgment and remanded the case 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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Association’s Demand to Access Owner’s Unit Must Be Reasonable and Necessary

Small v. Devon Condominium B Association, Inc., Nos. 4D10-2302, 4D10-5243, 4D11-247, 4D11-4119 (Fla. Dist. Ct. App. Apr. 2, 2014)

Association Operations/Covenants Enforcement/Powers of the Association: A Florida appeals court overruled a trial court order granting access to an owner’s unit to provide pest control services.

In 1989, Joyce Small purchased a unit in Devon Condominium B located in Boca Raton, Fla. The condominium is managed and maintained by Devon Condominium B Association, Inc. (association).

Initially, the association did not provide pest-control services to unit owners, but later offered it as an optional service. Small accepted the pest control treatments until she was diagnosed with a breathing disorder and her doctor recommended against the use of chemical pesticides.

Small informed the association that she no longer desired the pest-control service, and from 2005 until 2009, the association stopped spraying her unit. During that time, Small used an alternative form of pest control. In 2009, the association demanded access to Small’s unit to perform pest-control treatments, and she refused.

The association filed a petition for arbitration, seeking access to the unit. A default judgment was entered against Small because she did not respond to the petition in a timely manner. The arbitrator ordered Small to grant the association access each month to perform pest control service. Small filed a complaint in circuit court for a new trial. The association counterclaimed for breach of contract, injunctive relief and a request to uphold the arbitrator’s award. The association moved for summary judgment (judgment on the merits without a trial).

The association argued that the Florida Condominium Act (act) and the condominium declaration granted the association the right to enter the units to perform necessary maintenance. The association also claimed that it had offered to let Small retain her own exterminator if she provided proof that the pest control services were being performed. Small contended that summary judgment should be denied because there was a factual issue as to whether the association’s demands were reasonable.

The trial court granted the motion and ordered that Small could provide a non-chemical pesticide or an alternative vendor; otherwise, the association would have the right to access her unit to perform the preventative services with a chemical-free pesticide.

The association then filed a motion to hold Small in contempt because she refused the association access to the unit until she could have someone inspect the spray the association proposed to use. Small continued to refuse access when her expert found the spray harmful to Small’s condition. At the contempt hearing, Small argued that she had complied with the court order by providing proof to the association that her own exterminator serviced her unit. The association argued that it had a right to inspect the work.

The trial court allowed Small to avoid sanctions by permitting the association’s vendor to access the unit and apply a particular spray. The court appointed its own expert, who opined that Small’s pest control spray was one of the least toxic but was not chemical-free, as required by the court, and was not designed to eliminate pests other than ants and roaches. If Small failed to comply, the trial court held that the association could seek an order authorizing forced entry by the sheriff at Small’s expense. Small was also ordered to pay the association’s legal expenses of almost $3,000.

The association then moved for an enforcement order and additional attorneys’ fees when Small failed to submit a compliance affidavit. The trial court entered a contempt order without a hearing, which permitted the association access to the unit without Small’s approval through the use of a locksmith and the sheriff. Small was also ordered to pay an additional $765 for the enforcement proceeding. Small appealed.

Both the act and the declaration provide that the association has a right to enter a unit when necessary for maintenance, repair or replacement of common elements or any portion of the unit the association is required to maintain or as necessary to prevent damage to the common elements or units. The appeals court held that the act and the declaration both require a showing of reasonableness and necessity before the association can access an owner’s unit. The appeals court stated that the association must establish that its actions are necessary; a claim of necessity is insufficient.

The appeals court observed that Small had lived in her unit for several years without pest-control services provided by the association, and there was no evidence of a pest problem in 2009. Considering Small’s health risks, the appeals court found there was a genuine issue of material fact about the reasonableness of the association’s actions, making summary judgment improper.

The trial court’s order of summary 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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Construction Defect Case Barred by Statute of Limitations

The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, No. L-2306-09 (N.J. Super. Ct. Law Div. Mar. 31, 2014)

Developer Liability/Risks and Liabilities: A New Jersey appeals court ruled that a condominium association’s suit to recover damages for construction defects was barred by the statute of limitations.

In July 2000, A/V contracted with AJD Construction Co., Inc. (AJD) to erect five additional parking floors and a 30-story residential apartment tower on top of the parking facility. AJD hired various subcontractors to perform different aspects of the construction.

Construction of the complex was deemed substantially complete in May 2002. In June 2004, A/V sold the apartment complex to Crescent Heights of America, Inc. Crescent Heights then converted the apartments into condominium units and registered the development with the New Jersey Division of Housing and Development. It began selling units in January 2005.

The Palisades at Fort Lee Condominium Association, Inc., (association) was created by Crescent Heights to manage and maintain the development. Crescent Heights relinquished control of the association to the unit owners in July 2006. In November 2006, the association engaged an engineering firm to inspect the building. The engineer’s written report, issued in July 2007, detailed various construction and design defects.

The association sued A/V, AJD and several of the subcontractors in March 2009, asserting claims related to alleged defects in the building’s original construction. A/V reached a settlement with the association before trial. AJD and the subcontractors filed motions for summary judgment, asserting that New Jersey’s six year statute of limitations barred the association’s action.

Generally, in construction cases, a cause of action accrues (for statute of limitations purposes) at the time construction is deemed substantially complete. The exception to that general rule is found in cases where the discovery rule applies. “[I]n an appropriate case a cause of action will be held not to accrue until the injured party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim.” However, where a party has sufficient knowledge of its claim and a reasonable time remains within the statute of limitations to file a lawsuit, the discovery rule will not apply to extend the statute of limitations.

In this matter, the statute of limitations began to run on May 1, 2002. The association assumed control of the building in July 2006, and the engineer’s formal report was issued in July 2007. Therefore, by May 1, 2008, the statute of limitations had expired.

The association and unit purchasers were on notice of construction defects because the Public Offering Statement filed in January 2005 contained an engineering report that outlined a number of construction deficiencies. Even assuming there was no reason for the association to be aware of the defects until July 2007, there was still nearly a year left under the statute of limitations for the association to bring a claim.

The appeals court concluded that the association was reasonably aware of an injury within the statutory time frame and had ample time to seek recourse; but it failed to file its complaint in time. Therefore, the association was barred from pursuing the lawsuit.

The court acknowledged that its ruling in this matter was distinguishable from previous rulings where the discovery rule did apply, thus permitting a condominium association to sue the developer for construction defects. However, the defendant contractors in this case were hired by the building’s prior owner to construct a rental apartment building. Two years after the substantial completion date, the apartment building owner sold the property to the condominium developer. Only then were the units converted to condominiums. After approximately another two years, the units were sold to individual purchasers and eventually the association was formed.

The court found that AJD and the subcontractors could not have reasonably anticipated that they would be liable in perpetuity to subsequent purchasers for alleged construction defects that were previously known or should have been known to the building owner(s).

The New Jersey statute of repose (cuts off the right to bring a claim after a specified time from work completion, regardless of the time a potential legal claim becomes known) limits a contractor’s liability to unanticipated subsequent purchasers. Here, the ownership changes after the project was completed and the attenuated time frames were compelling facts to support enforcing the statute of limitations against the association. Therefore, the appeals court granted the defendants’ motions for summary judgment.

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

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Insurers Are Obligated to Pay for Repairs to Townhomes

The Village at Deer Creek Homeowners Association, Inc. v. Mid-Continent Casualty Company, No. WD76191 (Mo. Ct. App. Apr. 1, 2014)

Developer Liability/Risks and Liabilities: A Missouri appeals court ruled that an insurer was liable for damages caused by developer’s defective construction of townhome exteriors.

In 1999, Greater Midwest Builders, Ltd. (GMB) began phased development of the Village at Deer Creek, a 137 townhome subdivision in Overland Park, Kan. GMB recorded the declaration and established The Village at Deer Creek Homeowners Association, Inc. (association). The declaration obligated the association to maintain, repair and replace the units’ exteriors. The first townhomes were sold in October 2001.

In 2004, homeowners began complaining to GMB about water leaks in their townhomes. GMB attempted to fix each reported leak. The homeowners became concerned that GMB was using association funds to fix the leaks when they believed GMB should pay for the repairs. This and other concerns led GMB to turn over association control to the homeowners in January 2005. As part of the turnover, GMB agreed in writing to address “development related deficiencies” that were its responsibility before the subdivision was completely built out. Build out was completed in September 2007. During this time, the association continued efforts to resolve the construction deficiencies with GMB.

In December 2007, the association and 47 individual homeowners sued GMB in Kansas state court. The homeowners sought to recover for water damage to the homes’ interiors. The association sought to recover damages relating to the units’ exteriors.

GMB notified its insurers, Mid-Continent Casualty Company (Mid-Continent) and State Automobile Insurance Co. (State Auto), of the lawsuit. State Auto provided GMB’s liability coverage from November 2000 to November 2003. Mid-Continent provided GMB’s liability coverage from February 2004 to February 2008. Both insurers accepted defense of the claims.

Prior to trial, the association and the homeowners indicated their willingness to settle all their claims against GMB within the limits of the Mid-Continent and State Auto policies. However, the insurers would not agree to a settlement. GMB terminated its insurers’ defense and reached an agreement with the association and the homeowners that any recovery obtained would be collected solely from GMB’s insurance coverage. In exchange, GMB agreed not to offer evidence at trial or to cross examine witnesses.

At trial, the association’s expert, Laurence Fehner, identified a number of defects in the buildings’ exterior cladding system. Fehner also testified at length that each defect resulted in water intrusion into the townhomes, causing subfloors, floor joists and studs to rot and the cladding to crumble and disintegrate. Bids to repair the damage solicited by the association exceeded $7 million. GMB maintained that, although it knew about water leaks in some of the townhomes, it never suspected that the leaks were caused by pervasive construction defects. Instead, GMB believed the leaks were routine punch list and/or warranty work typical in residential construction.

The Kansas court found that GMB had been negligent in its duties to the association because it failed to use reasonable care to determine that the leaks indicated pervasive construction defects. The Kansas court entered judgment in favor of the association for $7,187,731.22 plus interest at the statutory rate. The Kansas court also awarded a judgment in favor of each homeowner for breach of contract and/or expressed or implied warranty for damages to the townhomes’ interiors.

Because GMB is a Missouri corporation, the association and the homeowners filed an equitable garnishment petition against State Auto and Mid-Continent in Jackson County, Missouri. GMB also asserted claims against Mid-Continent and State Auto for bad faith failure to settle, breach of fiduciary duty and breach of contract.

The Missouri trial court entered judgment in favor of the association for equitable garnishment in January 2013. It concluded the association met its burden of establishing coverage under the insurers’ liability policies. Judgment was entered against State Auto in the amount of $2,728,189.05 and against Mid-Continent in the amount of $4,302,145.69, with interest. Interest applied from the Kansas judgment date to the equitable garnishment judgment date. Mid-Continent appealed.

Mid-Continent first claimed the judgment was for defective construction repair, which is not “property damage” covered under the policy. Mid-Continent argued that the association failed to meet its burden to allocate the costs between property damage that was covered and damage that was not covered.

Mid-Continent conceded that water damage caused by the defective cladding is covered by the policy but argued that repair of the defective cladding was not covered. The appeals court held that once defective construction causes damage, the repair costs may include the cost to replace the defective construction if it too is damaged or must be removed to access other damaged areas. The appeals court found that substantial evidence supported the conclusion that removing some or all of the exterior cladding was necessary to repair the damage behind the walls. As a result, the trial court did not err in determining that the Kansas judgment was for “property damages” under the insurance policy.

Alternatively, Mid-Continent argued that there had not been an “occurrence,” as required by the policy, for 52 of the townhomes. The policies defined “occurrence” as “an accident, including continuous and repeated exposure to substantially the same general harmful conditions.” The trial court found that there were separate occurrences each time there was a new moisture-related event that allowed for more damage to the home through the exterior. The appeals court determined that Mid-Continent’s argument was negated by the trial court’s finding of GMB’s negligence. Further, the appeals court noted that, when an insurer has notice of litigation and the opportunity to control and manage it, but fails to do so, it is bound by the litigation’s result.

It is also well-settled in Missouri law that when a liability policy defines occurrence to mean accident, courts consider this to mean injury caused by the negligence of the insured. A liability policy is designed to protect the insured from tortious injury caused by his actions. If the injury occurs because of the insured’s carelessness, he can expect the injury to be covered.

The appeals court concluded that Mid-Continent failed to prove that an exclusion in its policies defeated its obligations to cover the losses. The trial court’s judgment granting equitable garnishment against Mid-Continent was affirmed in its entirety.

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

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