Recent Cases in Community Association Law

Law Reporter provides a brief review of key court decisions throughout the U.S. each month. These reviews give the reader an idea of the types of legal issues community associations face and how the courts rule on them. Case reviews are for information only and should not be applied to other situations. For further information, full court rulings can usually be found online by copying the case citation into your web browser.

Development Right Expired When Developer No Longer Owned Property

Todd Hollow Apartments at Deer Mountain, LP v. Homes at Deer Mountain Homeowners Association, Inc., 2015 UT App. 190 (Utah Ct. App. Aug. 6, 2015)

Canyon Ridge Apartments at Deer Mountain, LP (developer) developed the Deer Mountain Resort Subdivision in Wasatch County, Utah. The developer recorded master covenants, conditions and restrictions (declaration) and created the Homes at Deer Mountain Homeowners Association, Inc. (association) to govern the subdivision.

The declaration gave the association the authority to levy assessments against all its property to maintain and operate the common areas and provide utilities and other services. The developer retained the right to withdraw property it owned from the declaration’s coverage (the withdrawal option). The declaration also provided that the developer’s rights could be assigned.

The developer constructed an apartment complex on 26 acres of land in the subdivision, which Todd Hollow Apartments at Deer Mountain, LP (Todd Hollow) purchased. By 2012, Todd Hollow had become dissatisfied with the association and wanted to withdraw the apartments from the declaration.

The developer assigned the withdrawal option (the assignment) to Todd Hollow, which then recorded a declaration amendment purporting to withdraw the apartments from the declaration (the amendment).

The association challenged the validity of the assignment and the amendment. The association also continued to bill Todd Hollow for assessments. In October 2012, after Todd Hollow failed to pay the assessments, the association recorded a lien against the apartments in the amount of $24,446 plus interest, late fees, attorney’s fees and costs. Todd Hollow twice asked the association to remove the lien, but the association refused. In May 2013, Todd Hollow filed suit against the association to nullify the lien.

The trial court dismissed the suit, finding that the assignment and the amendment were invalid. Todd Hollow appealed.

The association argued that the withdrawal option expired by its own terms prior to the assignment because the developer did not own any property subject to the declaration at the time of the assignment. The developer sold its last remaining interest in the project in 2005, seven years before the assignment. Todd Hollow asserted that the withdrawal option was a right that could still be assigned even after the developer no longer owned any property to which the withdrawal option could attach.

The appeals court agreed with the association based on the principle that the assignee acquires the rights and remedies of the assignor at the time of the assignment. If the developer could not exercise the right at the time of the assignment, then it had no right that could be assigned to Todd Hollow. The assignor cannot assign more than it holds. Accordingly, Todd Hollow received no withdrawal option in the assignment.

The trial court’s judgment was affirmed.

Association May Be Liable for Not Removing Snow from Community Sidewalks

Qian v. Toll Brothers Inc., No. 073982 (N.J. Aug. 12, 2015)

The Villas at Cranbury Brook Homeowners Association (association) governs The Villas at Cranbury Brook (Villas), an age-restricted community containing about 102 detached units in Plainsboro, N.J. Owners take title only to the home, with all of the remaining land in the community being owned by the association.

The association’s bylaws provide for the association to maintain the common area according to “accepted standards.” The association hired Integra Management Corp. (Integra) to manage the common area and Landscape Maintenance Services, Inc. (Landscape) to provide snow-removal services. Landscape’s responsibilities included removing snow and ice from the Villas’ roads, parking areas, driveways and sidewalks when two or more inches accumulated. If accumulation was less than two inches, the association had to specifically request removal.

In December 2008, a snowstorm with freezing rain led to about one-and-a-half inches of ice on the sidewalks. The association asked Landscape to salt the roads, but it did not ask Landscape to clear sidewalks or walkways. Two days later, additional freezing rain accumulated, but Landscape did not apply salt or clear sidewalks or roads. Later that day, Cuiyun Qian and her husband walked a half mile through the Villas to a store. On their way home, Qian slipped and fell on a common area sidewalk, injuring her wrist and shoulder.

Qian filed a personal-injury suit against the association, Integra, Landscape and Toll Brothers Inc., the Villas’ developer. The N.J. Supreme Court had previously held that residential property owners have no common law duty to clear snow and ice from public sidewalks, and the failure to do so does not expose the owner to tort liability, even where a local ordinance requires residential owners to clear snow or ice from public sidewalks on their property.

The trial court determined that the Villas’ sidewalks were the functional equivalent of public sidewalks. In addition, the association’s bylaws provided that the association would not be liable to unit owners for injuries occurring on the common property unless they were the result of the association’s willful, wanton or gross negligence.

Accordingly, the trial court granted summary judgment (judgment without a trial based on undisputed facts) in favor of the association and Integra. The trial court dismissed the claims against Toll Brothers after determining that the developer no longer controlled the Villas. The trial court determined that public sidewalk immunity did not apply to Landscape since it was paid for its services. Finding that a question remained concerning whether Landscape exercised due care in fulfilling its contractual obligation to remove snow and ice, the trial court denied summary judgment to Landscape.

Qian appealed to the Appellate Division, which affirmed the ruling. Qian appealed further to the Supreme Court.

The Supreme Court held that residential public-sidewalk immunity does not apply to private sidewalks owned by a common-interest community. The Supreme Court determined the key distinguishing point between a public and a private sidewalk is who owns or controls the sidewalk, not who uses it. While New Jersey law provides limited immunity to associations from certain suits brought by unit owners, an association does not have immunity for injuries caused “by its willful, wanton or grossly negligent act of commission or omission.” Therefore, the association has a duty based on premises-liability common law to keep its private sidewalks reasonably safe.

Considering the fact that the Villas is restricted to persons 55 years of age and older, a population more susceptible to serious injuries from falls, the Supreme Court determined it was error to grant summary judgment to the association without considering whether the association breached its duty to keep the sidewalks reasonably safe for its residents.

The Supreme Court vacated the summary judgment grant and remanded the case for further proceedings.

Insurer Must Defend Claims Against Owners

Market Lofts Community Association v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. CV 15-03093-RGK (MANx) (C.D. Cal. July 30, 2015)

Market Lofts Community Association (association) governs a mixed-use condominium in Los Angeles, Calif. In 2011, the association sued the condominium’s developer, a parking garage owner and several others, including three former board members (former directors), alleging that the developer had violated a parking agreement (the underlying suit) by charging the association’s members parking fees.

In January 2012, the former directors filed claims with National Union Fire Insurance Co. of Pittsburgh, Pa. (National Union), which had issued the association’s directors’ and officers’ liability insurance policy (D&O policy). The D&O policy provided coverage for claims made against the association and its current and former board members. National Union denied the claims, and the former directors sued National Union. The court upheld the coverage denial because the D&O policy excluded coverage for claims made by the association.

In September 2014, the developer and the garage owner filed cross claims in the underlying suit against approximately 300 association members. The developer alleged that the association members or the original unit purchasers agreed in their purchase agreements to be bound by the condominium’s governing documents, which specifically reference the parking fee obligation. The association filed a new suit against National Union seeking coverage for the claims brought against its members. National Union again denied coverage, stating that the association’s members were not insured under the D&O policy.

National Union argued that the case should be dismissed because it had no duty to defend the association’s members. The association asserted there was potential for coverage that required National Union to defend the association’s members.

“Under a liability policy, an insurer ‘must defend a suit which potentially seeks damages within the coverage of the policy.’ ” To determine if a defense duty exists, a court must compare the lawsuit’s allegations with the policy’s terms. The existence of a defense duty does not turn on the ultimate outcome of the case, but on those facts known to the insurer when the lawsuit commences. “Hence, the duty may exist even where coverage is in doubt and ultimately does not develop.”

National Union argued that there was no coverage under the D&O policy because the developer did not file any claims against the association, only its members. The association argued that a claim “made against” it should include claims that—in an improper attempt to circumvent the association’s interest—name the association’s members as defendants, but against which the association has a statutory right to defend.

Under California law, an association has the authority to institute, defend, settle or intervene in litigation pertaining to enforcing governing documents. In addition, California law allows one or more parties to represent the interests of many parties in a class action lawsuit when the question is of common or general interest and when the parties are so numerous that it would be impractical to bring them all before the court.

The court determined that the association could defend the suit on its members’ behalf since every member was subject to the same parking charges and would be similarly affected.

The court also found that the phrase “made against” in the D&O policy was ambiguous because it was subject to two reasonable interpretations. First, it clearly included lawsuits in which the association is named as a defendant. Second, the phrase could also be read to cover a suit that the association has a statutory right to defend and where the association’s members are sued for an improper purpose.

The court found that the developer’s allegations were directed toward the association, but the cross-complaint only named the association’s members for strategic adversarial reasons. In addition, the D&O policy did not include language excluding or limiting suits where the association exercises its statutory defense right. Moreover, the association would be bound by any resulting judgment concerning the parking agreement regardless of the association’s involvement in the case.

The developer’s allegations related to the association’s failure to honor its promise to pay a parking fee to the developer and the garage owner. The court found this to be an omission by the association, which qualified as a wrongful act under the D&O policy. Therefore, the developer’s claims against the association members were based on an alleged wrongful act by the association.

The court found that the association had established a potential for coverage under the D&O policy. Therefore, National Union had a duty to defend the association in the underlying suit. Accordingly, the court denied National Union’s motion to dismiss the case and granted the association’s motion for summary judgment (judgment without a trial based on undisputed facts).

Association May Withhold Privileged Information from Owner

100 Harborview Drive Condominium Council of Unit Owners v. Clark, No. 2175 (Md. Ct. Spec. App. July 30, 2015)

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Condominium Lien Does Not Secure Post-Lien Debts

One Bratenahl Place Condominium Association, Inc. v. Sliwinski, No. 102493, 2015-Ohio-3353 (Ohio Ct. App. Aug. 20, 2015)

One Bratenahl Place Condominium Association, Inc. (association) manages a condominium in Cuyahoga County, Ohio. Owner Teddy Sliwinski became delinquent, and in July 2009, the association filed a lien against his unit for $3,048.16 plus interest and “any unpaid assessments accruing hereafter until this lien is satisfied.” In August 2009, the association filed another lien for $3,753.39 with the same language regarding accruing assessments.

In March 2010, the association filed a foreclosure action against Sliwinski. The magistrate court granted the foreclosure, finding that, as of January 2011, $8,955.33 was due to the association and that the additional amounts due through the sheriff’s sale date still needed to be determined by the court.

The parties attempted to negotiate the matter but were unable to reach a settlement, so the matter went to trial for resolution. The trial court entered a foreclosure decree in May 2014 and ordered that the association’s 2009 lien amounts plus interest be satisfied from the foreclosure sale proceeds. The property was sold at a sheriff’s sale in September 2014. The association filed a motion requesting payment of an additional $122,029 from the sale proceeds to cover the assessments that had accrued after the 2009 liens. The trial court denied the motion, determining that the liens did not secure amounts accrued after the liens were filed. The association appealed.

Ohio’s Condominium Property Chapter (condominium act) provides that an association’s lien is effective from the date it is recorded. The lien must contain the amount of unpaid assessments “and, subject to subsequent adjustments, any unpaid interest, administrative late fees, enforcement assessments, collection costs, attorney’s fees, and paralegal fees.”

The association argued that the phrase “subject to subsequent adjustments” indicated that the legislature intended liens to automatically include debts incurred after a lien was recorded. Since the condominium act does not define or explain “subsequent adjustments,” the appeals court looked to similar statutes to give the phrase meaning. Ohio’s planned community lien statute describes a homeowners association lien as a continuing lien and clearly provides that such liens are subject to automatic subsequent adjustment. The condominium act contains no similar language.

Since the legislature expressly provided for automatic perfection of post-lien debts in one statute but not in the other, the appeals court determined that the phrase “subject to subsequent adjustments,” without elaboration, meant simply that liens may be modified by subsequent liens. Supporting this assumption was the fact that a bill was introduced in the Ohio General Assembly to amend the condominium act to include automatic subsequent adjustment language, but (at the time of the appeals court’s decision) that bill had not been passed.

The association further argued that the condominium declaration placed Sliwinski on notice that he would be liable for debts accruing after the lien was filed. However, the appeals court disagreed because the declaration provided that the association’s lien had the same effect as a lien under the condominium act.

The appeals court affirmed the trial court’s judgment, holding that the condominium act does not perfect a lien for debts that accrue after a lien is filed.

Statute Allowing Association to Void Contract Not a Statute of Limitations

Double Diamond Ranch Master Association v. Second Judicial District Court, No. 65666 (Nev. July 30, 2015)

Double Diamond Ranch Master Association (association) governed the South Meadows and Double Diamond Ranch subdivisions in Reno, Nev. Before the subdivisions, which were located in a flood zone, could be developed in 1996, the Federal Emergency Management Agency required the developer to obtain a map revision letter from the City of Reno and enter into a maintenance and operation agreement (maintenance agreement) with the city. The maintenance agreement required the association to maintain flood control channels, provide rock rip-rap protection (laying a foundation of broken stones) and file an annual report.

In February 2012, the association gave notice to the city that it was terminating the maintenance agreement pursuant to a state law that permits a homeowners association to terminate (upon at least 90 days’ notice) a contract that the developer executed on its behalf that was not executed in good faith or was unconscionable to the unit owners at the time it was signed. The association claimed it was not a proper party to the maintenance agreement because the agreement was executed the day before the association was legally formed. The association also argued that the maintenance agreement was for the developer’s benefit, not the association’s, since it allowed the developer to develop the property as it desired.

The association claimed it only recently learned of the maintenance agreement and that the city never sought to enforce it. The city rejected the association’s termination notice.

In October 2013, the city filed suit against the association seeking to enforce the maintenance agreement. The association moved to dismiss the suit, arguing that it had properly terminated the maintenance agreement. The association also argued that the statute’s 90-day notice period operated as a statute of limitations, thus requiring the city to file suit within 90 days. The association argued that the 90-day language was superfluous if it did not operate as a statute of limitations.

The trial court denied the association’s motion to dismiss, and the association appealed.

The statute allowed an association to treat certain contracts as voidable since the association’s members had little opportunity to protect themselves while the association was under the developer’s control. The statute did not indicate the rights and obligations a recipient has when it receives a contract termination notice. The appeals court concluded that neither the statute’s plain language nor the legislative history indicated that the legislature intended the 90-day period to operate as a statute of limitations. Instead, the appeals court found that, when a party to a contract receives a termination notice, it would have the customary time to commence a suit as any other contract suit.

The appeals court upheld the trial court’s order.

Short-Term Leasing Does Not Violate Commercial Use Prohibition

Houston v. Wilson Mesa Ranch Homeowners Association, Inc., No. 14CA1086, 2015 COA 113 (Colo. Ct. App. Aug. 13, 2015)

David Houston owns a home in the Wilson Mesa Ranch subdivision in San Miguel County, Colo., which is governed by Wilson Mesa Ranch Homeowners Association, Inc. (association). The subdivision is subject to restrictive covenants that prohibit using or occupying property for commercial or business purposes.

In December 2012, Houston began renting his home for short-term vacation rentals and advertising the property on the Vacation Rentals by Owner (VRBO) website. When the association’s board of directors (board) learned of Houston’s rentals, it adopted an administrative rule that prohibited rentals for fewer than 30 days without prior board approval. The board also established a $500 fine for each violation of the new rental restriction.

The board notified Houston of the new rule and ordered him to comply with it. Houston objected that the board’s action was an unlawful attempt to amend the covenants. The board argued that short-term rentals were a commercial use that was already prohibited under the covenants, and the rule was adopted to establish procedures for seeking an exception.

The board denied Houston’s request for permission to continue the short-term rentals. Houston took two more vacation reservations through VRBO. The board treated the reservations as anticipatory breaches of the covenants and rules and fined Houston $500 for each reservation.

Houston filed suit against the association, seeking a ruling that the board could not bar short-term rentals based on the covenants’ commercial use prohibition. The association filed a counterclaim for a declaration that: (1) the covenants prohibited rentals for fewer than 30 days; (2) the leasing rule was enforceable; and (3) Houston violated the covenants and the rules by advertising and taking reservations for short-term rentals. The association also sought a permanent injunction (order to take action or refrain from taking action) requiring Houston to comply with the covenants and rules.

Both parties moved for judgment on the pleadings (judgment without a trial based solely on undisputed facts). The trial court concluded the covenants were ambiguous about short-term rentals—nothing expressed or implied a prohibition. Ambiguity must be resolved in favor of the free and unrestricted use of the property. Accordingly, the trial court entered judgment in Houston’s favor and dismissed the association’s counterclaim. The association appealed.

While the appeals court acknowledged that “residential use” unambiguously refers to use for living or dwelling purposes, it also recognized the ambiguity inherent in whether the dwelling was done temporarily or permanently. The appeals court held that a unit’s temporary or short-term use did not preclude that use from being residential under the covenants.

The appeals court next examined whether the short-term rentals violated the commercial use restriction. Black’s Law Dictionary defines “commercial use” as one connected with or furthering an ongoing profit-making activity. While Houston did profit from the rentals, the appeals court determined that renting to people who use the unit for eating, sleeping and similar residential purposes does not violate the commercial use restriction. The appeals court found that receiving income from the unit’s lease did not transform residential use into commercial use. Moreover, as the trial court found, ambiguity in the covenants must be construed in favor of unrestricted use of the property.

Finally, the appeals court held that the board’s adoption of a rule governing leases was insufficient to create a short-term rental restriction. The covenants themselves must be amended to create such a prohibition.

The trial court’s judgment was affirmed.

Short-Term Leasing Consistent with Single-Family Residential Use

Zgabay v. NBRC Property Owners Association, No. 03-14-00660-CV (Tex. App. Aug. 28, 2015)

NBRC Property Owners Association (association) governed the River Chase subdivision in Comal County, Texas. The River Chase Declaration of Covenants, Conditions and Restrictions (declaration) provided that lots were only to be used for single-family residential purposes.

In 2000, Craig and Tammy Zgabay bought a lot in River Chase, where they built a home and lived for a number of years. In 2014, the Zgabays began to lease the home for vacation rentals when they were not using it. They later moved from the home and kept it as rental property.

In 2014, the association demanded that the Zgabays stop the short-term rentals and cease advertising the property online. The Zgabays filed suit against the association, seeking an order that the declaration does not prohibit short-term rentals. At the time of the trial, the home was leased for a one-year term. However, the Zgabays indicated that they intended to continue advertising and renting the home for varying lengths of time and paying hotel and lodging taxes when the home was rented for fewer than 30 days.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the association and denied summary judgment to the Zgabays. The Zgabays appealed.

“Single-family residential purposes” was not defined in the declaration, and the appeals court found that common usage was not helpful in determining a definitive meaning. The appeals court determined the declaration contemplated leasing because it permitted “for rent” signs with some limitations and did not impose limitations on leasing. However, the declaration did provide that a temporary structure such as a mobile home, barn or garage could not be used for a residence except for up to six months while a permanent home was under construction. This indicated that the declaration’s drafter knew how to impose time limits on particular uses and chose not to include such limits for leasing or residential use.

The appeals court found that, at best, the absence of any definition for single-family residential use rendered the declaration ambiguous. The court was compelled to resolve the ambiguity in favor of the free and unrestricted use of the property. The appeals court held that leasing is permissible and that the declaration did not impose limits on the lease duration. The appeals court reversed the summary judgment grant to the association and remanded the case for further proceedings.

Editor’s Observation: The Idaho Supreme Court reached the opposite conclusion in Adams v. Kimberley One Townhouse Owner’s Association, reported in the August 2015 Community Association Law Reporter.