July 2019
In This Issue:
Recent Cases in Community Association Law
Mortgage Company's Payment of First Association Lien Does Not Protect It from Foreclosure of Second Lien
One-story Home Restriction Still Valid
Association Has Right to Install Ditches in Easements on Lots
Future Promises Independent of Deed Are Not Extinguished by Deed
Co-op Not Liable for Discrimination Where it Had Legitimate Reason for Enforcement Action
Beachfront Townhome Owner's Right to Elevate Townhome Following Storm Damage Outweighed Rights of Other Owners to Ocean View
Owner Loses Right to Lease Unit Following Proper Adoption of a Leasing Prohibition
Mortgage Company Released its Security Interest in All Condominium Property
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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.

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.

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