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 illustrations 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. In addition, the College of Community Association Lawyers prepares a case law update annually. Summaries of these cases along with their references, case numbers, dates, and other data are available online.

Voting Irregularities Invalidated Declaration Amendment

Harlan v. Frawley Ranches PUD Homeowners Association, Inc., No. 28027 (S.D. Sept. 13, 2017)

Frawley Ranches Planned Unit Development Homeowners Association, Inc. (association) governed the Frawley Ranches subdivision in Lawrence County, S. Dak. Robert and Geneieve Harlan owned a lot in the community.

The community’s declaration of covenants, conditions, restrictions and reservations (declaration), recorded September 29, 1993, provided for it to continue in effect for 20 years. After that time, the declaration would automatically be extended for successive 20-year terms unless association members casting 90 percent of the “total votes cast at an election held for such purpose” agreed to terminate within the six months prior to a term’s expiration.

There were 35 lots in the community, and five belonged to the developer. At the 2013 annual meeting, the members discussed amending the declaration so that it would automatically extend for five years instead of 20 years, and they agreed to conduct the vote by email.

In August 2013, the association’s secretary emailed the members with a proposed amendment attached. The email instructed members to reply to vote, and failure to reply would be considered a “no” vote. Once the replies were collected, the association’s board of directors determined that 90 percent of the members had voted in favor of the amendment. On September 20, 2013, the board recorded an amendment extending the declaration for a five-year term.

The Harlans sued the association, asserting that the amendment was invalid because the declaration required members to vote at a meeting. The trial court held that the email vote was proper, and since there were 32 “yes” votes and 3 “no” votes, the amendment passed by more than 90 percent. The Harlans appealed.

The Harlans argued that the association’s bylaws required a meeting because voting at a membership meeting was referenced repeatedly. However, the appeals court found the documents silent on how the required election was to be conducted, so it concluded that no meeting was required.

The Harlans also alleged several voting improprieties. They challenged the votes cast by Daryll Propp, the developer’s president, asserting that Propp needed a proxy or corporate resolution from the developer to cast the developer’s five votes. Since there was no proxy or resolution, they argued that the developer’s votes were invalid.

One association member asked his daughter to email his vote from her email account. The Harlans alleged this constituted an attempt by the daughter to cast another’s vote without a proxy. Another member was on vacation and did not have access to email, so he sent a vote by text message. The Harlans argued this was improper because the voting instructions did not authorize voting by text message.

Further, the Harlans alleged that the association’s secretary never actually voted because he did not respond to his own email solicitation for votes. They argued that, when all of these improper or invalid votes were deducted from the total, there were insufficient votes to pass the amendment.

The appeals court determined that, since neither the declaration nor the bylaws specified how the election was to be conducted, the association was free to adopt rules for conducting the election. While the association did adopt such rules, it did not follow them.

The appeals court held that, as the developer’s president, Propp could cast the developer’s votes without a proxy. The appeals court found the association’s voting instructions perfectly clear—votes must be cast by reply email. Therefore, under the association’s own voting rules, the secretary could not record a “yes” vote unless the vote was made by reply email.

The appeals court held the three votes not cast by reply email were invalid. The secretary never replied, so he never actually voted. The vote sent by the daughter’s email was not a reply to the vote solicitation, so it did not count. The text message was also not a reply email. Without these votes, the amendment was not approved by the requisite 90 percent vote.

The appeals court reversed the trial court’s judgment and remanded the case for the trial court to address the invalid amendment recorded in the court records.

Club Covenant Terminates When Not Renewed Under Texas Uniform Condominium Act

Twin Creeks Golf Group, L.P. v. Sunset Ridge Owners Association, Inc., No. 03-16-00653-CV (Tex. App. Aug. 25, 2017)

In 2002, Twin Creeks Holdings, Ltd. (TCH) began developing the Twin Creeks Country Club Community in Travis County, Tex. A restrictive covenant (original covenant) obligated all residential property owners to acquire and maintain a membership in Twin Creeks Country Club, Inc. (club) operated by TCH.

In 2004, the Sunset Ridge Condominiums were established and made subject to the original covenant. Sunset Ridge Owners Association, Inc. (condominium association) was formed to govern the condominium.

That same year, TCH’s rights under the original covenant were transferred to Twin Creeks Operating Co., L.P. (TCO). As part of the transfer, an amended and restated restrictive covenant was recorded (restated covenant). Other than naming TCO as the club operator, the restated covenant made few changes to the original covenant and none were substantive. The restated covenant indicated that the transition was to have no effect on the unit owners’ obligations to acquire and maintain club memberships. The restated covenant further specified that it amended and restated the original covenant in its entirety, it superseded the original covenant, and the original covenant was of no further force or effect.

In 2008, Twin Creeks Golf Group, L.P. (TCGG) acquired TCO’s rights under the restated covenant. In 2015, the condominium association sued TCGG, seeking a determination that the restated covenant was invalid with respect to the condominium unit owners under the Texas Uniform Condominium Act (act).

Adopted in 2003, the act provides that a covenant that requires condominium unit owners to maintain a membership in a private club is not valid after its 10^th anniversary, unless renewed after the ninth anniversary in the manner provided by the covenant. However, such provision applies only to covenants recorded or renewed after 2003.

The trial court granted summary judgment (judgment without a trial based on undisputed facts) to the condominium association after determining that the restated covenant was invalid based on the association’s failure to renew it as required by the act. TCGG appealed.

TCGG argued that the club membership obligation was created in the original covenant before the act, and the restated covenant did not alter that obligation. It further argued that the restated covenant did not create a new restrictive covenant, as contemplated by the act; it merely continued an existing one. Therefore, the obligation was exempt from the act’s renewal requirements. The appeals court disagreed.

The restated covenant specifically stated it superseded the original covenant and that the original covenant was of no further force and effect. Therefore, the restated covenant established a club membership obligation that was recorded after the act’s effective date.

Further, the act applies to covenants renewed after 2003. TCGG argued that the restated covenant did not renew the original since it did not extend the original covenant’s term. Since the act did not define “renew,” the appeals court looked to Black’s Law Dictionary for guidance. In addition to meaning lengthening, the appeals court found that “renew” also meant restoring or reestablishing and replacing an old contract with a new contract. Therefore, the restated covenant was “renewed” within the act’s meaning.

TCGG argued that invalidating the restated covenant for the condominium owners would be unjust and unreasonable for the rest of the community. The remaining lot owners would have to pay increased fees to support the club facilities, and the condominium owners would continue to reap many of the club’s benefits without having to pay for them. However, the act contained no exception for communities composed of lots and condominium units.

In addition, the appeals court could not conclude that the act’s application would be unjust and unreasonable. The act provided for a mechanism by which the restated covenant could have been renewed during the ninth year. TCGG could have avoided the predicament it was in by simply renewing the restated covenant in a timely fashion.

Accordingly, the trial court’s judgment was affirmed.

Condominium Expansion Deadline Does Not Limit Development Rights in Unsubmitted Property

Bethany Marina Townhouses Phase II Condominiums, Inc. v. BMIG, LLC, No. 2,2017 (Del. Oct. 10, 2017)

Bethany Marina Townhouses Phase II Condominiums, Inc. (association) governed a condominium in Ocean View, Del. The original project plan included 14 buildings, but only 11 were constructed.

The condominium declaration gave the developer until August 2010 to unilaterally expand the condominium by submitting additional phases to the declaration, thereby converting the property to condominium ownership. After that time, the consent of all unit owners was required to annex additional land or units. The declaration also granted the developer a perpetual easement over both the submitted and the unsubmitted property to build up to 14 buildings as long as the condominium existed.

In 2008, BMIG, LLC acquired the developer’s interests, the undeveloped land, and 11 boat slips. In June 2014, BMIG began construction on an undeveloped parcel. The association objected, arguing that the deadline to construct additional units had expired.

BMIG had also failed to pay assessments on the boat slips. The association had previously sued BMIG for delinquent assessments, and the parties entered into a settlement agreement. BMIG paid the settlement amount but then failed to pay assessments that accrued after the settlement.

The association sued BMIG to collect the delinquent assessments. BMIG countersued, seeking a determination regarding its development rights, easement rights, and the ownership of the pool, pool house, and stormwater management ponds (collectively, amenities) as well as the pumping station and pump house (collectively, pumping facilities) serving the condominium.

Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court determined that the deadline to construct Bethany Marina units had no effect on BMIG’s general development rights; it only barred BMIG from expanding the existing condominium. The trial court also held that BMIG’s easement for construction purposes was not affected by the expansion deadline.

The trial court held that BMIG owned the amenities and the pumping facilities since either the declaration or declaration amendments excepted them from the submitted property. Further, it ordered BMIG to pay the delinquent assessments, late fees, and legal fees. Both parties appealed.

The association argued that, once the deadline to expand the condominium passed, BMIG lost the right to develop the undeveloped land without the unanimous consent of the unit owners. The appeals court disagreed, finding that the deadline for submitting additional units did not affect the right to develop the undeveloped property. BMIG could develop the property independent of the condominium.

The association argued that unit owners were assured there would be no further development after August 2010, but the appeals court found that the only assurance was that no additional units would be submitted to the condominium after such date.

The association asserted that BMIG’s easement rights were strictly tied to the future development of the condominium, so they expired when BMIG’s condominium development rights terminated. Since the appeals court found that BMIG’s general development rights did not expire, it also concluded that the easement required to complete the development did not expire.

The original recorded condominium plans indicated that the pumping facilities were to be conveyed to the county. Then, the first amendment to the plans stated the pumping facilities had been conveyed to the county. However, a later amendment stated that the pump house was “to be removed.” To complicate matters, both the original declaration and all declaration amendments excepted the pumping facilities from the submitted condominium property.

The appeals court determined that, if the plans were correct, the county owned the pumping facilities, and BMIG could not later attempt to reclaim them through a plan amendment. However, if the plans were not correct, then BMIG owned the pumping facilities because they had never been submitted to the declaration to make them part of the condominium property.

The original condominium plans showed the amenities located on property submitted to the declaration, but then a declaration amendment excepted them from the submitted property. The appeals court held that, once the amenities were constructed on submitted condominium land, they belonged to the condominium, and the later amendment was ineffective to remove them. The unit owners had acquired an ownership interest in the amenities that could not be revoked without their consent. Accordingly, the appeals court reversed the trial court’s ruling that BMIG owned the amenities.

BMIG argued that it was not responsible for assessments on the boat slips because the statutes exempted a developer from assessments. The appeals court ruled that BMIG was subject to assessments because it agreed in the settlement agreement to pay all future assessments in a timely manner. BMIG complained that it should not be liable for late fees or legal fees since the settlement agreement did not establish such penalties. However, the appeals court ruled that, once BMIG agreed to pay assessments, it submitted itself to the penalties for nonpayment under the condominium documents.

Accordingly, the trial court’s judgment was affirmed in part and reversed in part.

Different Interest Rates Apply to Different Parts of Owner’s Debt

Lott v. Vial Fotheringham, LLP, No. 3:16-cv-00419-HZ (D. Ore. Oct. 12, 2017)

Janice Lott owned a home in the Autumn Meadows subdivision subject to Autumn Meadows Owner’s Association’s (Autumn Meadows) jurisdiction. Lott was delinquent in assessments, and Autumn Meadows hired the Vial Fotheringham, LLP (VF) law firm to pursue collection.

Kanika Chea owned a home in the Waterford Park subdivision subject to Waterford Park Homeowners’ Association's (Waterford Park) jurisdiction. Chea was delinquent in assessments, and Waterford Park hired VF to pursue collection from Chea also.

Autumn Meadows and Waterford Park (collectively, the associations) prevailed in their respective collection actions. VF charged Lott and Chea (collectively, owners) for attorneys’ fees incurred before it filed suit. It also charged the owners for management fees for communicating with VF, such as a charge for informing them how much they owed.

Additionally, VF charged the owners interest, not just on the delinquent assessments, but also on the attorneys’ fees awarded to the associations; VF also charged higher interest than the standard statutory rate.

The owners jointly sued VF, alleging that it engaged in abusive, deceptive, and unfair debt collection practices in violation of the Federal Fair Debt Collection Practices Act (act). The act prohibits collecting interest, charges, or expenses unless expressly permitted by law or authorized by the agreement creating the debt. Both sides moved for partial summary judgment (judgment without a trial based on undisputed facts).

Oregon law allows an association to impose late charges and attorneys’ fees for collection efforts, provided the charge is based on a schedule contained in the declaration or bylaws or in a board resolution delivered to each owner. However, Oregon law prohibits charging interest unless allowed by statute or by the agreement establishing the debt. Oregon law imposes nine percent interest on attorneys’ fees and costs as part of a judgment, but if the debt agreement provides for a higher interest rate, the principal will be subject to the agreed-upon rate.

The Autumn Meadows declaration provided that delinquent assessments were subject to interest, late fees, attorneys’ fees, and other costs. The Autumn Meadows declaration also gave the board the discretion to set the interest rate and impose late fees and penalties on delinquent assessments.

The Autumn Meadows bylaws established 18 percent interest on delinquent assessments plus a late charge not to exceed 30 percent of the delinquent amount. Further, the Autumn Meadows board adopted a resolution stating that owners were obligated to pay attorneys’ fees and collection costs incurred in collection efforts, regardless of whether suit was filed.

The appeals court determined that the Autumn Meadows documents did not treat attorneys’ fees as part of the assessment subject to 18 percent interest because the declaration stated that interest, costs, and attorneys’ fees would be added to the assessment amount. Therefore, the Autumn Meadows board could not adopt a resolution providing for a higher interest rate on attorneys’ fees and costs than the statutory rate. As such, VF violated the act when it attempted to collect more interest from Lott than was allowed by statute.

The Waterford Park declaration provided for 12 percent interest, a late charge equal to 30 percent of the delinquent amount, court costs, and attorneys’ fees set by the court. The Waterford Park board also adopted a collection resolution stating that all collection costs would be assessed against the delinquent owner and collected as an assessment.

The appeals court concluded that the Waterford Park declaration did not expressly state that attorneys’ fees were included in the assessments subject to the 12 percent interest rate. Thus, VP violated the act by also attempting to collect more interest from Chea than was allowed by statute.

However, the appeals court found that VP did not violate the act by charging pre-suit attorneys’ fees. Oregon law clearly authorizes an association to establish delinquency charges, and both associations adopted resolutions providing for all collection costs to be charged to the delinquent owner.

The appeals court also determined that collection costs could include what the owners characterized as management fees, such as the costs to update the owners’ ledgers, so long as the costs were related to collection. However, the appeals court could not determine whether the fees were authorized, since VP did not show that it incurred particular losses or costs that were actually attributable to the owners.

Accordingly, the appeals court granted summary judgment to the owners on the interest rate issue, granted summary judgment to VP with respect to the pre-suit attorneys’ fees, and denied summary judgment on the issue of management charges.

Business Judgment Rule Did Not Protect Association’s Long-Standing Practice

Davis v. Lakewood Property Owners Association, Inc., No. WD80146 (Mo. Ct. App. Sept. 19, 2017)

Lakewood Property Owners Association, Inc. (association) governed the Lakewood subdivision in Lee’s Summit, Mo. The subdivision’s 1973 declaration of covenants, conditions, and restrictions (declaration) authorized the association’s board of directors to levy an annual assessment so long as it did not exceed the maximum assessment, which the board was directed to calculate.

The declaration specified that the maximum assessment for 1974 was $200. After that, the maximum assessment could be increased each January by an amount equal to 150 percent of the rise, if any, in the Consumer Price Index (CPI) published for the preceding July. An annual assessment exceeding the maximum required member approval.

In November 2015, the board increased the annual assessment by $84, from $1,236 to $1,320. Lot owners Roger Davis, Robert Kronschnabel, and Timothy McCraw (collectively, owners) sued the association, asserting that the assessment increase exceeded the maximum that could be levied without a member vote.

The association responded that the board’s long-standing practice was to determine the maximum assessment by calculating the increase in the CPI from 1973 to the CPI for the preceding July and then multiplying 150 percent of that figure by $200. Using this methodology, the board had calculated the maximum assessment as $1,622.65. Since the $1,320 assessment was well under that amount, the association argued that no member vote was required.

The association stated that its bylaws supported this methodology. The original bylaws contained the same narrative instructions as the declaration for calculating the maximum assessment. However, at some time prior to 1979, the bylaws were amended to express the formula as a mathematical equation.

The trial court determined that the board’s calculation was made in good faith based on historical practice and within the authority granted by the declaration. Therefore, it was protected by the business judgment rule. The trial court granted judgment in the association’s favor, and the owners appealed.

The owners argued that the calculation conflicted with the declaration. They asserted that the declaration did not allow the board to apply the cumulative increase in the CPI since 1973, only the increase in the CPI over the previous year. The owners claimed the board’s calculation was beyond its authority and not protected by the business judgment rule.

The association countered that the declaration allowed the board to recognize the increase in CPI each year, thereby preserving the board’s ability to rely on previous CPI increases to set the annual assessments in later years. The appeals court disagreed.

It found the declaration unambiguously limited the increase in the maximum assessment to only the increase in the CPI over the preceding year and did not allow the board to look at cumulative increases in CPI since 1973. The appeals court further found that the fact that the board had relied for more than 25 years on a formula in the bylaws did not make the calculation authorized. The bylaws specifically stated that where the declaration and the bylaws conflicted, the declaration controlled.

The appeals court held that the board’s calculation of the maximum assessment was outside the scope of its authority and not protected by the business judgment rule. The appeals court reversed the trial court’s judgment and remanded the case for entry of judgment in the owners’ favor.

Combined Lots Treated as Separate for Restriction Purposes

Diercks v. Odom, No. 1160620 (Ala. Sept. 1, 2017)

Robert and Carin Diercks owned Lots 47 and 58 in the Second Alexander Heights Subdivision in Brewton, Ala. Lot 47 was purchased in 1993 and contained a dwelling facing Robin Drive. In 2010, the Dierckses purchased Lot 58, which was a vacant lot that abutted Lot 47’s rear property line and faced Brooks Boulevard.

In May 2014, the Dierckses conveyed to themselves the two lots in a combined metes-and-bounds legal description. In October 2014, the Dierckses built a garage on Lot 58 in which to park their motor home. The garage opened onto Brooks Boulevard.

In February 2015, several other lot owners (plaintiffs) sued the Dierckses, asserting that the garage violated the subdivision’s restrictive covenants, which prohibited carports and garages facing the street. Further, the city’s zoning ordinances stated that a detached accessory building could not be located on a lot by itself.

The Dierckses admitted they intended to build only a garage on Lot 58, the garage faced Brooks Boulevard, and it was an accessory building. However, they argued that the garage did not violate the restrictive covenants because it was not located on a separate lot since the two lots had been combined.

In May 2016, the trial court entered a summary judgment (judgment without a trial based on undisputed facts) in favor of the plaintiffs. The trial court concluded that, even though the Dierckses combined the two lots, the restrictive covenants still applied to Lot 58; as such, it violated the restrictive covenants. The Dierckses appealed.

As reported in the July 2017 edition of Law Reporter, the appeals court determined that the combined lots were to be treated as a single lot, so the garage did not violate the restrictive covenants. The plaintiffs appealed to the Alabama Supreme Court, which approached the issue differently.

The supreme court found that the subdivision was developed pursuant to a common scheme where all lots were subject to the restrictive covenants. The Dierckses argued that ambiguity in the covenant’s meaning must favor unrestricted use of the land. While the supreme court agreed with this general concept, it could not ignore the rule that restrictive covenants are to be interpreted according to the original parties’ intent. Further, the property must always conform to the restrictive covenants as they originally applied, unless the covenants contain an express provision allowing a combined lot to be treated as a single lot.

The supreme court held that the restrictive covenants clearly intended Lot 58’s front to mean the side facing Brooks Boulevard. At a minimum, the Dierckses’ garage violated the prohibition against garages facing the lot’s front. The supreme court stated that the Dierckses could not unilaterally reverse the covenant’s meaning by combining the two lots.

The supreme court held that the trial court correctly entered summary judgment in the plaintiffs’ favor. The appeals court’s decision was reversed, and the case was remanded for further proceedings.

©2017 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

Short-Term Rentals Are Commercial Use

Bauckham Trust v. Petter, No. 332643 (Mich. Ct. App. Sept. 19, 2017)

Matthew Petter owned a lot in the Sunset Shores Subdivision in Casco, Mich., which he used for short-term rentals. Petter’s neighbors objected to the constant flow of new renters. The John H. Bauckham Trust and other lot owners (collectively, plaintiffs) sued Petter and other owners who were using their properties for short-term rentals (collectively, defendants) to enforce the subdivision’s deed restrictions.

The deed restrictions required that only private residences could be maintained on a lot, and they were for the owner or occupant’s sole use. In addition, the property could not be used for commercial purposes. The plaintiffs also asserted that short-term rentals violated the town’s zoning ordinances.

The defendants argued that short-term rentals were common in the community and had become a long-accepted practice. The trial court found that none of the defendants made significant personal use of the property, and two spent fewer than two weeks a year there. They advertised the properties for short-term rentals on the internet, and they collected the state’s hotel/motel tax on the rentals. Three defendants received a combined $140,000 in rental fees in a single year. Two defendants even employed third-party concierge and maid services for their renters.

The trial court concluded that the defendants were not using their properties as private residences but were engaging in commercial activity. It also determined that the rental activity violated the town’s zoning ordinances. As such, the trial court granted partial summary judgment (judgment without a trial based on undisputed facts) in the plaintiffs’ favor, and it prohibited all rental activity in the subdivision. The defendants appealed.

After interpreting “commercial” to mean “able or likely to yield a profit,” the trial court concluded that renting the properties to the public for a fee constituted commercial use. This definition of “commercial” was consistent with both legal and standard dictionaries and consistent with how other Michigan courts had construed the term.

The defendants argued that the trial court went too far in prohibiting all rentals, since the plaintiffs only complained about short-term rentals. However, Michigan law allows a court to grant relief to which a party is entitled, even if the party did not demand such relief. The appeals court reasoned that commercial activity applied to rentals of any length, since they are likely to yield a profit.

Since the deed restrictions clearly barred commercial activity, the trial court’s decision to bar all rental activity was not outside the range of principled outcomes. Accordingly, the trial court’s rental ban was affirmed. The trial court’s ruling on other unrelated issues was vacated, and the case was remanded for further proceedings.

©2017 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.