December 2015
In This Issue:
Recent Cases in Community Association Law
Lot Purchaser Not Bound by Restrictive Covenants
Condominium Common Elements Must Be Owned by Unit Owners
Portion of Common Elements Carved Out for Exclusive Use
Owner May Not Use Common Area for Private Purpose
Limited Insurance Coverage Available for Matching Items
Golf Course Owner Must Maintain Golf Course
Bank’s Last Minute Payment of Super Priority Lien Prevents Foreclosure of Bank’s Interest
Residential Use Must Continue Despite Area Commercialization
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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.

Lot Purchaser Not Bound by Restrictive Covenants

Akers v. Butler, 2015 Ark. App. 650, No. CV-15-295 (Ark. Ct. App. Nov. 12, 2015)

Covenants Enforcement: The Arkansas Court of Appeals held that restrictive covenants recorded while a buyer was under contract to purchase a lot required the buyer’s signature to bind the lot.

In April 2005, Angie and Darrell Butler contracted with Mary and Kenneth LaBuy to purchase property in the Forest Ridge Estates subdivision that was being developed by the LaBuys in Garland County, Ark.

The purchase agreement referenced Land Use and Architectural Controls (restrictions), but the restrictions were not detailed in the agreement and were not recorded in the public records at that time. The restrictions were recorded by the LaBuys later that year along with the signatures of 14 Forest Ridge Estates owners acknowledging the restrictions, but the Butlers did not sign the restrictions. One of the restrictions prohibited using the property for commercial purposes. After the restrictions were recorded, the Butlers closed on their purchase of the property.

In April 2013, an amendment to the restrictions was recorded. The amendment was signed by the Butlers and 37 other property owners, who made up more than 80 percent of the total property owners in the subdivision. The amendment revised the commercial use restriction to provide that no commercial activities of any kind would be allowed on any lot, except that rentals for special events would be allowed.

The Butlers built a barn on their property and began renting it out. Twenty-one owners (plaintiffs) filed suit against the Butlers, alleging the Butlers were using their property for commercial use in violation of the restrictions.

The trial court dismissed the case, holding that the Butlers were not subject to the restrictions because they did not sign them. The plaintiffs appealed.

The plaintiffs argued that it was of no consequence that the Butlers did not sign the restrictions because when the restrictions were recorded, the Butlers did not own land in the subdivision. At that time, they only had a right to acquire land at a future date. The appeals court disagreed, finding that the Butlers had a vested interest in the property because the purchase contract contained a forfeiture clause. If the Butlers defaulted on the contract, the LaBuys could cancel the contract and retain all monies paid by the Butlers toward the purchase as liquidated damages.

Under Arkansas law, a restrictive covenant does not restrict land use or development unless it is executed by the property owner and recorded in the public records. The appeals court found that concluding that a buyer had only an equitable interest in the property would completely negate the contract’s forfeiture clause. Therefore, the appeals court held that, for purposes of the Arkansas statute, the Butlers owned the property when the restrictions were recorded.

The plaintiffs argued that the Butlers should be bound by the restrictions because they had actual knowledge of them. The appeals court was not persuaded that a single sentence providing that the restrictions would be a part of the agreement was sufficient to bind the Butlers to restrictions that were not yet signed or effective.

The trial court’s judgment was affirmed.

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Condominium Common Elements Must Be Owned by Unit Owners

The Residences at Biltmore Condominium Owners’ Association, Inc. v. Power Development, LLC, No. COA14-1222 (N.C. Ct. App. Nov. 3, 2015)

Developmental Rights: The North Carolina Court of Appeals held that a developer could not retain ownership of property in a condominium that is neither a unit nor part of the common elements.

The Residences at Biltmore Condominium Owners’ Association, Inc. (association) managed the Biltmore Condominium in Asheville, N.C. In 2006, Power Development, LLC (Power), as the declarant, recorded a declaration of condominium (declaration) creating the condominium and describing the 5.7 acres submitted by the declaration to the terms of the North Carolina Condominium Act (act).

The plat maps included in the declaration showed several shaded areas identified as “Declarant Retained Property,” which the declaration explained was property retained by the declarant that was not part of the units or the common elements. The Declarant Retained Property was within the physical boundaries of the condominium building and included management offices, house utility boards, power breakers, water systems, fire alarm and sprinkler systems, and emergency lighting systems that serviced the common elements and individual units. The declaration further specified that the Declarant Retained Property must be built by the declarant who would retain ownership and could, but was not required to, convey it to the association.

To secure a $15.5 million loan in 2007, Power executed a deed of trust encumbering 2.074 acres (Tract B) that included the units and the Declarant Retained Property. Power defaulted on the loan, and the lender commenced foreclosure proceedings. Before the foreclosure sale, Power recorded a supplemental declaration to clarify that the Declarant Retained Property was part of the common elements.

In January 2011, Tract B was sold at the foreclosure sale to a third party. In June 2012, an agreement dated April 2009 (transfer agreement) was recorded stating that, in consideration for a loan from Mountain Mortgage, Inc., Power pledged its retained rights in various common elements that were not already pledged in the deed of trust. The transfer agreement specified that Power’s retained property included “telephone boards, electrical boards, all communication boards, as well as any other boards or areas needed to service the entire condominium. For example, all storage closets, etc.”

In September 2013, the association filed suit against Power and Mountain Mortgage seeking a declaratory judgment (judicial determination of the parties’ legal rights) that the Declarant Retained Property was part of the common elements and not property owned separately by Power or a successor declarant.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) in the association’s favor, ruling that the Declarant Retained Property was part of the common elements owned by the association members free and clear of any claims of Mountain Mortgage or Power. Mountain Mortgage and Power appealed.

The association argued that the act established units and common elements as the only types of property comprising a condominium. It asserted that since the Declarant Retained Property was not designated as units, it must be common elements.

Power argued that the act did not prohibit a developer from retaining property within the physical boundaries of a condominium. Power asserted that, by shading and labeling the property as Declarant Retained Property, it was excluded from the condominium and not submitted to the act. Alternatively, Power argued the act allowed it to retain special declarant rights.

The appeals court agreed with the association that a condominium may contain only two types of property—units designed for separate ownership and common elements covering all remaining property. By submitting the property to the act, the appeals court held that Power was bound by these limits. The Declarant Retained Property was not carved out in a manner as to be excluded from the condominium.

In addition, the rights Power attempted to reserve in the Declarant Retained Property far exceeded any special declarant rights allowed by the act. The act requires a declarant to specifically state the rights it wishes to retain along with a legal description of the property to which the rights apply and a time limit by which each right must be exercised. The appeals court held that the special declarant rights allowed by the act do not include the right to retain ownership of property within a condominium that is not designated as a unit.

While the act does specifically allow a declarant to retain the right to use condominium management offices, it does not permit a declarant to maintain offices on property that is neither a unit nor a common element. Further, the right permitted by the act is a use right, not an ownership right.

Finally, the appeals court stated that it would defy logic to permit a declarant to retain ownership of such critical life safety equipment as involved here, thereby retaining the legal right to exclude owners and the association from access to such equipment. Accordingly, the appeals court affirmed the grant of summary judgment to the association.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Portion of Common Elements Carved Out for Exclusive Use

Pflugh v. 2-4-6-8-10-12 Steiner Street and 490-492-494-496 Duboce Avenue Condominium Homeowners Association, Nos. A141771 & A142827 (Cal. Ct. App. Nov. 4, 2015)

Documents: The California Court of Appeal held that unanimous owner consent was not required to convert a portion of the condominium common area to exclusive-use area.

2-4-6-8-10-12 Steiner Street and 490-492-494-496 Duboce Avenue Condominium Homeowners Association (association) manages a 10-unit condominium in San Francisco County, Calif. This case involves a dispute among the owners of three units, William Pflugh, Luis Guzman, Aaron Binkley and Mark Culbert (collectively, the plaintiffs) with the association and six other owners, John McLay, Janna Chow, Debi Gunders, Steven Gunders, Brad Frazier and Diana Foster (collectively, the defendants).

Units 10 and 12 face the project’s interior, and the front doors of these units are accessible only from a private drive off Steiner Street that runs through the project. There is a paved area in front of these two units (the Steiner area). Unit 10 is owned by Frazier, and Unit 12 is owned by Debi Gunders. The project’s original covenants, conditions and restrictions (declaration) specified that ownership of each unit included an undivided interest in the common area.

In 2007, Gunders advertised Unit 12 for rent, indicating that it included two parking spaces. At the next association meeting, Pflugh argued that the declaration did not allow parking in the Steiner area. He threatened to sue if the association allowed occupants of Unit 10 or 12 to park in the Steiner area. In August 2008, the association sent a letter to all owners notifying them that parking in the Steiner area was not permitted. Owners affected by this policy were invited to raise their concerns at the next association meeting.

In December 2009, Gunders and Frazier entered into a license agreement with the association that allowed them to park in the Steiner area. The agreement required them to each pay $1,500 per year for this privilege. At the 2009 annual meeting, McLay proposed a long-term solution by amending the declaration.

In 2011, a proposed amendment to the declaration was approved by seven owners and six or seven unit mortgage holders. In December 2011, an amended and restated declaration was recorded that entirely replaced the original declaration. The Steiner area, including utility meter access, a recycling area and two parking spaces, was designated as exclusive-use common area, with Units 10 and 12 each being assigned one parking space. Gunders and Frazer agreed to pay $4,000 each for the parking spaces.

In July 2013, the plaintiffs filed suit against the defendants claiming they had breached the declaration by creating the exclusive-use common areas without a unanimous vote of the owners. The declaration provided that “[t]he common interest appurtenant to each unit is declared to be permanent in character and cannot be altered without the consent of all Owners affected and the first mortgagees of such Owners.” The plaintiffs argued that converting the Steiner area to an exclusive-use common area constituted a qualitative change to the permanent character of each unit’s common interest.

McLay testified that since at least 1996, when he moved into the condominium, the Steiner area had been used by Units 10 and 12 for parking because the garages attached to these units had previously been converted to living space. One section of the driveway contained concrete runners to delineate parking areas. McLay was not aware of any concerns about parking in this area until Pflugh raised the issue in 2007.

The trial court ruled in favor of the defendants, finding that unanimous consent was not required to change common area to exclusive-use common area. The court determined that parking spaces for Units 10 and 12 were always part of the development plan. The trial court ruled against the plaintiffs on all remaining claims. The plaintiffs appealed.

The declaration defined “common interest” as the “proportionate undivided interest in the common area which is appurtenant to each unit.” The appeals court found that the plaintiffs read too much into the phrase “permanent in character” which modified the common interest clause. Since the plaintiffs admitted that the restated declaration did not change the percentage interest assigned to each unit, the plaintiffs’ argument that unanimous consent was required clearly failed.

Since the declaration did not specifically reserve any parking for Unit 10 or 12, the plaintiffs argued the Steiner area was not intended to be a parking area. However, if there is more than one reasonable interpretation of a disputed provision, a court must look to other objective manifestations of the parties’ intent. Subsequent performance following a contract’s execution is to be considered in determining intent. Units 10 and 12 were the only units with front doors opening directly into the Steiner area, and there was ample evidence that the Steiner area had been used for parking by these units for many years.

Finding no error, the trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Owner May Not Use Common Area for Private Purpose

Boyle v. Huron Dunes Association, No. 323051 (Mich. Ct. App. Nov. 5, 2015)

Powers of the Association: The Michigan Court of Appeals held that an association lacked the power to authorize construction of a private deck in the common area because it would interfere with the right of all owners to use the common area.

Huron Dunes Association (association) governs a subdivision next to Saginaw Bay in Huron County, Mich. William Boyle owns a lot in the subdivision.

All lot owners have easements over the association-owned parks and streets. In July 2012, the association gave permission to an owner to construct a private deck on the park property next to his lot. Boyle objected to the deck and filed suit to determine whether the association could authorize such private use of the common area.

The trial court determined that constructing a private deck in the common area was contrary to the subdivision restrictions and the dedicatory language on the plat. The association appealed.

An easement is a right to use land owned by another, but it does not include the right to occupy and possess the land in the same way as the property’s owner. Where a plat dedicates land for use by all subdivision lot owners, they have an irrevocable right to use it.

The Huron Dunes plat provided that the subdivision streets, lanes and parks were dedicated for subdivision property owners use. The recorded subdivision restrictions and Boyle’s deed provided that the park was reserved for all lot owners to use, and no buildings could be erected in the park without the developer’s consent. Further, the developer, or its successor, was to determine proper use of the park—so long as that use was for educational, recreational or community service activities.

The trial court found that constructing a private structure in the park would allow one owner to infringe on property for his convenience to the detriment of other owners. The appeals court held the trial court did not err in making this determination.

While the restrictions gave the association, as the developer’s successor, the right to approve structures in the park, approving a private deck for private use in the park was not proper use. The deck was constructed neither for all owners to use nor for educational, recreational or community service activities.

The trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Limited Insurance Coverage Available for Matching Items

Great American Insurance Company of New York v. The Towers of Quayside No. 4 Condominium Association, No. 15-CV-20056-KING (S.D. Fla. Nov. 5, 2015)

Risks and Liabilities: The U.S. District Court for the Southern District of Florida held that an insurer was not responsible for paying to replace undamaged building components in a multi-story building in order to maintain a uniform appearance throughout the entire building.

The Towers of Quayside No. 4 Condominium Association (association) managed a 25-story condominium in Miami, Fla. The common area halls on Floors 3 through 25 had the same design with identical carpet, wallpaper and woodwork. The carpeted halls on the east and west side of the building were separated by a tiled elevator landing.

The association obtained an insurance policy from Great American Insurance Company of New York (Great American). In February 2013, a broken valve on an air conditioning unit caused a water leak that damaged drywall, carpeting, baseboards, insulation and wallpaper in the east hallways of the 11th floor and the floors below. The association submitted a claim to Great American.

Great American paid the association $170,291.84, but the association asserted that this amount did not fully compensate it for the loss. The association filed suit against Great American, seeking to recover the cost to repair or replace undamaged common area carpet, wallpaper, baseboards and woodwork on all floors. The association asserted that it would not be possible to achieve the same uniform appearance as previously existed unless all hallways were renovated to match. It also claimed that the loss of uniformity devalued the building and constituted a loss to the building.

Great American filed a motion for summary judgment (judgment without a trial based on undisputed facts), arguing that it had no responsibility to pay for replacement of building components that were not physically damaged. Great American relied on the policy’s limitation of coverage to “direct physical loss” and a specific exclusion for consequential loss, which was defined as “[d]elay, loss of use, loss of market, or any other consequential loss.”

The association urged that the measure of damages must be determined from the building as a whole because the whole building would suffer if its pre-loss, aesthetically uniform condition was not restored.

The court found that coverage was available for matching items such as wallpaper, baseboards, woodwork and carpeting to achieve aesthetic uniformity but only where the repairs were made to a “continuous run of an item or adjoining area.” Otherwise, the court found no coverage under the policy for matching items.

The court determined that Great American had no responsibility to replace undamaged components on floors 12 through 25 or the carpeting on the west side of the building on floors 3 through 11 since the tile elevator lobby interrupted the continuous carpet between the damaged east side and the undamaged west side. However, the parties did not present sufficient evidence as to whether there was a continuous run of wallpaper, baseboards or woodwork on floors 3 through 11 or whether the elevator lobby interrupted this look in the same manner as the carpet. Accordingly, Great American’s motion for summary judgment was granted in part and denied in part.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Golf Course Owner Must Maintain Golf Course

Hellerstein v. Desert Lifestyles, LLC, No. 15-cv-01804-RFB-CWH (D. Nev. Nov. 10, 2015)

Risks and Liabilities: The U.S. District Court for the District of Nevada ordered a golf course owner to restore a golf course that it was obligated to maintain by a restrictive covenant.

Silverstone Ranch Community Association (association) governed a common interest community in Las Vegas, Nev., comprising about 1,520 lots developed around a 27-hole golf course spanning approximately 272 acres. About half of the Silverstone Ranch homes bordered the golf course or featured prominent views of the golf course.

Silverstone Ranch was developed by Pulte Homes of Nevada (Pulte) between 2002 and 2004. In June 2002, Pulte and the golf course owner recorded an agreement (agreement) that created an easement and restrictive covenant burdening the golf course.

The agreement required the golf course to be “operated and maintained solely as a 27-hole (or more) championship golf course and related improvements, which shall generally be open to the public.” It also contained extremely detailed standards for maintaining the course in a first-class manner. The agreement provided that it would continue in full force and effect until terminated with the approval of 75 percent of the Silverstone Ranch owners. The association was given the right to enforce the agreement.

In the summer of 2015, Desert Lifestyles, LLC (Desert Lifestyles) began negotiations to purchase the golf course from Par 72, LLC (Par 72). During its due diligence, Desert Lifestyles learned of the agreement and of previous litigation by the association against Par 72 to enforce the agreement. Desert Lifestyles also learned of the costs to maintain the golf course.

Desert Lifestyles and Par 72 signed a purchase agreement in August. They discussed notifying the association that the sale was pending and that Desert Lifestyles intended to close the golf course after the sale. Desert Lifestyles anticipated litigation by the association but wanted to delay notifying the association to avoid litigation before the transaction was completed. Desert Lifestyles never intended to operate the golf course or to comply with the agreement, and the case does not reveal Desert Lifestyles’ motive for purchasing the golf course.

The golf course was fully operational and well-maintained when Desert Lifestyles took possession on September 1. Desert Lifestyles and its golf course manager, Western Golf Properties, LLC (Western Golf) (collectively, the defendants), immediately erected a fence around the clubhouse, disabled the irrigation systems and drained the water features.

The association and a number of Silverstone Ranch owners (collectively, the plaintiffs) filed suit against the defendants. On September 8th, the plaintiffs obtained a temporary restraining order (TRO) in Nevada state court that ordered the defendants to turn on the water, irrigate the golf course, fill the water features and not commit waste (abuse or destructive use of property) on the golf course. After a week without water, the grass was somewhat distressed, but it could still be restored to optimal condition.

The defendants chose not to comply with the TRO so the grass would deteriorate completely. The defendants removed the case to federal court, representing to the court on September 18th that Desert Lifestyles had purchased a nonoperational golf course. The court found such statement to be in bad faith since the golf course was used for play the evening of August 31st, hours before closing.

The plaintiffs filed a motion for a preliminary injunction (court order prohibiting or mandating certain action). The defendants argued they should be excused from complying with the agreement due to impossibility or frustration of purpose. The court held that neither defense was available.

For the doctrine of impossibility to apply, unforeseen circumstances must have made complying with the agreement impossible or highly impractical. However, the doctrine does not apply if the promisor should have anticipated the circumstance. The defendants presented evidence that the golf industry in Las Vegas suffered due to the struggling economy. However, the plaintiffs presented evidence that other golf courses in Las Vegas were profitable and that the Silverstone golf course could be made profitable. The court held the circumstances here were far from unforeseen.

The commercial frustration doctrine applies to “discharge a party’s contractual obligation when [p]erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration.” The defendants could not say that their expected value of the agreement’s performance was frustrated because they never intended to comply with the agreement.

The defendants argued that they should not be forced to water a nonoperational golf course. The cost of watering and maintaining the golf course was about $1 million per year. Desert Lifestyles did not have funding beyond the $340,000 it raised for the deposit required to open an account with the local water authority.

The court found that the danger of irreparable harm to the plaintiffs’ golf course views, as unique assets, and home values outweighed the monetary and self-induced harm to Desert Lifestyles. As a result of the defendants’ actions, the golf course was overgrown with weeds and at least 70 percent of the grass was dead or dying, and there was no possibility that it could be rehabilitated.

The evidence showed that the plaintiffs’ homes had decreased significantly in value. The decrease was approximately 20 to 30 percent for homes on the golf course and 15 to 25 percent for homes not directly on the golf course. The estimated value loss for the entire community was between $10 million to $15 million, and the evidence showed that the values would continue to decrease if the golf course condition remained the same or deteriorated further.

The court found that there was a substantial risk that Desert Lifestyles would become insolvent simply because of its financial obligations to maintain the golf course, and Desert Lifestyles certainly had no plan for how it could restore the lost home values. The court found that irreparable harm to the community was likely without an injunction.

The court granted the preliminary injunction in part, ordering defendants to restore the golf course to the condition that existed on September 1 and to maintain the golf course in that condition until the court determined otherwise.

However, the court declined to order the defendants to operate the golf course as a business. The law disfavors mandatory injunctions, particularly where the court would have to provide extensive, detailed supervision and oversight while the case is pending. The court found that operating the golf course was not necessary to prevent irreparable harm to the plaintiffs.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Bank’s Last Minute Payment of Super Priority Lien Prevents Foreclosure of Bank’s Interest

Linden Park Homeowners Association v. Mears, No. 72659-5-I (Wash. Ct. App. Oct. 19, 2015)

State and Local Legislation and Regulations: The Washington Court of Appeals held that a buyer at a foreclosure sale had a duty to inquire about the low opening bid based on the buyer’s knowledge of the judgment amount the sale proceeds were to satisfy.

Linden Park Homeowners Association (association) managed a condominium in King County, Wash. The association had a lien on a unit owned by Dustin Mears for unpaid association assessments. The association filed suit against Mears to foreclose the lien. Since a portion of the lien had super priority status under the Washington Horizontal Property Regimes Act over two deeds of trust held by Bank of America (bank), the association named the bank as a defendant to the lawsuit.

The bank did not answer or appear in the case. The trial court entered a default judgment and foreclosure order against Mears and the bank. The court entered judgment against Mears in the principal amount of $11,419, of which about $1,800 constituted the super priority lien. The judgment stated that the bank’s interest would be “forever and fully extinguished” at the foreclosure sale. The foreclosure sale was set for January 2013 and the sale notice published.

Ray Stevenson, a principal of Condo Group, LLC (Condo Group), saw the sale notice. Condo Group purchases about 20 properties a year and specializes in condominium units foreclosed under super priority liens. Condo Group investigated the unit by doing a drive-by inspection and reviewing the court records, including checking the deed indexes and tax assessments and making sure that the bank had not filed a notice of appearance in the case.

The day before the sale, the bank paid the super priority amount to the association, but it did not file any pleadings with the court or take any action to postpone the sale. The association sent an email to the sheriff’s office asking that notice be given at the sale that the super priority lien had been paid. The sheriff did not give the requested notice at the sale because only sale announcements from court orders are read. Even though he was shocked by the $1,000 opening bid, Stevenson bid $2,000, which was the winning bid. Stevenson inquired about the low bidding at the sheriff’s office when he went to pay the purchase price and was told that the bank had preserved its interest.

The association filed a motion to confirm the sale. Condo Group intervened and sought a determination that the bank’s interest had been extinguished as provided in the sale notice. The bank filed a motion to vacate the default order and judgment. The trial court granted the bank’s motion. The parties agreed to an order confirming the sale but did not agree on the effect of the foreclosure on the bank’s interest.

Condo Group and the bank filed motions for summary judgment (judgment without a trial based on undisputed facts) as to whether Condo Group was a bona fide purchaser (BFP) that acquired the unit free of the bank’s interest.

“A BFP is one who purchases property for valuable consideration in good faith, without notice of another’s claim of right to the property.” A buyer is considered to have constructive notice of a fact when the facts and circumstances would cause an ordinarily prudent person to inquire further. A buyer’s experience with real estate has great significance when evaluating whether the buyer had a duty to inquire further.

The trial court held that Condo Group was not a BFP and granted summary judgment to the bank. The trial court determined that, since Stevenson knew the judgment amount and that the property was being sold to satisfy the judgment, the difference between the judgment amount and the $1,000 opening bid would have caused an ordinarily prudent person to inquire further. Condo Group appealed.

While the appeals court made a point of stating that it did not condone the bank’s negligence in protecting its rights by allowing a default judgment to be entered, the appeals court could not support Condo Group’s argument that the bank’s interest was wiped out by the foreclosure. Stevenson could not ignore the questions that were prompted by the low opening bid.

Condo Group argued that it could not have reasonably investigated the low bidding while the auction was in progress. The appeals court held that a reasonable inquiry in this case would have been to ask the deputy sheriff calling the sale about the opening bid. The sheriff’s office knew why the bid was so low, so there is no reason to presume the deputy would have withheld that information. Even if the deputy refused to answer the question, the duty of inquiry would have been satisfied.

The trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Residential Use Must Continue Despite Area Commercialization

Stephan v. The State of Ohio, No. 2015-CA-15, 2015-Ohio-4516 (Ohio Ct. App. Oct. 30, 2015)

Use Restrictions: The Ohio Court of Appeals held that increased commercialization outside a subdivision was not sufficient grounds for making the subdivision’s residential-use restriction unenforceable.

Robert Stephan owned two lots in the Reckler Heights Subdivision in Piqua, Ohio. In February 2013, Stephan filed suit against the State of Ohio and multiple defendants seeking relief from the covenants in his deeds that restricted the property to residential use only. Over the next few months, nine other Reckler Heights lot owners joined the case as plaintiffs seeking the same remedy.

The plaintiffs asserted that extensive changes and intensive commercialism in the surrounding area had diminished the values of the Reckler Heights lots, and the residential use restriction had prevented the plaintiffs’ properties from being put to their highest and best use.

In 1946, residential use deed restrictions were imposed on the subdivision when the area was mostly rural and the subdivision abutted a two-lane country road. In 1957, Springcreek Township adopted a zoning plan that allowed a substantial portion of the original Reckler Heights subdivision to be used for commercial purposes. In 1969, a portion of the subdivision was taken for improvements to U.S. Route 36, and access to the subdivision became more limited. Interstate 75 was constructed, and the subdivision now lies directly adjacent to the ramp to the Interstate.

In 1986, the City of Piqua annexed a portion of the subdivision, including the plaintiffs’ lots, and zoned it as neighborhood business. In 2007, the City of Piqua adopted a comprehensive plan in which it targeted the plaintiffs’ lots for redevelopment as commercial/industrial.

The plaintiffs asserted that several businesses operated within the subdivision, including a beverage company, a television sales and repair shop, a beauty shop and a drive-thru coffee shop. The plaintiffs alleged that, due to these open and obvious violations of the residential-use restriction, the defendants were prevented from insisting on the continued viability of the restriction.

The plaintiffs described the area surrounding the subdivision as consisting principally of “strip-clubs, bordellos, bootleg joints, flop houses and junkyards,” subjecting them to heavy traffic, noise, and 24-hour highway and supermarket bright lighting. Stephan asserted that litter blew onto his property from the mall across the street, and the mall’s excessive storm run-off routinely flooded his property, preventing him from maintaining a lawn.

The defendants argued that changes outside of the subdivision were immaterial, and the trial court concluded that the defendants continued to rely upon the covenants to maintain the subdivision’s residential character. With the exception of commercial development on a couple of lots, no other commercial development in the subdivision had occurred. The trial court noted that subdivision homes continued to sell, many owners had improved their homes, and four new houses had been built in recent years. As such, the trial court found that the subdivision’s character had not changed enough to make it unsuitable for residential use or to defeat the restrictive covenant’s purpose. The plaintiffs appealed.

The appeals court held that the fact that property burdened by a use restriction could have greater value or be used more extensively without the burden is not a basis for removing the burden. Restrictive covenants do not become unenforceable until they are waived or abandoned. The test is whether failing to object to existing violations or failing to enforce the restrictive covenant in the past has caused the neighborhood’s character to change.

A number of subdivision residents testified that they maintained and improved their homes relying on the subdivision’s residential nature and the use restriction. The trial court found that these residents had also purchased their homes with full knowledge of the existing commercial operations in the community. As such, the appeals court concluded the trial court did not err in finding that a change in the subdivision’s character wasn’t sufficient to make it unsuitable for residential use. The trial court’s judgment was affirmed.

©2015 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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