August 2014
In This Issue:
Residuary Beneficiary Is Not Responsible for Assessments After Property Owner’s Death
Association Did Not Breach Its Fiduciary Duty to Unit Owners
Association Has a Duty to Investigate Common Element Damage
Homeowner May Not Enforce Freedom to Display the American Flag Act
Association Did Not Have Standing to Sue Homeowner
Owners Must Remove Pool Pump House
Owner Cannot Sell Reconfigured Lot as Potential Homesite
Architects Owe Duty of Care to Future Homeowners
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Residuary Beneficiary Is Not Responsible for Assessments After Property Owner’s Death

Homestead at Mansfield Homeowners Association v. The Estate of Lois Mount, No. A-0836-13T1 (N.J. Super. Ct. App. Div. July 8, 2014)

Assessments: A New Jersey appeals court upheld a finding that the residuary beneficiary under the will of her late mother was not responsible for assessments levied on the deceased’s home after her death.

Lois Mount owned a home in the Homestead at Mansfield subdivision, located in Burlington County, N.J. The subdivision is managed by Homestead at Mansfield Homeowners Association (association). Under the association’s governing documents, Mount was responsible for paying assessments. The property also was encumbered by a reverse mortgage that exceeded the home’s value.

Mount left a will in which she made a specific bequest of $2,000 to her son and left “the rest, residue and remainder” of her estate and property her daughter, Patricia Mount, who also was executrix of the estate. There were limited funds in the estate, so Patricia, as executrix, attempted to get the bank to take a deed in lieu of foreclosure, and the estate paid monthly assessments to the association until the estate’s funds ran out.

The association sued both Patricia and the estate for the unpaid assessments. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The association contended that because a deceased’s real and personal property transfers to the persons named in the will under the New Jersey probate statutes, Patricia became the owner of her mother’s home at the time of her mother’s death. Thus, she was responsible for paying all assessments coming due thereafter. Patricia contended that the assessments were owed by the estate.

The trial court determined that the estate was responsible for the assessments and dismissed the association’s claims against Patricia. Noting that the statute made the property transfer “subject to rights of creditors and to administration,” the trial court observed that a creditor had begun foreclosure, and the home was not the subject of a specific gift under the will but was instead included in the remainder of the estate. The association appealed.

The association contended that N.J.S.A. Section 3B: 1-3 codifies what has long been the law in New Jersey—that title to real estate vests in the gift recipient upon the deceased’s death even before admission of the will to probate. The statute provides:

[u]pon the death of an individual, his real and personal property devolves to the persons to whom it is devised by his will . . . subject to rights of creditors and to administration.

Although the property transferred to Patricia as the residuary beneficiary upon her mother’s death, it did so “subject to rights of creditors and to administration.”

The association argued that the quoted language simply provides that the beneficiary takes title subject to claims of creditors, i.e., the mortgagee. The appeals court acknowledged that the property transferred subject to the mortgage; however, the association’s argument ignored the remainder of the clause, which makes the transfer also subject to administration.

Here, the related provisions of the probate code detailing the powers of executors provided the context in which the relevant clause, “subject . . . to administration,” must be understood. The code provides that, in the absence of contrary or limiting provisions in the will, an executor shall have the power to take possession of and manage any property owned by the deceased at the time of death and to collect the rents therefrom and pay taxes, mortgage interest and other charges against the property, except where a specific gift or other disposition of the property is made in the will.

The appeals court found that this statute made plain that because the deceased did not make a specific gift of her home in the will but let it fall into her residuary estate, her executor was responsible for taking possession and managing the property on behalf of the estate, including making payment of any taxes, mortgage interest, and other charges.

The appeals court was satisfied that the trial court was correct that the statute did not make Patricia responsible, as her mother’s residuary beneficiary, for payment of the assessments coming due after her mother’s death. Instead, the statute made those assessments the responsibility of the executor on behalf of the estate.

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.

Association Did Not Breach Its Fiduciary Duty to Unit Owners

Davis v. Innwood Condominium Property Owners Association, Inc., No. 2013-CA-001221-MR (Ky. Ct. App. June 27, 2014)

Association Operations: A Kentucky appeals court dismissed claims by a unit owner that the association breached its fiduciary duty by failing to maintain the common elements properly due to lack of funds. 

Innwood Condominium, in Jefferson County, Ky., was established by a master deed that provides for Innwood Condominium Property Owners Association, Inc. (association) to act on behalf of the owners. The association is governed by a board of directors, all of whom are unit owners.

Innwood residents are a mix of low- and fixed-income persons, including many elderly people and individuals receiving government assistance. Since 2009, Innwood has expended significant funds for brick repairs costing nearly $100,000, significant repairs to the heating system and, more recently, restoring eight units damaged by fire. While insurance covered some of the expense, a special assessment was required to replenish reserves.

Rex Davis purchased a unit in the early 1980s, which he initially rented out. In 2000, he moved into the unit himself and was serving as a director when he sued the association in 2011. He sought to force the association to enforce the governing documents uniformly and for his attorney’s fees and costs. Davis claimed the board breached its duty by failing to maintain the common elements properly, to limit unit occupancy to two adults and to enforce parking regulations and pet rules.

Davis asserted his unit’s value was diminished as a result of the association’s breach of duty, and he submitted an appraisal stating his unit was only worth $17,000, while his property tax valuation was at $30,000. The appraisal stated that the building’s exterior was “inferior” and caused a direct loss in value of 25 to 50 percent. Davis stated the master deed required the complex to be maintained as a “first class” condominium, and this had not been done.

Davis filed a motion for summary judgment (judgment without a trial based on undisputed facts), and the association filed a cross motion. The trial court granted the association’s motion and dismissed all of Davis’ claims upon finding that the business judgment rule applied. Davis appealed.

He claimed the photos of items in need of maintenance he submitted to the court clearly indicated the board breached its duty to maintain the property properly. He argued that material factual issues needed to be decided before the business judgment rule applied, and the trial court had no facts on which to base its finding that there was no self-interest on the part of the directors in making their decisions.

The board maintained it took appropriate action regarding each issue Davis raised. While it conceded that not all issues had been resolved due to lack of funding or the fact that certain residents continued to violate the rules, the board exercised appropriate business judgment with respect to its actions, and it had made reasonable ongoing attempts to address the matters at issue.

To prevail on a claim of breach of fiduciary duty, a plaintiff must prove that (1) the defendant owed a fiduciary duty to the plaintiff, (2) the defendant breached that duty and (3) the plaintiff suffered damages as a result of the breach. The appeals court acknowledged that the board owed a fiduciary duty to the unit owners. However, the evidence indicated that the board had addressed many of the issues at board meetings and determined that it would make repairs. The board notified Davis of a special assessment to repair the parking lots, sidewalks and gutters.

The appeals court concluded the trial court correctly applied the business judgment rule to the case. The business judgment rule is a presumption that in making a business decision not involving self-interest, corporate directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. The evidence indicated that the board sought guidance from its management company and local realtors in making decisions about how to best address Davis’ issues. Based on the advice it received, the board voted to approve the special assessment for repairs and maintenance. The appeals court was not persuaded that the board breached its duty by considering the economic impact of a special assessment on its residents and the problems involved with the decision.

The general rule of law is that courts will not interfere with corporate management unless there is actual fraud or such a waste of corporate property or funds that it practically amounts to fraud. Davis did not allege fraud, and the appeals court found no evidence that fraud had occurred. Accordingly, the appeals court affirmed the grant of summary judgment to the association and dismissal of Davis’ claims.

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

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Association Has a Duty to Investigate Common Element Damage

Fisher v. Shipyard Village Council of Co-Owners, Inc., No. 5241 (S.C. Ct. App. June 25, 2014)

Association Operations/Covenants Enforcement/Powers of the Association: A South Carolina appeals court ruled that a board had a duty to investigate the cause of damage to common elements and to pursue responsible parties, but its investigation will be examined under the business judgment rule.

Shipyard Village is a condominium development in Pawleys Island, S.C., managed by Shipyard Village Council of Co-Owners, Inc. (association). Shipyard Village was built in two phases—Buildings A and B were completed in 1982 and Buildings C and D in 1998.

The master deed establishing the condominium regime provides that balcony doors, door frames, window glass, screens, window frames and casings are part of each unit. Other exterior elements are common elements. Maintaining and repairing common elements are association responsibilities. However, if common elements are damaged due to neglect or abuse by a unit owner and insurance proceeds are insufficient to cover the repair costs, the unit owner will be charged the difference as an individual assessment.

In 1990, the association waterproofed the buildings, and an inspection in 1994 indicated the waterproofing was performing as intended with no problems.

Over the years, Buildings A and B experienced leaks at the windows and balcony doors. In August 1999, the association notified owners in Buildings A and B that they were responsible for waterproofing the thresholds and window frames on their units. In 2002, the association hired an engineering firm to study the windows in Buildings A and B. It determined some of the windows leaked when sprayed by a hose.

The engineer discovered some of the windows had been replaced after Hurricane Hugo in 1989 and appeared to be prefabricated instead of custom made; the windows were smaller than the openings, and wood framing had been installed to fill the gaps. The replacement windows were also thinner than the original windows. However, the association’s attorney noted the statute of limitations did not allow the association to pursue any action for deficiencies in the replacement windows.

The association hired a construction company to further examine the leaks, and it determined that water was leaking through the stucco on the buildings’ exteriors instead of the windows because there was no window flashing. It also found that the windows were improperly sized, poorly installed and stucco had been used to fill in gaps around the windows.

In 2004, Ben and Katie Morrow, who owned a unit in Building B, had water intrusion problems, and they replaced their windows. They continued to experience leaks afterward and hired an architect and an engineer to investigate the cause. The architect reported there was water migration through the building’s exterior wall that was not related to the window sill, jamb or header. The engineer reported that repairing one window would not solve the leak problem, and an entire vertical stack of windows needed to be removed, flashed and replaced at the same time.

The board considered amending the master deed to include windows and sliding doors as common elements because it was concerned about window uniformity, complying with building codes, stucco being damaged during replacement, individual owners’ ability to procure competent contractors and the need to replace entire stacks at the same time. The estimated cost to replace all the windows in Buildings A and B was $2.48 million.

An amendment to the master deed required the vote of 66.68 percent of the owners. At the 2006 annual meeting, only 63.59 percent of the owners voted in favor of the amendment. The board decided to leave the vote open for an additional 30 days to allow voting by owners who had not voted at the meeting or by proxy. After leaving the vote open, more than 80 percent of the owners voted in favor of the amendment, and the board believed the amendment had passed. In October 2006, an amendment was recorded that designated window glass, screens, frames and casings as part of the limited common elements rather than the unit. Another amendment was recorded in November 2007 to correct the omission of sliding doors from the limited common elements in the 2006 amendment.

At the 2008 annual meeting, the board reported that Buildings A and B needed extensive repairs estimated to cost between $12 and $13 million, which would be funded through a special assessment charged to all owners.

In January 2009, some Building C and D unit owners sued the association for breach of the master deed, seeking injunctive relief (order prohibiting someone from doing something or commanding someone to do something) and a declaratory judgment (adjudication of the rights and status of the litigants) stemming from the 2006 amendment. The board called a special meeting to re-vote on the amendment; however, only 48.31 percent of the owners voted in favor of the amendment.

The association notified owners that repairs would begin in September 2009, the cost of which was estimated at almost $11 million. The board planned to finance the cost through a special assessment, which ranged from $68,471 to $88,398 per unit. To pass a special assessment, 51 percent plus one vote was needed, but only 44.26 percent voted in favor of the assessment, so the board informed owners the repair costs would be incorporated into the 2010 and 2011 operating budgets and the regular assessments.

In October 2009, additional Building C and D unit owners sued the association, alleging negligence and gross negligence, negligent and gross negligent misrepresentation, breach of fiduciary duty and breach of the master deed. This suit was consolidated with the prior suit.

Another engineer was hired by the association, who reported that the extensive repairs were needed because the project is located ocean front and was constructed nearly 30 years ago. He indicated that “similarly aged and located properties undergo major rehabilitations every 25 to 30 years.”

In May 2012, the unit owners moved for summary judgment (judgment without a trial based on undisputed facts) or partial summary judgment on their negligence and breach of fiduciary duty claims. The trial court granted the motion for partial summary judgment, holding that the bylaws and master deed imposed duties on the board to enforce, investigate and correct known violations of the governing documents and the South Carolina Horizontal Property Act. The trial court found that the board breached its duty to investigate substantial evidence showing that owners had neglected maintenance of their leaking windows and sliding doors, which allegedly caused damage to the common elements. The trial court further determined the board was precluded from asserting the business judgment rule based on its lack of good faith in enforcing the 2006 amendment. The association appealed.

The association argued the trial court erred in finding it had a duty to investigate whether to assess individual owners for damage to the common elements because the master deed and bylaws did not contain such a duty. The appeals court disagreed.

The appeals court noted that when master deeds show an association has the obligation to maintain the common elements and a problem arises, the association has the duty to pursue responsible parties. For the association to perform its duty to recover from the responsible parties, it must first find out who caused the problem. Therefore, the trial court properly granted partial summary judgment to the unit owners on the duty to investigate.

However, the appeals court agreed with the association that the trial court erred in holding that the business judgment rule did not apply. In a dispute between homeowners and the association, the directors’ conduct should be judged by the business judgment rule, and the directors’ decision will not be set aside by judicial action absent a showing of bad faith, dishonesty or incompetence.

The business judgment rule only applies to intra vires acts (within the board’s scope of authority), not ultra vires acts (outside the scope of authority). Since the master deed and bylaws created a duty for the association to investigate, an investigation should be examined under the business judgment rule to determine if the association met its duty. There is a presumption under the business judgment rule that the board acted in good faith, and the burden falls on the unit owners to show the lack of good faith. Further, if the master deed or bylaws specified how the association’s duties should be performed, the business judgment rule would not allow the board to deviate from those specifications simply because the board did what was reasonable.

The association argued that the trial court erred in determining it breached a duty to the unit owners because it did investigate the cause of the water leaks and received contradicting reports. The appeals court agreed.

The association hired many construction and engineering companies and consultants to determine what was causing the leaks. The board was informed by its attorneys over the years that initiating a lawsuit would be expensive and likely unproductive. Accordingly, the appeals court held that the grant of summary judgment to the owners on this issue was in error.

The case was remanded back to the trial court to proceed with a trial.

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

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Homeowner May Not Enforce Freedom to Display the American Flag Act

Costanza v. Tchefuncte Harbour Association, Inc., No. 14-0488 Section “F,” U.S. Dist. Ct. (E.D. La. July 14, 2014)

Covenants Enforcement/Federal Law and Legislation: A U.S. district court dismissed a complaint against an association, holding that a homeowner could not enforce the Freedom to Display the American Flag Act of 2005 against the association.

Thomas Michael Costanza owns a townhouse in a development operated by Tchefuncte Harbour Association, Inc. (association) in Madisonville, La. In May 2013, Costanza began displaying the American flag outside the door to his townhouse. The association advised him that the flag violated the covenants and restrictions. The parties tried to discuss the matter, but after negotiations failed, Costanza continued to display the flag. In October 2013, the association recorded a lien against Costanza’s property, a portion of which related to his display of the flag.

After more failed negotiations and alleged harassment by the association, Costanza sued the association, seeking a declaration that the association’s actions were invalid under the Federal Freedom to Display the American Flag Act of 2005 (act).

The association sought to dismiss Costanza’s claims on the ground that the act does not provide a private right of action. The court agreed.

The act, codified as a note to 4 U.S.C. Section 5, provides:

A condominium Association, cooperative Association, or residential real estate management Association may not adopt or enforce any policy, or enter into any agreement that would restrict or prevent a member of the Association from displaying the flag of the United States on residential property within the Association with respect to which such member has a separate ownership interest or a right to exclusive possession or use.

Noticeably absent from the act, however, is an express private right of action, any explicit enforcement mechanism or remedy or any reference to penalties or sanctions to be imposed for violations.

The U.S. Court of Appeals for the Fifth Circuit applies four factors to determine whether a private right of action should be inferred from legislation: (1) whether the plaintiff is one of a class for whose especial benefit the statute was enacted; (2) whether there is an indication of legislative intent to create or deny such remedy; (3) whether such a remedy would be inconsistent with the underlying legislative purpose; and (4) whether the cause of action is one traditionally relegated to state law.

The court observed that, no matter how questionable the association’s action, the fact that a federal law has been broken and some person harmed did not automatically allow that person to take action. The court concluded that it was not Congress’ intent to create the private right of action Costanza asserted because there is simply nothing in the text to support a private claim. Nor was there any reference to a remedy, an enforcement mechanism or penalties for violations. Likewise, there was nothing implicit in the act that suggested congressional intent to establish a private right of action.

While the court did ponder why Congress would have enacted a statute that did not grant the protected persons a remedy, the court lacked the authority to create a remedy where Congress did not.

The court granted the association’s motion to dismiss.

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

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Association Did Not Have Standing to Sue Homeowner

Tuscany Grove Association v. Gasperoni, No. 314663 (Mich. Ct. App. June 24, 2014)

Covenants Enforcement/Use Restrictions: A Michigan appeals court ruled that, because an association failed to obtain pre-litigation approval from its members as required by its bylaws, it did not have standing to sue an owner to enforce use restrictions.

Tuscany Grove is a development in Shelby Township, Mich., composed of freestanding condominiums. The development is managed and maintained by Tuscany Grove Association (association). Sergio Gasperoni owns a condominium in the community.

In the spring of 2012, Gasperoni presented a backyard renovation plan to the association. The plan included installing a pool and pergola surrounded by a fence. Under the bylaws, outdoor renovations must be approved by the association, and the association approved his plan. However, as construction proceeded, neighbors reported that Gasperoni’s renovations were more extensive than what was approved, including a fireplace, brick pizza oven and a fence around the property perimeter, which was expressly prohibited under the bylaws. Gasperoni ignored the association’s orders to halt the renovations.

In July 2012, the association sued Gasperoni to stop him from completing the renovations and to remove the unapproved items. Gasperoni claimed he installed the perimeter fence without first securing approval because of safety concerns, and he had submitted “as-built” plans to the association for approval but received no response.

He also argued the association lacked standing to file suit because the bylaws required a vote of 66-2/3 percent of the owners before funds could be expended on litigation. The association responded that provisions of the Michigan Condominium Act permitting associations to enforce property restrictions gave the association standing, and the act must be deemed superior to the bylaws.

The association further argued that the voting provision was void as against public policy because it would permit a minority of owners in support of non-conforming uses to block actions to enforce the agreed-upon restrictions. Gasperoni moved for summary disposition (judgment without a trial based on undisputed facts).

The trial court found that the bylaws plainly required the association to obtain owner approval before filing suit. Since the association did not do so, the trial court granted Gasperoni’s motion and dismissed the case.

After the case was dismissed, the association began collecting votes to authorize the suit and asked the court to reconsider the decision; the court denied its requests. The association appealed.

The Tuscany Grove master deed provides that the association has the power to take any action required of or permitted by the association, unless such power is specifically reserved to the members. The appeals court found that authorizing litigation is such a power specifically reserved to the members since the bylaws clearly provide that the association did not have authority to incur legal expenses without prior approval of its members.

The only exception in the bylaws is collecting delinquent assessments. Including an exception in the bylaws implies that all other litigation requires prior approval. Under the rule of construction the express mention of one thing implies the exclusion of another. Accordingly, the trial court correctly determined that the association lacked authority to file the suit.

Moreover, even when the association begrudgingly sought the necessary votes to file suit, it did not do so in conformance with the bylaws. The association did not collect the votes at a meeting, and it did not satisfy the bylaws’ requirements for voting outside of a meeting. The appeals court concluded that even this attempt fell short.

The association argued the requirement for pre-litigation approval violated general principles of the condominium act, and it discussed at length the need for uniformity in condominium developments and strict enforcement of association powers. It highlighted the fiduciary duty owed by the association to owners to ensure that uniformity is maintained through rule enforcement. The appeals court found, nevertheless, that condominium purchasers have freedom to contract, and in the process of drafting the Tuscany Grove governing documents, someone had decided it was important for the owners to have control over litigation spending.

The appeals court made no judgment on the merits of the association’s underlying claims, but affirmed the trial court’s order dismissing the complaint.

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

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Owners Must Remove Pool Pump House

Oakwood Meadows Homeowners Association v. Urban, No. 316193 (Mich. Ct. App. June 26, 2014)

Covenants Enforcement/Use restrictions: A Michigan appeals court ruled that an owner’s pool pump house must be removed because it violated a restrictive covenant that prohibited structures other than one dwelling on a lot.

Frank and Carol Urban own a home in the Oakwood Meadows Subdivision in Green Oak Township, Mich., which is governed by Oakwood Meadows Homeowners Association (association). When the Urbans purchased their home in 1984, the property had an in-ground swimming pool with a concrete deck that was surrounded by a privacy fence. The pool had an electric pump and gas heater. In 2008, the Urbans built a pump house to protect the pump and heater from the elements. The pump house is a small, wood frame structure within the fenced-in area. The roof is shingled and rises a few feet above the fence. The total cost of the pump house was $5,800.

In November 2011, the association sent the Urbans a letter informing them that their pump house violated the restrictive covenants and demanding they remove the structure within 21 days to avoid legal action. When they refused to comply, the association filed suit, seeking an order that the pump house be removed.

Oakwood Meadows’ use restrictions provide:

No building or structure shall be erected, altered, placed, or permitted to remain upon any lot other than one detached one [sic] family dwelling not exceeding two stories in height. . . . No outbuildings, sheds, detached garages or the like shall be erected, placed or permitted to remain upon any lot.

The trial court concluded that the pump house was only a slight or technical violation of the restrictions and dismissed the complaint. It reasoned that a pool surrounded by a fence is permitted under the restrictions, so what goes inside the fence to service the pool should be allowed, and that the pump house does not cause irreparable injury to the neighborhood. The trial court permitted the pump house to remain so long as the pool remained and was properly maintained. The association appealed.

The Urbans argued that a negative use restriction, which states specifically what cannot be on the property, should be strictly limited to items enumerated, and all other uses should be permitted. They contended that because pump houses were not specifically restricted, the use was permitted. However, the restriction states that sheds, outbuildings and the like are prohibited. Therefore, the appeals court found that the principle of ejustdem generis (of the same kind, class or nature) applied, so that the prohibition covered not only enumerated items but also items of like character.

The trial court found that the restricted items served as storage structures, which was not the pump house’s purpose. However, the appeals court found the restriction’s goal to be aesthetics. The restriction recognizes the necessity of a dwelling, but it restricts other structures to further the aesthetic purpose. The restriction’s first two sentences clearly state that no buildings other than the dwelling and attached garage are permitted.

The appeals court found no ambiguity in the restriction. The pump house violated the express terms of the restriction; therefore, the question of the proper remedy arose.

A breach of a use restriction, no matter how minor or how minimal the damage, can be enforced. The recognized exceptions are (1) technical violations in the absence of substantial injury, (2) changed conditions and (3) limitations and laches (unreasonable delay in enforcing the restriction).

A technical covenant violation has been defined as a slight deviation or a violation that does not add to or take from the purpose of the general development scheme. The Oakwood Meadows general development scheme contemplated a neighborhood free of sheds and outbuildings. The existence of a shed clearly would take away from this purpose.

Laches is an equitable defense similar to a statute of limitations. For laches to apply, the defendant would have to show it was prejudiced by a lack of diligence in pursuing the claim. Here, the evidence did not demonstrate a lack of diligence. Although the pump house was built in June 2008, when the association became aware of the pump house in late 2010, it immediately contacted the Urbans. When the Urbans refused to comply, the association sent a demand letter in November 2011 and filed suit in January 2012.

The association pointed out it was not a police authority. It did not go around looking for violations. It merely reacted to violations that were reported. Once the pump house was reported, the association acted promptly to address the violation. Even if the delay between the pump house’s construction and the association’s suit wasconsidered unreasonable, the facts did not support that the Urbans were prejudiced by the delay. If the association had sued to enjoin the Urbans the day after the pump house was constructed, they would have faced just as much economic waste as if the association waited 10 years to sue.

The Urbans urged the court to take into account the hardship they would endure if forced to remove the pump house. Not only would their $5,800 investment be wasted, but they would lose the benefit of protecting their pool equipment from the elements. They also asserted that their immediate neighbors would lose the benefit of the noise-reducing effect of the pump house. They argued that the association failed to demonstrate how the neighborhood was harmed by the pump house.

The appeals court noted that the law was clear—consideration of relative harm was not appropriate. When no equitable exceptions apply, the restriction is enforced, and a trial court is not permitted to engage in a balancing of relative harm.

The appeals court reversed the trial court judgment dismissing the case and remanded the case to the trial court for an order requiring the Urbans to bring the property into compliance with the restrictions.

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

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Owner Cannot Sell Reconfigured Lot as Potential Homesite

Shader v. Hampton Improvement Association, Inc., No. 845, Sept. Term, 2013 (Md. Ct. Spec. App. June 26, 2014)

Use Restrictions: A Maryland appeals court affirmed a ruling that a restrictive covenant prohibiting more than one residence on any lot shown on the original subdivision plat was enforceable by the association.

Hampton is a residential community surrounding the grand Hampton Mansion and estate, a National Historic Site in Baltimore County, Md. Since 1931, the Hampton community has been subject to restrictive covenants that limit residential density, preserve spacious lots, restrict development to single-family homes and harmonize, to some extent, the appearance of homes in the neighborhood.

Before it was a National Historic Site, the Hampton Mansion and estate were privately owned by the Ridgely family. In 1929, John Ridgely, Jr. established the Hampton Company and began developing a portion of the estate property. The Hampton Company recorded Plat No. 1 in 1930 and recorded restrictive covenants and easements (covenants) in 1931. The use restrictions in Paragraph C of the covenants provide that “no more than one dwelling may be erected on a Lot,” with the term “Lot” being defined as a tract shown on the 1930 plat.

In 2002, Scott and Anna Shader purchased two parcels identified as 606 East Seminary Avenue: Lot 59, a 2.246-acre parcel containing a house and the eastern portion of Lot 75, a 1.457-acre vacant parcel contiguous to Lot 59. In the 1940s, the Hampton Company divided Lot 75 by conveying the 1.457-acre parcel to Raymond and Louise Moore, who owned Lot 59. The deed conveying the parcel to the Moores provided that “at no time shall any dwelling be erected on the lot hereby conveyed.” A home exists on the remaining portion of the original Lot 75.

In 2004, the Shaders reconfigured the lots to create two separate properties, 606 East Seminary Avenue and 606A East Seminary Avenue. In 2009, they listed their home for sale and simultaneously listed the 606A property for sale as a buildable lot.

Hampton Improvement Association, Inc. (association) was formed in the 1950s by John Ridgely, Jr. It is the successor to the Hampton Company, now defunct. The association sent the Shaders and their listing agent a letter reminding them of the prohibition against constructing more than one house per lot in September 2009.

In 2012, the Shaders sued the association, seeking a determination that the covenants did not prohibit building a home on the 606A parcel. They subsequently filed a motion for summary judgment (judgment without a trial based on undisputed facts). The trial court denied the motion, and the Shaders appealed.

The Shaders asserted that the trial court erred when it failed to declare that the one-house-per-lot restriction as shown on the 1930 plat had been waived by abandonment. They asserted that various buildings throughout the neighborhood violated the restriction. As proof, they submitted photos showing outbuildings, detached garages, guest houses, pool houses, sheds and gazebos. The Shaders urged that the Paragraph C restriction was intended to preclude construction of any building whatsoever other than a single-family home or garage on each lot.

Conversely, the association argued that the purpose of the Paragraph C restriction, which it duly enforced, was to maintain large, single family properties with low residential density. Association representatives also testified that they did not view any of the detached structures shown in the Shaders’ photos as being a second residential dwelling.

A cardinal principle in construing restrictive covenants is that courts should be governed by the original parties’ intent as it appears, or is implied, on the instrument itself. The court should only look beyond the text when the original parties’ intent and the restriction’s purpose are not clear from the actual language in the covenant.

The appeals court concluded the Paragraph C restriction was not ambiguous, and the original parties’ intentions were clear: to restrict each Hampton lot’s use to single-family residences. Even if Paragraph C was ambiguous, the trial court did not err in its factual finding as to the restriction’s purpose.

The appeals court shared the trial court’s conclusion that, although the Shaders were able to show numerous instances of separate structures throughout the community, they were unable to demonstrate construction of a second residence on a single lot.

The appeals court affirmed the trial court’s judgment in the association’s favor.

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

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Architects Owe Duty of Care to Future Homeowners

Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP, No. S208173 (Cal. July 3, 2014)

Warranties: The California Supreme Court held that condominium development architects had a duty of care to future homeowners to protect against negligent design work, even if they did not actually build the project or exercise ultimate control over construction decisions.

Skidmore, Owings & Merrill LLP and HKS, Inc. (collectively, architects) provided architectural and engineering services for the Beacon residential condominium, a complex of 595 units in San Francisco, Cal. Although units were rented out for two years after construction, the architects provided their services knowing finished construction would be sold as condominiums.

Beacon Residential Community Association (association) was formed before construction commenced and the covenants, conditions and restrictions were recorded. The association sued several parties involved in the condominium’s construction, including the original owners, the developers and the architects. The association alleged that the architects’ negligent design work resulted in defects, including solar heat gain, extensive water infiltration, inadequate fire separations, structural cracks and other safety hazards that rendered the units uninhabitable and unsafe during certain periods. The association asserted that the solar heat gain was due to the architects’ approval, contrary to state and local building codes, of less expensive substandard windows and a building design that lacked adequate ventilation.

The association claimed the architects not only provided original design services at the project’s outset, but played an active role throughout the construction process, coordinating the design and construction teams’ efforts, conducting weekly site inspections, recommending design revisions as needed and monitoring compliance with the design plans.

The architects contended they owed no duty of care to the association or its members. The trial court agreed and dismissed the case. The trial court held that the allegations did not show that either architect went beyond the typical role of an architect, which was to make recommendations to the owner. As long as the final decision rested with the owner, there was, in the trial court’s view, no duty owed by the architects to the future condominium owners. The association appealed.

The appeals court reversed, holding that the architects owed a duty of care to future homeowners. The architects appealed to the supreme court.

Actionable negligence occurs when the duty to use due care is breached and that breach is the primary cause of the resulting injury. The supreme court considered whether design professionals owe a duty of care to an association or future homeowners in the absence of any contract between the design professional and the association or the homeowner.

California case law establishes six factors that may determine whether a duty of care exists between a plaintiff and a defendant in the absence of a contractual relationship: (1) the extent to which the transaction was intended to affect the plaintiff; (2) the foreseeability of harm to the plaintiff; (3) the degree of certainty that the plaintiff suffered injury; (4) the closeness of the connection between the defendant’s conduct and the injury suffered; (5) the moral blame attached to the defendant’s conduct; and (6) the policy of preventing future harm.

The court focused on three considerations: (1) the closeness of the connection between the architects’ conduct and the association’s injury; (2) the limited and wholly evident class of persons and transactions that the architects’ conduct was intended to affect; and (3) the absence of private ordering options that would more efficiently protect homeowners from design defects and resulting harm.

The supreme court held that the principal architect owes a duty of care to future homeowners, even if the architect does not actually build the project or exercise ultimate control over construction decisions. A property owner typically relies on an architect’s specialized training, technical expertise and professional judgment. The architect is licensed and regulated by the state. Among all those involved in the project, only the architects possessed unique expertise, special competence and professional judgment about adequate ventilation and code-compliant windows.

The supreme court was not persuaded by the architects’ claim that the connection between their conduct and the association’s injury was attenuated because the developer was aware of and concealed the defects from purchasers. This allegation, if true, could inform whether the architects’ conduct was the proximate cause of the association’s injury. Because the developer’s misdeeds derived from the architects’ allegedly negligent conduct, they did not diminish the connection between the architects’ conduct and the association’s injury when determining duty of care. The architects’ work was intended to affect the future homeowners, and the transaction was intended to provide safe and habitable residences for future homeowners, a specific, foreseeable and well-defined class of potential claimants.

The supreme court concluded that the allegations in the association’s complaint were sufficient, if proven, to establish that the architects owed a duty of care to the homeowners who constitute the association and that the trial court erred in dismissing the case. The supreme court affirmed the appeals court’s reversal of the trial court’s judgment.

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

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