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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
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.
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Mortgage Company's Payment of First Association Lien Does Not Protect It from Foreclosure of Second Lien
The Bank of New York Mellon v. Khosh, No. 2:17-cv-00957-MMD-PAL (D. Nev. May 30, 2019)
Assessments: The U.S. District Court for the District of Nevada held
that a mortgage company's payment of an association lien did not protect the
mortgage from being extinguished from foreclosure of a second association lien
for subsequent delinquent assessments.
Arbor Park Community Association (association) governed a
community in North Las Vegas, Nev. Amir Khosh owned a home in the community.
Khosh became delinquent to the association. In 2012, the association
recorded a lien against the home and later recorded a notice of default and
election to sell. Khosh's mortgage company, The Bank of New York Mellon (bank)
offered to pay the super priority amount of the lien. The association stated
that it recognized the bank's position as the senior lien holder and that,
should the bank record a notice of default or notice of sale, the association
would hold its foreclosure action to allow the bank to proceed. The bank then
paid the entire lien amount owed at that time.
In January 2013, the association recorded a second lien. Three
months later, the association recorded a second notice of default and election
to sell, indicating that Khosh owed $2,120. The bank did not contact the
association or pay the lien this time. In August 2013, the association recorded
a notice of trustee's sale (foreclosure notice), noting that Khosh owed $3,987
to the association. The foreclosure sale took place in September 2013, and SFR
Investments Pool 1, LLC (SFR) purchased the property for $14,000.
The bank filed suit against Khosh, the association, and SFR,
asserting that its mortgage still encumbered the property or that the
association's foreclosure sale was void. The bank argued that it was excused
from paying the second lien amount due to the association's representations. The
court disagreed, holding that the bank's full payment of assessments attached
to the first lien did not protect it from the foreclosure of a subsequent lien.
The Nevada Uniform Common Interest Ownership Act (act)
splits an association lien into two parts—a super priority lien and a
subpriority lien. The act elevates the portion of the association's lien, consisting
of the last nine months of unpaid assessments and maintenance and
nuisance-abatement charges, and gives it priority over the mortgage. New
charges do not factor into an association's super priority lien absent a new
notice of delinquent assessments.
Since association assessments continue to accrue and the
association retains a lien for those unpaid assessments, full payment of
assessments attached to a prior lien does not provide protection from subsequent
foreclosure. A valid offer of payment operates to discharge a lien or cure
default. However, payment upon a first delinquency notice cannot satisfy the
super priority portion of the association's lien for which a second foreclosure
proceeding has been initiated, based on newly accrued assessments, through the
issuance of a new lien notice.
The bank argued that, because the association represented
there was no super priority portion until the bank's foreclosure, it was
excused from paying a super priority amount on the second lien. The court
disagreed because the second foreclosure proceeding was based on unpaid
assessments against the property, and nothing precluded the bank from paying
the super priority amount as it did for the first lien.
The bank asserted that the association foreclosure sale was
intended only to foreclosure on the subpriority lien. The court disagreed
because there was no evidence the association was proceeding only with respect
to the subpriority part. Thus, the bank's mortgage was not protected from being
extinguished by the association's foreclosure of its super priority lien.
The bank further contended the foreclosure sale should be
set aside because the sales price was inadequate or otherwise unfair or
oppressive. However, the bank presented no evidence that $14,000 was a grossly
unfair price. Rather, its argument was based solely on the association's representations
with respect to the first foreclosure sale. SFR noted that the bank had notice
of the foreclosure sale, and nothing prevented the bank from attending the sale
and bidding on the property.
Accordingly, the court granted summary judgment (judgment
without a trial based on undisputed facts) in favor of SFR and against the
bank. The court declared that the association's foreclosure sale extinguished
the bank's mortgage and that SFR took title free of the mortgage.
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One-story Home Restriction Still Valid
BCH Development, LLC v. Lakeview Heights Addition Property Owners Association, No.
05-17-01096-CV (Tex. Ct. App. May 21, 2019)
Use Restrictions: The Court of Appeals of Texas held that a
one-story height restriction unambiguously prohibited a second level of living
space.
The Lakeview Heights Addition was a 104-lot subdivision in
Dallas. The subdivision dated back to 1953, and all of the homes in the
subdivision were one-story, ranch-style houses except for one.
In June 2013, BCH Development, LLC (BCH) purchased a home in
the subdivision and demolished it. BCH posted a building permit on the lot,
indicating it had plans to build a two-story home. The second floor was to be
about 700 square feet and include a bedroom, bathroom, and game room.
Barbara Wohlrabe, another lot owner, notified BCH that its
plans violated the subdivision's covenants, which prohibited any building other
than one single-family dwelling not to exceed one story in height. In October 2013,
Wohlrabe and about 30 other owners formed Lakeview Heights Addition Property
Owners Association (association) for purposes including the preservation of the
covenants.
The association and Wohlrabe sued BCH to prevent it from
constructing a home with more than one story of living space. BCH then revised
its plans to refer to the second level as a "habitable attic" rather
than a second floor. The trial court granted summary judgment (judgment without
a trial based on undisputed facts) in the association's favor. It also issued a
permanent injunction prohibiting BCH from building a dwelling with more than
one above-ground level or floor of living space or with a habitable attic.
BCH asked the trial court to reconsider the ruling because
it was impossible for BCH to comply with the architectural approval process set
out in the covenants. The covenants provided that no building could be erected
or altered until the construction plans and specifications were approved by the
architectural control committee (ACC). The covenants named the three members of
the committee and provided that, in the event of the death or resignation of
any ACC member, the remaining members had the authority to appoint a successor.
In addition, a majority of the owners had the authority to amend the covenants
to change the composition of the ACC.
BCH argued that all members of the ACC were dead, and no
replacements had been named. BCH asserted that, since there were no living
members of the ACC, its plans were automatically approved. The trial court
denied the motion for reconsideration. The trial court also awarded attorneys'
fees to the association, but a jury trial was held to determine the amount of
the attorneys' fees. The jury awarded the association $290,000. BCH appealed.
Under the doctrine of impossibility of performance, a
party's performance under a contract is excused when supervening circumstances
make the performance impossible or impracticable. BCH argued it should be
excused from obtaining architectural approval since there was no alternative
means for obtaining approval without a living ACC.
However, the appeals court determined the covenants included
an outright ban on buildings of more than one story and did not include any
mechanism for obtaining approval for more than one story. In addition, the
association was not seeking to enforce BCH's failure to obtain plan approval. So,
the doctrine of impossibility of performance did not apply.
BCH insisted that the term "one story" was ambiguous,
and such ambiguity should be construed in favor of BCH's free use of its
property. Covenants are unambiguous if they can be given a definite or certain
legal meaning. Covenants are ambiguous if they are susceptible to more than one
reasonable interpretation. However, mere disagreement over the interpretation
does not make a covenant ambiguous.
Courts must give words the meaning that they commonly held
at the time the covenant was written, not as of a later date. The appeals court
used dictionaries from the 1940s and 1950s to determine that a
"story" was a set of rooms on the same floor or a floor of habitable
space. The association argued that, whether BCH chose to call it a habitable
attic or a second floor, it was still a second level of above-ground living
space that exceeded one story in height.
BCH argued the association's interpretation ignored the
phrase "in height." It urged that the purpose of the covenant was to
restrict the height of the home exterior, not to regulate how owners use the
home interior. BCH insisted that, if the level was unfinished, the design and
height would be the same, but the home would not be in violation.
The appeals court disagreed, determining that the phrase
"one story in height" was unambiguous. "Story" referred to
the level of habitable space, and "height" referred to the measure
upwards from the ground. The one-story-in-height restriction limited homes to
what was commonly understood as one story, not necessarily to a specific
numeric height.
BCH asserted the association waived the right to enforce the
one-story restriction because there was another two-story home in the
neighborhood. However, to establish waiver, the violations that exist must be
so great as to lead the average person to conclude the restriction had been
abandoned. The evidence of only one two-story home was insufficient to conclude
the restriction was waived.
Accordingly, the trial court's judgment was affirmed but
reversed with respect to other issues.
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Association Has Right to Install Ditches in Easements on Lots
Bolleter v.
Grand Lake Estates Property Owners Association, Inc., No. 09-18-00013-CV (Tex.
App. June 13, 2019)
Developmental Rights: The Texas Court of Appeals held that
an association, through an assignment of the developer's rights under the
subdivision covenants, had broad rights to install ditches in drainage and
utility easements on lots to improve drainage in the subdivision.
Grand Lake Estates Property Owners Association, Inc.
(association) governed a community in Montgomery County, Texas. The subdivision
plat depicted a 30-foot-wide drainage easement between lot 11, owned by Swen
and Gwendolyn Spjut, and lot 10, owned by Mark and Ehren Bolleter. The plat
also showed a 30-foot-wide utility easement across the backs of lots 9 (owned
by Justin and Jenifer Dancer), 10, 11, and 12 (also owned by the Spjuts).
The subdivision experienced some drainage problems, and the
association decided to enlarge the existing drainage facilities located in the
drainage easement and to enlarge an existing swale located in the utility
easement. The association's contractor dug ditches in the easement areas. The
Spjuts, the Bolleters, and the Dancers (collectively, the owners) sued the
association for trespass, conversion (an unauthorized act depriving an owner of
property permanently or for an indefinite time), and to require the association
to return their lots to their previous conditions.
The association argued the subdivision covenants allowed it
to place ditches in the easement areas for the purpose of improving drainage
without the owners' consent. The owners responded that the covenants allowed
the association to repair or maintain the existing drainage facilities installed
by the developer but did not allow the association to install more drainage
facilities. In particular, the owners asserted the association could not
construct steep-sided, 8-foot-deep ditches in the easement areas.
The association contended a hold-harmless provision in the
covenants protected the association from liability with respect to the ditches.
The provision stated that neither the developer nor any other authorized entity
using the easements should be liable for any damages done by them or their
agents to fences, shrubbery, trees, lawns, or other property located in the
easements. The owners asserted that the hold-harmless provision did not apply
to unauthorized entry into their lots.
The trial court granted summary judgment (judgment without a
trial based on undisputed facts) in the association's favor. The owners
appealed.
The covenants identified the common area owned by the
association as including all property owned by the association for the common
use and enjoyment of the homeowners, including drainage and utility easements
designated on the recorded plats. The developer had the right, under the
covenants, to construct additional improvements within the common area at any
time for the improvement and enhancement of the common area and the benefit of
the association and the homeowners (construction rights).
The covenants also established an easement for the developer
to enter upon any lot for the purpose of constructing or maintaining any
natural or manmade drainage pattern, area, or easement (easement rights). The
covenants further provided that all utility easements may be used for the
construction of drainage swales or detention ponds to provide for improved
surface drainage of the common area or lots. The developer had assigned its
rights under the covenants to the association.
The owners argued the easement rights applied to utility
easements only and that the association had no authority to dig a ditch in the
drainage easement. The appeals court disagreed, holding that the easement
rights were not restricted to utility easements only. In addition, based on how
the declaration defined "common area," the association, through the
assignment from the developer, had the right to construct additional
improvements in both the drainage and utility easements.
The appeals court also determined that the easement rights
unambiguously authorized the developer to enter the lots to perform
construction in the easement areas for the purpose of improving drainage. It
was undisputed that the ditches were built for the purpose of improving
drainage in the subdivision. Moreover, although the easement rights
specifically mentioned swales and detention ponds, they did not limit the association's
right to construct drainage facilities in the utility easement to only swales
and detention ponds.
Accordingly, the trial court's judgment in the association's
favor was affirmed.
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Future Promises Independent of Deed Are Not Extinguished by Deed
Cox v.
Givens & Houchins, Inc., No. 4:18-CV-00079-JHM (W.D. Ky. May 28, 2019)
Sales and Leases: The U.S. District Court for the Western
District of Kentucky held that, where a seller agreed in a purchase contract to
use restrictions on its remaining land, such use restrictions were not merged
with and extinguished by the deed for the property being sold.
Givens & Houchins, Inc. (G&H) owned a 5.88-acre
parcel in Grayson County, Ky. It contracted to sell about 1.6 acres within that
parcel to Susan Cox, who planned to build a Dollar General store on the
property (Dollar General tract).
Cox sought to prevent G&H from utilizing the remaining
portion of the parcel (G&H tract) for any commercial purpose that would
compete against her Dollar General. The purchase agreement provided that
G&H would not sell, lease, rent, or allow to be occupied any part of the
G&H tract for the purpose of conducting business as or for use as a Family
Dollar Store, Dollar Express, Bill's Lot, Walgreens, CVS, Rite Aid, Walmart or
any type of Walmart concept store.
The sale was completed in July 2017, but after the closing,
G&H refused to execute a recordable document reflecting the use restriction
on the G&H tract set out in the purchase agreement. In May 2018, Cox sued
G&H, seeking a declaratory judgment (judicial determination of the parties'
legal rights) that the G&H tract was subject to the use restriction as
described in the purchase agreement.
G&H argued that the purchase agreement's requirements were
merged with the deed and of no further effect. Under the merger doctrine, a
deed extinguishes or supersedes the provisions of the underlying contract for
the sale of the property. The deed is the final version of the property sale,
and any previous agreements have no further effect once the deed is executed.
There are three exceptions to the merger doctrine for fraud,
mistake, or contractual agreements clearly not intended to be merged into the
deed. Covenants in the purchase agreement that are not commonly incorporated
into the deed and that the parties do not intend to be incorporated (often
called collateral obligations) are not merged into the deed. A collateral
obligation is one that is not deed-related and has no bearing on the title or
property being transferred.
Cox argued that the merger doctrine did not apply because
the use restriction on the G&H tract was collateral to the deed to the
Dollar General tract. The court agreed, finding that the use restriction
concerned future actions with respect to the G&H tract. The merger doctrine
does not apply to the performance of future acts that are independent of the
terms of the deed. As such, the purchase agreement's use restriction on the
G&H tract was not extinguished by the merger doctrine.
Accordingly, the court ordered that the future use
restriction set forth in the purchase agreement was valid, binding, and
enforceable on G&H and subsequent owners of the G&H tract.
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Co-op Not Liable for Discrimination Where it Had Legitimate Reason for Enforcement Action
Favourite v.
55 Halley Street, Inc., No. 16-cv-4285 (NSR) (S.D. NY May 23, 2019)
Federal Law and Legislation: The U.S. District Court for the
Southern District of New York held that a co-op board was not liable for
creating a hostile housing environment under the Fair Housing Act where there
was no evidence that race played a factor in enforcing the co-op's noise rules.
55 Halley Street, Inc. (company) owned a cooperative
apartment building in Yonkers, N.Y. In 2007, Rayantha Favourite purchased
cooperative shares in the company, which entitled her to lease one of the
building's 53 apartments.
In 2008, Diane Currenti moved into the apartment directly
below Favourite's. Almost immediately, Currenti began complaining to the
company's board of directors (board) and the property manager about excessive
noise and marijuana odors emanating from Favourite's apartment. Currenti also
complained that Favourite sat in her car in front of the building for long
periods while people came up and visited. Over the next eight years, Currenti
filed 48 complaints about Favourite. Currenti's attorney also wrote to the
board, urging the board to take action to address Currenti's complaints.
The manager notified Favourite that she was causing constant
noise disturbances for those living around her, which violated the cooperative
house rules. Favourite requested a meeting with the board and complained that
Currenti banged on her ceiling, causing things to fall over. The manager asked
Currenti to stop banging on the ceiling.
Barbara Kehoe, the company president, initiated an
investigation into Favourite's behavior with the Yonkers Police Department. Two
detectives observed Favourite from outside the building at different times over
two days. They did not observe any behavior out of the ordinary or illegal. They
simply found that Favourite came home late at night.
The complaints from both parties continued, and the manager
strongly urged them to participate in mediation to resolve their issues. Favourite
and Currenti did so and signed a mediation agreement in which they agreed to respect
each other's lifestyles and schedules.
Unfortunately, the peace did not last. In 2011, an
altercation occurred in the hallway. Currenti and Doris Basilone, the new
president, both alleged that Favourite cornered Currenti's daughter in the elevator
and was cursing at her. Basilone stated that she had to intervene to prevent
Favourite from attacking the girl. Kehoe, however, reported that she saw
Favourite by the elevator surrounded by Basilone and two other residents, who
were yelling at Favourite and pushing her.
In 2014, Currenti became a board member and continued to
complain about noise in Favourite's apartment. This time, the matter was turned
over to the company's attorney. The attorney wrote to Favourite, reiterating
the numerous complaints over the years, the late and loud parties, repetitive
marijuana smoking, and reports of confrontational conduct with other residents.
The letter warned that legal action would be taken if the conduct continued.
Currenti's complaints continued. The attorney warned
Favourite that her lease would be terminated and eviction proceedings commenced
should there be any further complaints. In October 2015, the attorney sent
Favourite another notice to cure the violations. In November 2015, Favourite
was notified that her lease was terminated. More letters and an attempted
mediation followed. Favourite was not evicted from the building, but after
receiving the cure notice, she started staying with a friend about five days a
week.
In 2016, Favourite sued the company, the board, Currenti,
and Basilone (collectively, the defendants), alleging 15 claims, including six
discrimination claims. Favourite, a black woman of Guyanese descent, alleged
the defendants created a hostile housing environment based on race. Courts have
interpreted the Fair Housing Act (FHA) to prohibit the creation of a hostile
environment by individuals who have control or authority over the terms,
conditions, or privileges of sale or rental of a dwelling.
A party asserting a hostile housing environment claim must
establish that: (1) she was subjected to harassment that was sufficiently
pervasive and severe so as to create a hostile housing environment; (2) the
harassment was because of plaintiff's race, color, religion, sex, familial
status, or national origin; and (3) the defendant was responsible for the
allegedly harassing conduct.
The court emphasized that the harassment must be pervasive
and severe, and not merely isolated or sporadic, to establish a hostile housing
environment. Once a plaintiff makes an initial showing of allegedly
discriminatory conduct, the burden then shifts to the defendant to articulate a
legitimate, non-discriminatory rationale for the challenged action. If the
defendant meets its burden, then the plaintiff must establish that the
legitimate reasons offered by the defendant were not its true reasons, but a
pretext for discrimination.
The court found that the defendants demonstrated they had a
legitimate, non-discriminatory reason for sending Favourite the notices to cure
violations and for terminating the lease. There were numerous complaints filed
against Favourite, and while most were filed by Currenti, other residents had
also filed complaints. Favourite was warned numerous times about the noise
violations. There was no evidence the issue of race was discussed or raised as
a factor, and Favourite had never raised the issue before.
Favourite urged that Basilone used language reflecting a
racial bias because she allegedly made comments about the types of people
Favourite was bringing in the building and asked how Favourite could afford to
live there. The court, however, found such comments insufficient to show they were
laced with racial innuendo. Instead, the statements seemed more about lifestyle
and noise than about race.
Further, there were other residents of color, and there was
no evidence that they were treated as unwelcome or mistreated. During the same
seven-year period, the manager sent 27 warning letters to other residents about
noise. Although no one else's lease was terminated, the board stated these
warning letters had the desired effect of inducing those residents to comply
with the house rules.
Accordingly, the court granted summary judgment (judgment
without a trial based on undisputed facts) in the defendants' favor with
respect to the FHA claims. Since the remaining claims involved only state law,
the court declined to retain jurisdiction. The court dismissed such claims
without prejudice, allowing Favourite to refile the claims in state court if
desired.
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Beachfront Townhome Owner's Right to Elevate Townhome Following Storm Damage Outweighed Rights of Other Owners to Ocean View
Gross v.
Iannuzzi, No. A-0018-16T2 (N.J. Super. Ct. App. Div. June 5, 2019)
State and Local Legislation and Regulations: The Superior Court of New
Jersey, Appellate Division, held that New Jersey legislation to encourage
flood-safe construction following Superstorm Sandy allowed a townhome owner to
elevate and reconstruct his damaged beachfront townhome without having a vote
of the other owners as required by the declaration for architectural changes.
Kevin Iannuzzi owned a beachfront townhome in Margate, N.J. Developed
in 1978, the townhome project consisted of one row of 10 attached, two-story
oceanfront townhomes and a second row of 10 attached, three-story townhomes
located directly behind the first row. The purpose of this configuration was to
give both rows of townhomes an ocean view. Iannuzzi's unit was an end unit in
the first row.
The townhomes shared party walls that extended down into the
foundation, but each townhome was on its own subdivided lot. Each townhome had
its own roof and utilities and was separately insured. There was no homeowners
association.
In 2012, Superstorm Sandy damaged all of the beachfront
homes. Nine of the units were able to be repaired in place. However, Iannuzzi's
home was so badly damaged that the City of Margate declared it uninhabitable. The
city issued a zoning permit allowing Iannuzzi to demolish the damaged structure
and replace it with a detached house. Iannuzzi was advised by the city that any
rebuilt structure would have to comply with current code requirements and had
to be elevated to 13 feet above flood level, requiring an elevation increase of
slightly more than 4 feet.
Two groups of plaintiffs, including Steven Gross, filed
lawsuits seeking to stop the construction of the detached home. Iannuzzi
asserted that he had the right to either construct a detached home or rebuild
the original townhome elevated to meet the flood safety standards. The
plaintiffs opposed both options, potentially leaving Iannuzzi with a destroyed
townhome that he could not be rebuilt.
The declaration of covenants and restrictions (declaration)
filed in 1978 required owners to obtain the approval of at least a majority of
the other townhome owners to build additions, and required additions to conform
to the design of the development. The trial court held that either building a
detached home or elevating the townhome would constitute an addition under the
declaration and, thus, required the approval of a majority of the other unit
owners.
The trial court also determined that New Jersey legislation
concerning flood-safe construction (the act) adopted in 2013 in response to
Sandy did not apply to Iannuzzi's situation because the townhome did not
constitute a separate "structure" under the act. The act provided
that deed restrictions could not be enforced to prevent the elevation of a
Sandy-damaged structure. Iannuzzi and the city appealed.
The appeals court agreed with the trial court that the
construction of a detached home would constitute an addition under the
declaration and, thus, required the approval of a majority of the unit owners
in addition to the city's approval. However, the appeals court determined that
the declaration could not prohibit elevation of the townhome.
In 2017, after the trial court issued its decision, the
legislature amended the act to add row houses and attached townhomes to the
definition of "structure." The appeals court found that the
legislature intended the amended act to override the declaration and any local
development rules that might otherwise prevent Iannuzzi from elevating his
townhome. The appeals court rejected the plaintiffs' assertion that Iannuzzi
had to get approval from the city because elevating the townhome would be
inconsistent with the original development approval.
The appeals court also rejected the plaintiffs' contention
that, even if Iannuzzi was allowed to elevate the townhome, he had to maintain
the existing roof height by reducing the interior ceiling height or reducing
the number of stories. The act does not apply to any person who has altered the
original dimensions of a structure if, had the alteration not been made, the
structure could have been raised to meet the new elevation standard without an
exemption or with an exemption of a lesser degree. The act defined
"original dimensions" as the exact vertical and horizontal dimensions
that existed at the time the date the storm occurred.
The appeals court stated that the plaintiffs' suggested
interpretation would defeat the act's purpose, which was to encourage
flood-safe construction. It further held that Iannuzzi's right to protect his
property from flooding outweighed the rights of the other townhome owners to
preserve their ocean views.
Accordingly, the appeals court reversed the trial court's
order prohibiting Iannuzzi from reconstructing an elevated townhome.
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Owner Loses Right to Lease Unit Following Proper Adoption of a Leasing Prohibition
Pasha v.
Battle Creek Homeowners Association, Inc., No. A19A0015 (Ga. Ct. App. June
13, 2019)
Use Restrictions: The Georgia Court of Appeals held that an owner did
not have a vested right to lease his unit and was subject to a newly adopted
leasing prohibition because it was adopted with the approval required by the
Georgia Property Owners Association Act.
Battle Creek Homeowners Association, Inc. (association)
governed a subdivision in Cobb County, Ga. In 1999, the association
affirmatively opted to be subject to the Georgia Property Owners Association
Act (act). In 2000, Fard Pasha purchased a home in the community. In 2004,
Pasha moved out of the home but retained it as rental property and rented it to
different tenants over the next decade.
In 2016, with the approval of more than two-thirds of the unit
owners, the association amended the community's declaration of covenants,
conditions, restrictions, and easement (declaration) to prohibit leasing. The
amendment included an exception for any owner who was leasing its lot on the
date of the amendment and who provided the association with a copy of the lease
within 30 days of the amendment (grandfathered owner).
However, a grandfathered owner had the right to lease the
unit only until the unit was sold to another person or the date that all
current occupants ceased to occupy the unit, whichever was earlier. In
addition, the amendment required any change in the lease terms, including any
renewal, assignment, or change in the lease duration or unit occupants, to
comply with the new restriction.
Following approval of the amendment, the association
notified all owners that the leasing restriction would take effect in August
2016 and requested copies of any current leasing agreement. Pasha did not
respond to the association and instead filed suit against the association in
February 2017. Pasha sought a ruling that the leasing restriction was
unenforceable against him. The trial court granted summary judgment (judgment
without a trial based on undisputed facts) in the association's favor, and
Pasha appealed.
Pasha maintained that he had a vested right to lease his
unit regardless of the leasing restriction. The appeals court disagreed. Pasha
was aware, or at least on notice, that the declaration was subject to the act's
provisions. The act specifically allowed the declaration to be amended with the
approval of two-thirds of the owners. The association obtained the requisite
approval of the owners for the leasing amendment.
Pasha argued the amendment violated another Georgia statute
which voids conditions that are repugnant to property ownership, which require
impossible or illegal acts to be performed, or which in themselves are contrary
to the law's policies. However, the most conditions deemed void under this
statute are those that constitute either an outright or de facto restraint on
the ability to sell or convey property. Pasha did not show how his ability to
sell his unit was hindered by the leasing restriction.
Accordingly, the appeals court affirmed the trial court's
judgment.
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Mortgage Company Released its Security Interest in All Condominium Property
Trustees of the Beechwood Village Condominium Trust v. USAlliance Federal Credit Union,
No. 18-P-89 (Mass. App. Ct. May 15, 2019)
Developmental Rights: The Appeals Court of Massachusetts
determined that a mortgage company released its entire security interest in a condominium
common area when it issued partial releases from the mortgage for the sale of
units and, while some development easements had not expired, they were
insufficient to permit construction of additional units.
In 2006, Beechwood Village Realty Trust (developer) acquired
a 37-acre parcel in Rockland, Mass., for the purpose of developing a
condominium project. To finance the purchase and the development, the developer
obtained a $2.8 million loan from USAlliance Federal Credit Union (USAlliance)
and a $1.9 million loan from the property seller, Mark Gardner. Both Gardner
and USAlliance held mortgages on the property as security for the loans'
repayment.
In 2007, the developer recorded a condominium master deed
(master deed) on the entire 37-acre parcel (condominium property). The master
deed stated that all of phase one, consisting of three free-standing units, was
submitted to the Massachusetts Condominium Act (act), but the developer
reserved the right to construct up to 79 units in up to 30 additional phases. A
site plan depicting the 79 units was recorded with the master deed.
Beechwood Village Condominiums Trust (association) was
established to govern the condominium. Between 2007 and 2011, 54 units were
constructed in multiple phases. As each phase was completed, the units were
added to the condominium by amendment to the master deed.
As each unit was sold, USAlliance and Gardner issued partial
releases freeing the units from their respective mortgages. In 2007, the
developer refinanced the mortgage with USAlliance and granted USAlliance a
mortgage interest in all of the developer's interest in the condominium land,
unsold units, all buildings erected or to be erected, and all improvements
including walkways, parking areas, and driveways. The project ran into severe
financial difficulties by 2011, and the developer ceased operations. All of the
project roads were constructed, but the remaining planned units on scattered
sites were never constructed.
In 2012, Gardner assigned his mortgage to USAlliance. In
2016, the association sued USAlliance, seeking a determination that the
USAlliance mortgage no longer encumbered any interest in the condominium
property or buildings; the developer's development and easement rights expired
in March 2014 (seven years after the master deed was recorded); and the common
area was not subject to any development without the consent of 75% of the unit
owners.
The trial court found that the entire condominium property
remained subject to the mortgages superior to any interest created subsequent
to the master deed, except to the extent USAlliance and Gardner granted partial
releases for particular units. The trial court also determined the developer's
construction rights had expired. Both parties appealed.
The master deed reserved phasing and construction rights and
associated easements for the developer for seven years. It also granted other
access easement to and from buildings and for utilities for an unlimited period
of time. The "common area" was defined as including all of the
condominium property, including the buildings and improvements, other than the
units.
The appeals court determined that the common area consisted
of the entire 37 acres, including the land underneath the dwellings. The units
were dwellings sitting on top of the common area land, and each unit owner had
an exclusive use easement in the land on which the unit was located. When the
time master deed was recorded, the three existing units included an undivided
interest in the common area. Thus, when the first three units were sold, each
unit owner acquired an undivided 33.3% interest in the common area. That
interest cannot be separated from the unit under the act. As more units were
sold, each owner's percentage interest was gradually reduced, but the ownership
of the entire common area remained with the unit owners.
The appeals court determined the developer did not reserve a
reversionary interest in any portion of the common area under which the
property would revert back to the developer upon some event occurring or at the
expiration of a stated time. When USAlliance and Gardner issued partial
discharges of their mortgages to each unit owner, they released their entire
interest in the common area. That interest cannot be separated from the unit
under the act. The trial court erred in concluding that USAlliance, as
Gardner's successor, retained a mortgage interest in the common area.
However, the Gardner and USAlliance mortgages continued to
encumber the developer's reserved development rights. The master deed provided
that each unit (including its proportional interest in the common area) was
subject to the developer's reserved phasing and easement rights. Such rights
did not become part of the units or the common area by operation of the master
deed or the act. Nor were such rights released by the Gardner and USAlliance
partial releases.
The appeals court agreed that the developer's right to
develop phases was unlimited in time and did not expire after seven years when
the construction easement expired. Nonetheless, the easements that remained
were insufficient to allow access for further construction of additional units,
since the remaining easements permitted only access to and from buildings
located on other phases for all purposes including the transportation and
storage of construction materials.
Accordingly, the appeals court affirmed in part, and vacated
in part, the trial court's judgment. ©2019 Community Associations Institute. All
rights reserved. Reproduction and redistribution in any form is strictly
prohibited.
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