June 2014
In This Issue:
Unit Owner Is Liable for Special Assessment
Purchaser of Foreclosed Unit Not Liable for Prior Unpaid Assessments
Concerned Owners Group Has Standing to Sue Developer
Developer Did Not Forfeit Title to Vacant Lot
Association Is Not Liable for Contractor’s Injuries
Bank Is Liable for Unpaid Assessments
Directors Breached Duties by Failing to Comply with Declaration and Statutory Requirements
Short-term Rentals Do Not Violate Covenants
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Unit Owner Is Liable for Special Assessment

Randall v. Eclextions Lofts Condo Association, No. 13AP-708 (Ohio Ct. App. May 1, 2014)

Assessments: An Ohio appeals court determined that the unit purchaser was liable for a special assessment because he owned the unit on the assessment’s due date, even though the assessment had been levied before his purchase.


Eclextions Lofts is a condominium project in Franklin County, Ohio, which is managed and maintained by Eclextions Lofts Condo Association (association).

On September 15, 2009, the association sent a letter notifying unit owners that a special assessment was being levied and was due no later than October 15, 2009. Jeffrey Randall purchased a unit on September 23, 2009. He paid the $1,710 special assessment on October 8, 2009, but then filed suit against the association on October 25, 2009, alleging he was erroneously billed for the special assessment because he did not own the property on the date the assessment was levied. The trial court determined that Randall was not erroneously billed because he was the unit owner on the special assessment due date.

Moreover, even if the special assessment was the responsibility of the person who owned the unit when the assessment was levied, under the condominium declaration and association bylaws, the new owner would still be liable for delinquent assessments, fees or costs that remained unpaid at the time of transfer. Randall appealed.

The appeals court agreed with the trial court. Under the declaration and bylaws, every assessment is the personal obligation of the person who owns the unit when the assessment is due. The documents further provide that, although a delinquent assessment isn’t the new owner’s personal obligation, the association’s lien against the unit for delinquent assessments is unaffected by the title transfer.

Accordingly, the appeals court concluded that the trial court did not err in determining that Randall was liable the special assessment, and 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.

Purchaser of Foreclosed Unit Not Liable for Prior Unpaid Assessments

Federal National Mortgage Association v. Lagoons Forest Condominium Association, No. 313953 (Mich. Ct. App. May 15, 2014)

Assessments: A Michigan appeals court held that the purchaser of a foreclosed unit was not liable to the association for unpaid assessments that predated the sheriff’s sale.


Lagoons Forest is a condominium development in West Bloomfield, Mich. When a unit owner stopped paying his assessments, Lagoons Forest Condominium Association (association) filed a lien against the unit in January 2006 for $2,460.58. The owner also stopped making his mortgage payments, and the lender, RBS Citizens Bank (RBS) foreclosed on the unit. RBS purchased the unit at a sheriff’s sale on March 1, 2011, for $162,800. In April 2011, RBS transferred the property to the Federal National Mortgage Association (Fannie Mae).

Michigan law allows an owner who loses his property through foreclosure to reacquire or redeem the property for a certain period of time by paying the purchaser the amount it paid for the property at the foreclosure sale plus interest and fees. The statutory redemption period in this case ended on September 1, 2011, at which time the sheriff’s deed would become fully operative.

In September 2011, the association amended its existing lien to increase the amount of unpaid assessments and fees to $13,144.27 and to change the unit owner’s name on the lien to Fannie Mae. The association also sent Fannie Mae a letter stating that because Fannie Mae did not request a statement from the association of amounts due by the unit prior to its acquisition, it was liable for all unpaid assessments, including those accrued before and after the foreclosure sale pursuant to the Michigan Condominium Act (act).

In March 2012, Fannie Mae sued the association, requesting that it be released from the association’s lien and asserting claims for slander of title. The association filed a counterclaim alleging Fannie Mae owed $21,619.27 in unpaid assessments, late charges and legal fees pursuant to the act.

Fannie Mae filed a motion for summary judgment (judgment without a trial) arguing that the assessments claimed were illegal because the lien was extinguished by the foreclosure, and the act provision requiring notice to the association before a transfer did not apply to assignments subsequent to foreclosure. The association also filed a motion for summary judgment.

The trial court determined that the act did not distinguish between types of conveyances, which meant that RBS’s transfer to Fannie Mae was a transfer under the statute. Consequently, because Fannie Mae did not request a written statement of unpaid assessments at least five days before the sale, the association’s lien for unpaid assessments continued, including assessments that accrued before the foreclosure. The trial court granted the association’s motion for summary judgment. Fannie Mae appealed.

Section 559.221 of the act provides that, “[u]nless the purchaser or grantee requests a written statement from the association . . . at least 5 days before sale, the purchaser or grantee shall be liable for any unpaid assessments against the condominium unit together with interest, costs, fines, late charges, and attorney fees incurred in the collection thereof.” However, Section 559.158 of the act provides:

If the mortgagee of a first mortgage of record or other purchaser of a condominium unit obtains title to the condominium unit as a result of foreclosure of the first mortgage, that mortgagee or purchaser and his or her successors and assigns are not liable for the assessments by the administering body chargeable to the unit that became due prior to the acquisition of title to the unit by that mortgagee or purchaser and his or her successors and assigns.

The appeals court concluded that Section 599.158 and Section 599.211 irreconcilably conflict with one another, creating ambiguity within the act. Section 599.158 provides that any purchaser (successor or assign) who acquires title as a result of foreclosure is not liable for assessments that become due before the purchaser obtained title. But Section 599.211 provides that if a purchaser does not request a written accounting of the assessments due on the unit, the purchaser shall be liable for any unpaid assessments, and this section does make a distinction for a purchaser following foreclosure.

When confronted with two conflicting statutory provisions, specific provisions prevail over more general ones. Section 599.158 seeks to eliminate all preexisting assessments, fees and costs once a unit is foreclosed upon, unless the original owner reclaims the property during the six-month redemption period. Thus, because RBS took title as a result of a foreclosure sale, and because Fannie Mae was a successor in interest, the foreclosure acted to eliminate all preexisting assessments. Furthermore, even though Fannie Mae did not comply with Section 599.211 by requesting a statement from the association before it obtained title from RBS, that fact did not restore the assessments that were eliminated by the foreclosure.

As successor to RBS, Fannie Mae was only liable for assessments that accrued after RBS acquired the unit on March 1, 2011. The trial court’s ruling was affirmed in part and reversed in part.

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Concerned Owners Group Has Standing to Sue Developer

Concerned Owners of Thistle Hill Estates Phase I, LLC v. Ryan Road Management, LLC, No. 02-12-00483-CV (Tex. App. Apr. 10, 2014)

Covenants Enforcement/Association Operations: A Texas appeals court ruled that a limited liability company formed by a group of concerned homeowners had standing to sue a developer to enforce a declaration.


Thistle Hill Estates consists of 36 lots located in Denton County, Tex. Ryan Road Management, LLC (Ryan) recorded the Declaration of Covenants, Conditions, and Restrictions for Thistle Hill Estates in 2000, when it began developing the subdivision.

Ryan controlled the Thistle Hill homeowners association from the development’s inception. By 2010, 75 percent of the lots had been sold by Ryan. The lot owners asked Ryan to allow them to elect one-third of the association’s directors as required by the Texas Residential Property Owners Protection Act (act). Ryan refused.

The lot owners created Thistle Hill, LLC (Owners Group) for the purpose of enforcing the property rights of its members. The Owners Group sued Ryan, seeking a determination that Ryan owed the lot owners a fiduciary duty under the declaration and that the homeowners had the right to elect at least one-third of the association’s directors in accordance with the act. The Owners Group asserted that Ryan had used the annual fees collected from property owners for personal use and business ventures unrelated to Thistle Hill. The Owners Group sought an order requiring Ryan to provide it with access to the association’s books and records and an audit and full accounting of how lot owners’ funds were spent since 2000. The Owners Group also sought to recover any monies paid by the lot owners to the association if the monies were not used by Ryan to benefit the subdivision.

Ryan asserted that the Owners Group lacked standing to enforce the declaration and pursue the suit since it was not a property owner in the subdivision. The trial court granted Ryan’s plea to jurisdiction of the court (defensive argument that the court lacks jurisdiction to try the case) based on the standing argument. The association appealed.

The United States Constitution limits the power of the courts to resolving “cases” and “controversies.” One element of the case-and-controversy requirement is that a plaintiff must have standing (a legal right) to raise each claim.

An entity has standing to bring suit on behalf of its members when: (1) its members would otherwise have standing to sue in their own right; (2) the interests it seeks to protect are germane to the entity’s purpose; and (3) neither the claim asserted nor the relief requested requires participation of individual members. The appeals court noted that the fact that the Owners Group did not possess direct, independent standing was not relevant so long as the three conditions of this associational standing test were met.

The Owners Group maintained it was entitled to sue Ryan because it was a limited liability corporation composed solely of lot owners, and Section 11.7 of the declaration specifically authorized lot owners to sue or undertake any other legal process to enforce the declaration. The appeals court held that this satisfied the first standing requirement.

The Owners Group contended that it was formed for the purpose of “protecting, defending, and enforcing the rights of residential owners of property in [the subdivision].” Ryan did not present any evidence disputing these facts. Accordingly, the appeals court found that the Owners Group satisfied the second condition for standing.

The third requirement is often tricky for representative organizations since such suits typically seek to recover damages suffered by individual members. However, when an organization seeks a declaration, injunction or some other form of equitable relief, it can reasonably be supposed that the remedy would benefit those members actually injured.

Here, the Owners Group requested declaratory judgment and sought relief that benefited all members, even though recouping members’ assessments depended on establishing that Ryan had not used member’s money to benefit the subdivision.. The Owners Group did not seek to recoup fees for any individual member but, rather, to benefit the subdivision. Proof of damages did not require participation of any individual member; instead, it required evidence of Ryan’s wrongful expenditures. Thus, the claim satisfied the third condition for standing.

The appeals court reversed the trial court’s order granting Ryan’s plea to jurisdiction and remanded the case for further proceedings consistent with this opinion.

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Developer Did Not Forfeit Title to Vacant Lot

The Retreats at Stone Fountain Condominium Owners Association Board v. Wanninger, L.L.C., No. 4-025/13-0489 (Iowa Ct. App. Apr. 16, 2014)

Developmental Rights/Covenants Enforcement: An Iowa appeals court ruled that nothing in a condominium declaration allowed the association to assume ownership of an undeveloped parcel submitted to the condominium.


The Retreats at Stone Fountain is a condominium complex in Arnolds Park, Iowa. Wanninger, L.L.C., the developer, filed a declaration creating the horizontal property regime in 2005, and established The Retreats at Stone Fountain Condominium Owners Association Board (association) to manage and maintain the common elements.

The declaration anticipated construction of four buildings containing a total of 42 units. Under the declaration, unit ownership includes an undivided 1/42 interest in all common elements.

Due to the decline in the housing market, Wanninger did not construct the fourth building, Building A. Under the declaration, Wanninger retained the right to add additional property to the condominium and to submit one additional building of not more than 12 units to the condominium regime. This right expires on July 1, 2015. Wanninger also reserved the right to withdraw Building A and its land from the project, which expired July 1, 2009.

In late 2007 or early 2008, some of the association’s directors heard that Wanninger had advertised the Building A parcel for sale, and they worried it might be sold for a gas station or other “unsightly” commercial enterprise. In the meantime, the association maintained, landscaped, irrigated and paid property taxes for the undeveloped lot.

Wanninger failed to withdraw the Building A parcel from the project by deadline. On July 14, 2009, the association president executed and recorded an “Affidavit of Possession,” asserting the association was now the titleholder of the Building A parcel. On July 21, 2009, the association filed a quiet title action (a proceeding to establish the plaintiff’s title to property by providing a one-time opportunity for anyone who claimed to own the parcel to prove that ownership).

The trial court conducted a hearing in October 2012. The day before the hearing, Wanninger paid the delinquent taxes due on the parcel. John Wanninger, owner of Wanninger, L.L.C., testified that he believed his placing a “For Sale” sign on the parcel constituted notice to the association of his intent to withdraw the parcel from the condominium regime. Three days after the hearing, Wanninger recorded a supplemental declaration withdrawing the parcel.

The trial court found that Wanninger’s actions did not amount to withdrawing the parcel. In November 2012, the trial court decided the parcel was a part of the common elements owned by the unit owners as tenants-in-common and quieted title in the association. The trial court found the association established title to the parcel because the deeds to unit purchasers conveyed all of Wanninger’s ownership interests in the condominium property. Wanninger appealed.

The association argued that Wanninger no longer had a right to build on the parcel because the declaration granted Wanninger the right to transact business on the property “relating to the construction, sale, lease or rental of units” only until “all units” have been sold. Wanninger contended that “all units” meant all 42 units contemplated by the declaration, including the 12 units in Building A. He argued that nothing in the declaration required him to construct Building A within any specified period of time, and nothing provided for the property to revert to the association if it was not withdrawn from the condominium.

The appeals court interpreted “all units” as unambiguously meaning all 42 units. The declaration also contemplated recording a supplemental declaration setting out the change in each owner’s fractional interest if Wanninger submitted additional property to, or withdrew property from, the condominium.

Further, the appeals court noted that the trial court’s reading of the declaration as “fully divesting” Wanninger of its ownership interest in the parcel after the last constructed unit was sold in March 2009 was not supported by the declaration, and courts do not have the power to rewrite a contract.

While the declaration did require Wanninger to cede control of the association board when all units were sold or July 1, 2009, ceding association control in no way impacts other development rights. In fact, the declaration specifies that certain other development rights continue until July 1, 2015.

Further, the association did not acquire title to the parcel by the adverse possession doctrine, which requires hostile, actual, open, exclusive and continuous possession for at least 10 years. The association’s decision to maintain the parcel and pay delinquent taxes for a year or two is wholly insufficient to claim title by adverse possession.

The appeals court reversed the trial court’s judgment and remanded the case for entry of an order consistent with its finding.

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

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Association Is Not Liable for Contractor’s Injuries

Escareno v. Terra Cotta Commons Condominiums Association, No. 1-12-0682 (Ill. App. Ct. Apr. 9, 2014)

Risks and Liabilities: A condominium association was not held liable for injuries sustained by an independent contractor because it did not retain sufficient control over the work performed.


Terra Cotta Commons is a condominium in Chicago, Ill. The development is managed and maintained by Terra Cotta Commons Condominiums Association (association). The association hired Sherwin Painters, Inc. (Sherwin) to paint portions of the condominium building. Samuel Escareno, one of the painters employed by Sherwin for the project, was injured when he fell from a ladder while attempting to replace a window screen.

Escareno sued the association, seeking to recover damages resulting from the fall. He alleged the association refused to allow the painters to tie their ladders to the building—a request made by Sherwin because of strong wind. Escareno alleged he was injured when his ladder shifted in the wind, causing him to fall. He asserted that the association was negligent in failing to provide him with a safe means to access the areas being painted and in refusing to allow him to tie his ladder to the building.

The association maintained that Escareno’s injuries resulted from his own negligence because he failed to secure his ladder when it was windy. The association filed a motion for summary judgment (judgment without a trial), asserting that its conduct was not the proximate cause (primary cause or act without which the injury would not have occurred) of Escareno’s injuries. The association claimed it did not deny him safe access to the building or forbid him to secure his ladder to the building. The association also asserted it had no control over Escareno’s work and, therefore, had no duty of care. The trial court granted the association’s motion, and Escareno appealed.

Escareno’s claim of liability against the association was based on negligence. In a negligence action, a plaintiff must establish that the defendant owed a duty of care to the plaintiff, that the defendant breached that duty and that the injury was proximately caused by the breach.

There are two possible theories under which the association could be liable for Escareno’s injury. First, under a premises liability theory, a property owner may be liable for physical harm caused to his guests by a condition on the land. Because Escareno claimed that the wind caused him to fall, the appeals court concluded that he had no viable claim for premises liability.

The second possible approach for Escareno was based on employer liability. As a general rule, one who employs an independent contractor is not liable for the contractor’s acts or omissions. A recognized exception to this rule is the “retained control” exception, which provides that one who hires an independent contractor but retains control of the work is liable for injuries to others.  An employer must retain some degree of control over how the work is done for the retained control exception to apply.

It is not enough that the employer has the right to inspect the work or its progress, receive progress reports, make suggestions or recommendations or prescribe alterations or deviations in the work. Rather, for the retained control exception to apply, the employer must have a right to supervise the work in a manner that does not leave the contractor entirely free to do the work in his own way.

In this case, Sherwin provided all the equipment and materials and gave all the directions and instructions on how the work was to be done. The evidence established that the association had no right to supervise Escareno, and Escareno was required to perform his work and paint according to Sherwin’s instructions. Therefore, because the association exercised only a general right to inspect the work’s progress, while Sherwin controlled the methods by which the work was performed, the appeals court concluded that the association owed no duty of care to Escareno and could not be held liable for his injuries.

The trial court did not err when it granted the association’s motion for summary judgment, and that 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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Bank Is Liable for Unpaid Assessments

Bermuda Dunes Private Residences Condominium Association, Inc. v. Bank of America, 133 So. 3d 609 (Fla. Dist. Ct. App. Mar. 7, 2014)

State and Local Legislation and Regulations: A Florida appeals court held that a bank that purchased a condominium unit after foreclosure was not entitled to statutory protection from unpaid assessments that would be afforded to a first mortgagee.


Bermuda Dunes Private Residences Condominium Association, Inc. (association) governs a condominium complex in Orange County, Fla. In June 2007, Bank of America made a loan to Maika and Salvador Martinez, which was secured by a mortgage on Unit 1024 in Bermuda Dunes. In September 2009, Bank of America assigned the mortgage to Federal Home Mortgage Corporation (Freddie Mac).

When the Martinezes became delinquent on the loan, Freddie Mac pursued and was issued a final foreclosure judgment for Unit 1024. Bank of America acquired title to the unit in the foreclosure action.

In preparing to sell the unit, Bank of America asked the association for an estoppel certificate (a statement of any amounts due on the unit). The association demanded $17,987.84 for unpaid assessments due on the unit. Bank of America refused to pay, relying on a safe-harbor provision in the Florida Condominium Act (act) that caps the liability of a first mortgagee or its successor assign who acquires title to the unit by foreclosure or a deed in lieu of foreclosure for unpaid assessments that became due before the title was acquired.

Bank of America sued the association, seeking an order requiring the association to issue an estoppel certificate that complied with the protection afforded under the act.

The association moved to dismiss the action, arguing that Bank of America assigned the mortgage to Freddie Mac, and the evidence clearly showed that Bank of America was neither the assignee nor the successor to the first mortgagee.

Bank of America moved for summary judgment (judgment without a trial). The trial court granted the motion. The association appealed.

In its appeal, the association asserted that a material issue of fact existed regarding the capacity in which Bank of America took title to the unit. Bank of America claimed that it never gave up the mortgage and that Freddie Mac, as servicer of the note, foreclosed the mortgage on Bank of America’s behalf.

The appeals court held that the key for establishing who is entitled to safe-harbor protection under the act is determining who held the rights and obligations under the mortgage at the time of foreclosure, whether as a first mortgagee or as a successor or assignee. If that entity took title to the unit by the foreclosure, its liability for unpaid, past due assessments was limited by the act.

Based on the documentation submitted by Bank of America, the appeals court determined that Freddie Mac was the entity having rights and obligations under the mortgage at the time of the foreclosure, not Bank of America. Although Bank of America took title to the unit by foreclosure, the evidence did not show that it did so as the first mortgagee.

Bank of America next argued that the safe-harbor provisions do not require that it hold the mortgage at the time of foreclosure; it is sufficient if Bank of America, once upon a time, was the first mortgagee. The appeals court disagreed and held that, if Bank of America assigned away its rights as first mortgagee as indicated by the assignment it executed, it is no longer the first mortgagee and not entitled to the act’s benefit.

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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Directors Breached Duties by Failing to Comply with Declaration and Statutory Requirements

Palm v. 2800 Lake Shore Drive Condominium Association, No. 1-11-1290 (Ill. App. Ct. May 2, 2014)

State and Local Legislation and Regulations/Association Operations/Covenants Enforcement: An Illinois appeals court held that directors breached their fiduciary duties by violating requirements for open meetings, board approval and financial practices.


Gary Palm owns a unit in the 2800 Lake Shore Drive Condominium Association (association) in Chicago, Ill. He served on the board of directors from 1992 to 1998. In September 1999, Palm asked the board for documents related to the building’s management. When his request was denied, Palm sued the association, seeking access to the association’s records and a number of reforms on how the board conducts business.

Palm filed two complaints that were dismissed because he failed to provide any factual support for his allegations. Palm filed a third complaint in 2004 and a fourth in 2005. In the last filing, Palm claimed a number of violations of the Illinois Not for Profit Corporation Act (corporation act), the Illinois Condominium Property Act (condominium act), Chicago ordinances and the condominium declaration.

Through a series of hearings and orders issued over three years, the trial court found that some of the board’s practices violated the declaration, the corporation act and the condominium act and granted partial summary judgment (judgment on the facts without a trial) to Palm. The trial court found that the directors’ conduct was “grossly negligent in that they intentionally failed to act in the face of a known duty, demonstrating a conscious disregard for their duties.” The association appealed.

The trial court held that actions taken by the board outside of open board meetings violated the declaration and the condominium act, specifically pointing to the board’s discussions in closed workshop sessions and to canvassing or soliciting directors for comment on association action without a meeting.

The condominium act requires that an association’s bylaws provide for “meetings of the board of managers” to be open to any owner. There are three exceptions to this rule: discussions concerning litigation, employees or owner violations; but the condominium act requires that the vote be taken during an open board meeting. The condominium act defines “meeting of board of managers” as any gathering of a quorum of directors held for the purpose of conducting board business. The association’s bylaws provided that all board meetings shall be open to all owners.

The association argued that the condominium act does not prohibit a board from holding working sessions at which association issues are discussed but not voted upon. After examining the statutory language, the appeals court held that the condominium act’s open meeting requirement encompasses board activities in the workshop executive sessions. Although the board may discuss and consider the three excepted subjects in closed meetings, it is still required to vote on these matters at an open meeting. The appeals court concluded that, not only must all board voting occur at open meetings, so must all board discussion or consideration of association matters, except for discussion or consideration of the three specified exceptions.

The appeals court found nothing in the statute to support the association’s assertion that “conducting board business” should mean only voting on board business. Since no one contested that the board discussed association business in closed workshops and executive sessions, the trial court did not err in finding that the board violated the declaration and the condominium act.

The trial court held that provisions in the association’s management agreement that allowed management to obtain approval for bidding and contracting from one or more officers rather than the whole board violated the declaration and the corporation act and were null and void. The association argued the board had the authority to delegate its power under the declaration.

The declaration provided that the board shall act by majority vote of those present at board meetings when a quorum exists. It further provided that the board is responsible for condominium management and operation but it may delegate such tasks to a manager.

The corporation act allows boards to create commissions or advisory bodies, which may or may not include directors, to make recommendations to the board, but they cannot act on the corporation’s behalf or bind it to any action. However, the 2800 Lake Shore Drive declaration did not provide for such a commission. Therefore, the appeals court held that any board business must be decided by the board as a whole.

Construing the declaration provisions with the corporation act, the appeals court found no authority to permit anything other than a decision by the entire board to approve contracts. The appeals court held that the association must make a choice—it can either delegate the power to enter into contracts without board approval under the declaration provisions, or it can permit the manager to execute contracts with full board approval. As such, the trial court did not err in finding that the management agreement’s contract approval provisions violated the declaration and the corporation act.

The association argued the trial court erred when it found the board violated the declaration and the corporation act by failing to vote on defending the litigation in an open meeting. The trial court ordered the board to vote on whether to continue defending the lawsuit at an open meeting within 30 days.

It was uncontested that the board never voted on litigation matters at open meetings or otherwise. The association president testified that the board had never voted because the association never affirmatively filed suit; the board delegated responsibility for handling collections to the management company, who worked with the association’s counsel on such matters.

The appeals court held that litigation is association business that must be voted on in open meetings. It affirmed the trial court’s grant of summary judgment to Palm on this issue as well as the trial court’s order enjoining the association from continuing its defense without board approval at an open meeting.

The association argued that the trial court erred in ruling that the directors’ breaches of fiduciary duty were done with “gross negligence” because no claim exists for negligently breaching a fiduciary duty. The appeals court found this misconstrued the trial court’s holding. The directors were not found guilty of committing a civil wrong or tort for the negligent performance of their duties. Rather, the trial court found the directors breached their fiduciary duties when they failed to strictly comply with the clear requirements of the declaration and the condominium act.

The association argued that the trial court erred in ruling that the directors breached their fiduciary duties when they transferred surplus income to the reserve account instead of crediting it against owners’ future assessments, as arguably required by the declaration. It argued this was not a breach of duty because the directors acted on advice of counsel in interpreting the declaration to permit this practice. The association urged that, under the business judgment rule, courts are not to interfere with the board’s exercise of business judgment absent evidence of bad faith, fraud, illegality or gross overreaching.

The appeals court noted, however, that if directors fail to exercise due care, they may not use the business judgment rule as a shield for their conduct. One component of due care is that directors must inform themselves of material facts necessary to properly exercise their business judgment. To that end, if a board seeks legal advice before reaching a decision and relies on that advice in reaching its decision, it will be found to have properly exercised its business judgment.

The appeals court found the evidence presented inadequate to show the board received the requisite legal advice and relied on it. The president testified that she thought the practice was based on legal advice given some 10 years earlier to former directors, but there was no written legal opinion and no current director received such legal advice. Therefore, the trial court did not err in finding that the business judgment rule did not protect the directors from their breaches of fiduciary duty with regard to surplus income transfers.

For the reasons stated above, the appeals court affirmed the decision of the trial court.

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

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Short-term Rentals Do Not Violate Covenants

Wilkinson v. Chiwawa Communities Association, 180 Wash. 2d 241 (Wash. Apr. 17, 2014)

Use Restrictions/State and Local Legislation and Regulations: The Washington Supreme Court ruled that short-term rentals did not violate covenants that prohibited commercial use and restricted lots to single-family residential use.


The Chiwawa River Pines community in Chelan County, Wash., consists of a mix of permanent and vacation residences. The development is governed by Chiwawa Communities Association (association).

The community’s covenants restrict lots to single-family residential use only and prohibit industrial or commercial use. The covenants also permit the association’s members to change the restrictions by a majority vote.

Chiwawa residents rented their homes on a short-term basis for decades without controversy. However, as the number of homes available for short-term rental and the frequency of rentals increased, the association noted rising concerns among association members about vacation rentals. In 2011, a majority of association members voted to amend the covenants to prohibit rentals for less than one month or 30 continuous days. Ross and Cindy Wilkinson and other homeowners (collectively, Wilkinson) sued the association to invalidate the rental restriction. Both sides moved for summary judgment (judgment on the facts without a trial).

The trial court granted Wilkinson’s motion, holding that the bar on short-term rentals was invalid and unenforceable. The trial court concluded that the original covenants contemplated there could be rentals because for rent signs were specifically excepted from the sign restrictions, and the covenants placed no limitations on those rentals. The trial court rejected the association’s argument that residential rentals of any duration were a “commercial” use of land and renting a home to unrelated persons violated the single-family residential use covenant. The association appealed.

While Washington courts once strictly construed covenants in favor of the free use of land, this rule no longer applies where the dispute is between homeowners who are jointly governed by restrictive covenants. Courts now seek to ascertain and give effect to those purposes intended by the covenants and place special emphasis on an interpretation that protects the homeowners’ collective interests.

The Chiwawa covenants specify the rights and duties of residents in painstaking detail. It is evident that had the developer wanted to prohibit rentals of a particular duration, it would have done so.

Not only was it manifestly clear to the appeals court that the developer intended to permit vacation rentals without limits on the duration, such rentals were consistent with the prohibition on commercial use. The appeals court held that, if a vacation renter uses a home for eating, sleeping and other residential purposes, this use is residential use, not commercial, no matter how short the duration. In the appeals court’s opinion, the owner’s receipt of rental income, either from long- or short-term rentals, in no way detracts or changes the residential characteristics of the tenant’s use. The payment of business and occupation taxes or lodging taxes also does not detract from the residential character of such use to make the use commercial.

The residential use restriction was incorporated into a covenant provision that restricts the type of structures that can be built and how far from the front line they must be built. Read in context, the covenant restricts only the type and appearance of buildings that may be constructed on the lot, not who may reside there.

The appeals court emphasized that its ruling did not prohibit residential communities from banning short-term rentals; but merely provided that Chiwawa River Pines could not do so through covenants that allowed rentals while prohibiting commercial uses.

Where covenants give a majority of homeowners the authority to change the covenants, but no mention is made about the adoption of new covenants, that authority will not be broadened to allow a simple majority to adopt new restrictive covenants that are inconsistent with the general development plan or that have no relation to existing covenants. This rule protects the reasonable, settled expectation of homeowners by giving them the power to block “new covenants which have no relation to existing ones.”

The appeals court concluded that Wilkinson’s short-term rentals did not violate the ban on commercial use or the requirement that structures be restricted to single-family residential use. Therefore, the amendment barring short-term rentals was invalid, and the trial court’s judgment was affirmed.

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