August 2019
In This Issue:
Recent Cases in Community Association Law
Association Not Liable for Inherently Dangerous Conditions in Common Area
Subdivision Covenants Did Not Protect Views in Perpetuity
Real Estate Value Includes the Right to Acquire Membership in Separate Club
Second Home Owner Bound by Arbitration Requirement in Prior Owner's Deed
Developer Liable for Selling Unbuildable Lot
Operation of a Wedding Venue Violates Covenants
Board Could Interpret Bylaws as Not Granting Broader Rights Than Statute
Association Barred from Suing Contractor for Property Damage Since Insurance Covered the Damage
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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.

Association Not Liable for Inherently Dangerous Conditions in Common Area

Dupreus v. Lake Forest Estates Homeowners Association, No. 78175-8-I (Wash. Ct. App. July 1, 2019)

Risks and Liabilities: The Court of Appeals of Washington held that an association that owned a lakefront park and dock was not liable for a boy's drowning because the lake was an open and obvious danger.

Lake Forest Estates Homeowners Association (association) governed a community adjacent to Lake Wilderness in King County, Wash. Douglass and Sarah Miller (the Millers) rented a home in the community from Charles and Angela Santillan (the Santillans).

In June 2015, the Millers' son, Devon, invited Ritchy Valmont to his 14th birthday party. Ritchy had just turned 14 the day before. As renters in the community, the Millers had access to a gated, lakefront park owned by the association, which was intended for use by association members and their guests.

Devon, Ritchy, and several other boys entered the park. It’s unclear whether the boys did so by using a key or by jumping a fence. As they made their way toward the lake, the boys passed signs warning, "Danger [-] Do Not Swim Under Dock" and "No Lifeguard [-] Swim at Your Own Risk." The boys started swimming off of an L-shaped dock that extended 25 feet into the lake.

Witness accounts differed as to whether Ritchy jumped, fell, or was pushed, but he entered the water from the dock. Ritchy did not know how to swim, and he struggled in the water. His friends tried to help him, but Ritchy sank.

The boys called for help, and an off-duty police officer who was in the park dove into the water but could not find Ritchy. A dive team recovered Ritchy about 40 minutes later. He still had a pulse when they pulled him from the water, but Ritchy died after reaching the hospital.

Ritchy's parents, Remy Dupreus and Melodie Valmont (the parents), sued the Millers, the Santillans, and the association for negligence. Both the association and the Santillans argued that they had no duty to Ritchy. The trial court agreed and granted summary judgment (judgment without a trial based on undisputed facts) in favor of the association and the Santillans, dismissing the claims against them. The parents appealed.

To establish a case for negligence, a plaintiff must demonstrate that the defendant owed the plaintiff a duty, the defendant breached that duty, and the defendant's breach proximately caused the plaintiff's damages. A property owner owes differing duties to people coming onto the property depending on the person's status as a trespasser, a licensee, or an invitee.

A landlord has a duty to protect its residential tenant and the tenant's guests from dangers on the property that are open and obvious if the landlord should anticipate the harm despite such knowledge or obviousness. However, the Santillans did not possess or control the park where the drowning occurred. As such, the Santillans had no duty to warn invitees of dangers at the park.

The parents argued the association breached its duty to Ritchy as a licensee by failing to warn about the danger posed by the lack of visibility of the lake's depth or by failing to install safety measures on the dock. With respect to natural conditions on land, the duties of a property owner to a licensee depend on the knowledge of each. A licensee's full understanding that a natural condition is dangerous ends any liability of the owner for the condition. Whether a natural hazard is open and obvious depends on whether the licensee knew, or had reason to know, the full extent of the risk posed by the condition.

The parents argued that Ritchy could not appreciate the danger the lake posed because an algae bloom reduced the water's visibility and concealed its true depth. However, the appeals court found that Ritchy's inability to gauge the lake's depth was precisely why he had reason to know it was dangerous. His observation of the murky water should have given him reason to know that it was dangerous to be in water of an unknown depth when he could not swim. Dupreus testified that he told Ritchy not to get in the water when he does not know how to swim.

The parents also asserted that the dock was a danger because it directed swimmers to the deepest part of the lake and lacked a safety railing and safety equipment. The appeals court stated that the risk of harm was that a person who could not swim and was near a lake of unknown depth might drown. The danger of drowning related to the lake, not to the dock.

The parents further urged that a higher standard of care applied because Ritchy was a business invitee instead of merely a licensee. To qualify as a business invitee, the person entering the property must bestow an economic benefit on the property owner. The parents argued that the association derived an economic benefit from the assessments paid by the association members for use of the park similar to the dues paid by members of a private club. However, assessments were not paid specifically for use of the park. The Millers did not rent the park, and there was no evidence that the association invited the Millers or Ritchy to use the park for the association's economic benefit.

Accordingly, the trial court's judgment was affirmed.

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Subdivision Covenants Did Not Protect Views in Perpetuity

Eisen v. Tavangarian, 36 Cal. App. 5th 626 (Cal. Ct. App. Jun. 20, 2019)

Architectural Control: The Court of Appeal of California held that, although subdivision covenants expressed view protection concerns for initial home construction, the expiration of architectural control powers meant that no approval was required for home remodels, even where such remodel obstructed views from other lots.

Glen and Alison Eisen (the Eisens) owned a home in the Marquez Knolls subdivision in Pacific Palisades, Calif. In 2012, Ardeshir and Tania Tavangarian (the Tavangarians) purchased the property across the street from the Eisen property. The Tavangarians purchased the property for the purpose of remodeling the existing home for resale. Both homes had ocean views, but the Eisens' primary view was over the roof of the Tavangarians' home.

When the Tavangarians purchased the home, it was L-shaped. One side of the "L" was two stories, and the other side was one story. Beginning in 2013, the Tavangarians began remodeling the home. They replaced the rooftop air conditioner units with new units and equipment. The second story western wall was extended by more than 5 feet (the privacy wall) and the south wall by more than 4 feet. The second story roof was extended by cantilevering it out by 8 feet to meet the new privacy wall. A second story deck was added that also had a cantilevered roof. New, tall privacy hedges also were added.

The Eisens sued the Tavangarians in September 2013 as the remodel was nearing completion, claiming the remodel violated three of the subdivision's restrictive covenants. First, the covenants provided that no building other than a single-family dwelling, not to exceed one story in height, was permitted to be erected, altered, or permitted to remain, except that the original developer and the architectural committee could approve a two-story dwelling where it would not detract from the view of any other lot.

Second, the covenants prohibited the alteration of any structure without approval by the architectural committee as to conformity and harmony of exterior design with existing structures in the subdivision and location of the building with respect to topography and finished ground elevation. However, the covenants specified that the committee's powers expired at the end of 1980. Third, the covenants forbade any fences or hedges exceeding 3 feet in height from being erected or permitted to remain or any tree, shrub, or other landscaping planted, or any structures erected that obstructed the view from any other lot.

The trial court concluded that a home could be remodeled only if the changes did not detract from the view of any other lot. It found that most of the Tavangarians' exterior changes violated the covenants. In particular, the trial court found that the privacy wall and the cantilevered roof unreasonably obstructed the Eisens' view, and it ordered both to be removed.

The trial court further found that the new, larger air conditioning units on both the first- and second-story roof obstructed views, and the Tavangarians were ordered to replace the equipment with significantly less obtrusive equipment. Finally, the trial court found the hedges violated the height restriction. The trial court awarded the Eisens $39,000 as interim damages for the view loss during the duration of the lawsuit. The Tavangarians appealed.

The appeals court found that, although the basic one-story limit applied whether a dwelling was initially constructed or altered, it did not otherwise restrict the renovation of a single-story residence. Once a second story was initially approved by the original developer or architectural committee, the one-story limit had no further role and imposed no limits on the renovation of the home. The appeals court rejected the Eisens' contention that, once a second story was initially approved, the second story could not thereafter be modified in any way that enlarged its contour or silhouette, finding that such interpretation would fail to give effect to the covenant requiring architectural approval.

Both parties agreed that the architectural approval requirements had expired in 1980, but they disagreed as to the consequences of such. The Eisens argued that, once architectural review ceased, there could be no architectural changes because there was no entity to approve the changes. The appeals court disagreed, holding that the absence of an entity with authority to review and approve building plans nullified the requirement for plan approval. Nowhere did the covenants indicate an intent to prohibit remodeling a home after the architectural committee ceased.

Further, the covenant prohibiting any landscaping to be planted or structures erected that may obstruct the view from any other lot applied only to erecting a structure, not making alterations to one. Although a dwelling is a "structure," the appeals court determined the context required that the structures regulated by this covenant were limited to outbuildings and similar objects surrounding the dwelling, not the main dwelling itself. The appeals court determined it was not logical to restrict buildings by the catchall phrase "other structures" in a paragraph devoted to hedges, walls, and fences.

Accordingly, the trial court's judgment was reversed except as to the order requiring that the hedges be trimmed and maintained at a height of 3 feet or under.

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Real Estate Value Includes the Right to Acquire Membership in Separate Club

Glynn County Board of Assessors v. SIA Propco I, LLC, No. A19A0771 (Ga. Ct. App. Jun. 25, 2019)

Taxes and Tax Regulation: The Georgia Court of Appeals held that, where ownership of a unit gave the owner the right to apply for membership in a separate club, the value of the club membership was inextricably bound with the value of the real estate and properly included in the unit's valuation for property tax purposes.

SIA Propco I, LLC (SIA) owned timeshare interests in condominium units within the Cloister Ocean Residences on Sea Island in Glynn County, Ga. The declaration of condominium (declaration) allowed an individual unit to be owned in quarter shares (quarter interests), entitling the quarter interest owner to use the unit for one quarter of the year. SIA owned 52 quarter shares in 17 units.

The Glynn County Board of Assessors assigned each quarter interest a fair market value for 2015 property ad valorem taxes using the sales comparison approach, based on two comparable sales of quarter interests during the previous year. SIA appealed the assessed value of its quarter interests to the Glynn County Board of Equalizations, which reduced the valuations to account for the value of Sea Island Club (club) membership rights that were included in the sales prices of the comparable properties.

The county appealed the decision to the Superior Court of Glynn County. The superior court granted partial summary judgment (judgment without a trial based on undisputed facts) in SIA's favor, finding that the county failed to exclude the value of club membership that was associated with ownership of a unit and failed to take into account that the quarter interest owners were required to pay only 25% of the annual club dues. The county appealed to the court of appeals.

SIA argued that the club membership rights constituted personal property that could not be taxed, and the comparable sales prices should be reduced by the value of the club membership. The county asserted that no adjustment should be made because the purchase of a quarter interest did not automatically include club membership. Rather, such purchase gave the owner the right to apply for membership in the club.

The appeals court previously held that, although a club membership is intangible personal property, not taxable real estate, if the procedure for transferring club membership shows that a purchaser obtains a right to apply for a membership in the club as part of the real estate purchase rather than purchasing a membership directly from the property seller, such right is inextricably bound with the sale of qualified real estate and properly considered when assessing the fair market value of such properties. Thus, the county could properly include the enhanced value paid to the seller for the right to apply for club membership as part of the fair market value of the property. This increased value was a benefit connected to the real estate rather than an intangible benefit unrelated to the real estate, such as goodwill.

The declaration provided that quarter interest purchasers were entitled only to an opportunity to apply for club membership. It specifically provided that club memberships were not transferable or assignable and that sale of a quarter-interest terminated the seller's club membership, and the purchaser had to apply for club membership.

The superior court had relied upon the testimony of the club's vice president of membership, who stated that a purchaser was automatically approved for membership. The club routinely referred to club membership as "coming with" the unit. They did not utilize a procedure for formal approval for membership. The vice president also testified that the membership was transferred directly from the seller to the buyer.

This testimony was at odds with the provisions of the declaration and the public offering statement. Moreover, the vice president's own statements were contradicting because she also stated that club members were not able to sell memberships to other owners; they always had to go through the club. Without any evidence to explain or resolve the contradictory statements, the statements must be construed against the club and SIA. The trial court erred in holding that the county was required to exclude the value of club memberships when valuing the quarter interests.

Further, the county was not required to reduce the value of the comparable sales prices to factor in that quarter interest owners paid only 25% of the club annual dues when determining the quarter interests' fair market value. The club membership available to quarter interest owners was part of—and could not be separated from—the value of the quarter interest. For purposes of real property taxation, the real property includes the bundle of rights, interest, and benefits connected with the ownership of the real estate. To do otherwise would allow a taxpayer to escape taxation on a portion of the amount a buyer would pay and a seller would accept for the property in an arm's length, bona fide sale.

Accordingly, the trial court's judgment was reversed.

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Second Home Owner Bound by Arbitration Requirement in Prior Owner's Deed

Hayslip v. U.S. Home Corporation, No. 2D17-4372 (Fla. Ct. App. July 10, 2019)

Contracts: The Court of Appeal of Florida held that an arbitration requirement in a deed was a covenant running with the land and binding on successor owners of the property.

In 2007, David and Luisa Kennison (the Kennisons) purchased a newly-built home from U.S. Home Corporation (U.S. Home) in Lee County, Fla. The property was conveyed to the Kennisons by a special warranty deed containing various covenants, conditions, and restrictions. Among these was a requirement that any disputes be submitted first to mediation and, if not settled in mediation, to binding arbitration. The arbitration requirement applied to any claims or disputes related to the property and the community in which the property was located, among other things. The deed further provided that the Kennisons, by acceptance of the deed, automatically agreed for themselves and their successors and assigns to observe and be bound by the deed's terms and conditions.

In 2010, Shane and Laura Hayslip (the Hayslips) purchased the property from the Kennisons. The warranty deed from the Kennisons to the Hayslips did not contain any express provisions for arbitration, but it did state that the conveyance was subject to easements, restrictions, reservations, and limitations, if any.

In 2017, the Hayslips sued U.S. Home, alleging that the stucco system was inadequate and improperly installed in violation of the Florida Building Codes Act. The trial court stayed the case (put it on hold) pending mediation and/or arbitration in accordance with the Kennisons' deed. The Hayslips appealed.

Absent a valid written agreement, no party can be forced to arbitrate a claim. There was no dispute that the Kennisons acquiesced to the arbitration requirement by taking title to and possession of the property, but the Hayslips argued that they were not so bound. They asserted that the arbitration agreement was a personal contract between U.S. Home and the Kennisons and not a covenant running with the land and binding upon subsequent purchasers.

Covenants are either real or personal. Real covenants run with title to the land and bind the heirs, successors, and assigns of the original party making the covenant and imposing it on the land. A personal covenant does not continue with the land or bind successor owners. The primary test for whether a covenant is real or personal is whether it concerns the property granted and the occupation or enjoyment of such property, or is a collateral or personal promise not immediately concerning the property granted. A covenant running with the land must have a relation to the land, and the thing required to be done must be something which touches the land and the occupation, use, or enjoyment of the land.

To establish a valid and enforceable covenant running with the land, a plaintiff must show: (1) the existence of a covenant that touches and concerns the land; (2) an intention that the covenant run with title to the land; and (3) notice of the restriction on the part of the party against whom enforcement is sought.

The appeals court determined that the arbitration requirement touched and concerned the property. Performance of the covenant affected the occupation and enjoyment of the home because it dictated the means by which the Hayslips must seek to rectify building defects in the home. Not only is the requirement triggered when a defect is realized and the owners seek recourse from the builder, but the outcome of the arbitration also impacts the home.

Accordingly, the trial court's judgment was affirmed. However, the appeals court certified the issue as one of great public importance because it was an issue that the Florida appellate courts have not yet considered, and it has potentially wide-ranging effects. Such certification means that the issue is eligible for appeal to the Florida Supreme Court.

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Developer Liable for Selling Unbuildable Lot

Herhold v. Smith Land Company, 2019-Ohio-2418, C.A. No. 28915 (Ohio Ct. App. Jun. 19, 2019)

Contracts: The Ohio Court of Appeals held that a developer was liable for selling a lot that was not buildable, even though the sales contract stated the lot was sold "as is."

Smith Land Company, LLC (Smith Land) developed the Woodbury Estates neighborhood in Fairlawn, Ohio. In 1999, Smith Land submitted a report identifying 5.54 acres of wetlands in the neighborhood to the U.S. Army Corps of Engineers (ACOE).

In 2000, Smith Land applied to ACOE to fill a 0.945 acre of wetland in Block A and to mitigate the impact by purchasing two acres of wetlands elsewhere. ACOE issued a permit authorizing the work. A notation on the subdivision plat stated that an ACOE permit was required to fill any wetlands not identified on the plat as to be filled with dirt. Block A was not shown on the plat as wetlands that were to be filled.

In 2002, Shawn and Malavanh Herhold (the Herholds) met with Robert Smith, principal of Smith Land, about purchasing a vacant lot in Block A. Mr. Herhold noticed the lot was level and freshly graded with woods at the back. Mr. Smith told the Herholds that there were wetlands at the back of the lot and that he had been allowed to bring in fill dirt, but he did not inform them that any wetlands had been filled. Mr. Smith said the lot was buildable and advised the Herholds that some extra stone would be required for the home foundation that would cost about $5,000 more than the average home construction.

Mr. Herhold told Mr. Smith he wanted to ensure that the lot was buildable, so they hand wrote a note on the purchase contract obligating Smith Land to provide documentation that the lot was buildable with fill dirt. There was a 60-day period for the Herholds to obtain an inspection and conduct any other due diligence. After the due diligence period expired, the contract stipulated that the Herholds were buying the lot "as is" without warranties or representations.

Mr. Smith also completed a disclosure form in which he indicated that he knew that the lot was designated as a wetland but was not aware of any flooding, drainage, or grading problems on the lot; did not know of any excessive settling, slippage, sliding erosion, or other soil stability problems; and did not know of any violations of local, state, or federal laws affecting the lot. The contract was signed in July 2002. The Herholds did not obtain an inspection, instead relying upon Mr. Smith's representations that the lot was buildable by using some extra stone for the foundation. The closing of the sale took place in September 2002.

The Herholds did not start construction on a home because shortly after purchasing the lot, Mr. Herhold was deployed to Japan with the U.S. Navy Reserve. When he returned to the U.S. a year later, the Herholds decided they should sell the property due to changed circumstances.

In December 2004, the Herholds contracted to sell the property for $61,900, but the contract fell through because the parties discovered that the city would not issue a building permit for the lot. The city stated that permission from the Ohio Environmental Protection Agency (OEPA) was a prerequisite to the issuance of a building permit since any construction might impact the wetlands.

The OEPA inspected the lot and determined that the fill dirt surpassed the amount allowed under the ACOE permit by a large margin. Mr. Herhold was informed that his options were limited to either removing the fill dirt and reestablishing the wetlands or submitting an after-the-fact application to allow the fill dirt to remain and purchasing mitigation.

The Herholds chose the first option because the mitigation option was very expensive. They removed about 40 dump trucks of fill dirt from the lot and planted vegetation to reestablish the wetlands. This made the level portion of the lot very narrow. A soil test also revealed that it would cost about $15,000 to $20,000 to put in a foundation for a house.

Although the lot was then eligible for a building permit, the Herholds could not sell the lot, even after listing it in the $30,000 range, because the lot was no longer desirable due to the greatly diminished buildable area. The Herholds filed suit against Mr. Smith and Smith Land for breach of contract and fraud by representing that the lot was buildable and failing to disclose the illegal fill dirt.

A jury found in favor of the Herholds and awarded them $42,000 in damages for breach of contract and fraud plus $165,000 in punitive damages, $48,062 for attorneys' fees, and $29,826 in prejudgment interest. Smith Land and Mr. Smith (collectively, defendants) appealed.

The appeals court found that the jury reasonably concluded that the lot was not buildable as sold. The contract's "as is" clause stating that the lot was sold without warranties conflicted with the handwritten notation requiring documentation that the lot was buildable with fill dirt. There was no provision in the contract that caused the "as is" clause to trump the buildable requirement.

The defendants argued that the contract requirements did not survive the sale closing based on the merger doctrine. Under the doctrine, whenever a deed is delivered and accepted without qualification pursuant to a sales contract, the contract merges into the deed and any claim based upon the contract is extinguished. However, the merger doctrine does not apply if fraud or mistake existed. Since a jury found the defendants guilty of fraud, the merger doctrine did not apply.

Mr. Smith argued he should not be individually liable because he was not a party to the contract. However, Mr. Smith made the disclosure statements based on his knowledge. There were also places in the contract where Mr. Smith signed only his name without any indication that he was signing only on behalf of Smith Land. If a corporate officer signs an agreement in any way that indicates personal liability, the officer becomes personally liable, regardless of his intention. Thus, the jury could have reasonably concluded Mr. Smith was individually liable under the contract.

Accordingly, the trial court's judgment was affirmed.

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Operation of a Wedding Venue Violates Covenants

Sides v. Saliga, No. 03-17-00732-CV (Tex. App. Jun. 20, 2019)

Use Restrictions: The Court of Appeals of Texas held that operation of an event venue violated a commercial use prohibition in subdivision covenants, and a minor discrepancy in the property owner's name did not invalidate the covenants.

In 2006, Jani Saliga purchased a 12-acre lot in Hays County, Texas. Saliga obtained title insurance and a survey of the property in connection with the purchase. Both the title insurance policy and the survey indicated that the property was subject to a declaration of covenants (declaration) and stated the recording information for the declaration. However, Saliga did not obtain a copy of the declaration.

The declaration required that the property be used solely for single-family residential purposes, and it specifically prohibited conducting any business or commercial activity to which the general public or any employee was invited. The declaration further prohibited using any lot as a lodging house, hotel, bed and breakfast, or similar purpose.

In 2014, Saliga obtained a new title insurance policy and survey in connection with getting financing to construct a home on the property. The new policy and survey did not indicate that the property was subject to any restrictive covenants. Saliga completed the home's construction in 2015 and began operating an event venue out of the home under the name "Garden Grove." She first hosted a wedding at the home in April 2016.

In June 2016, seven of Saliga's neighbors, including Michael Sides (collectively, the neighbors), sued Saliga, asserting that she was using the lot for commercial purposes in violation of the declaration. The neighbors stated that Garden Grove offered overnight lodging and that hundreds of people and vehicles would attend events at the property. They claimed the events generally included either a live band or music so loud that it caused their windows to shake.

The neighbors also said the events went on until late at night. The Garden Grove website advertised that the property could accommodate groups of up to 500 people and offered a chef-prepared brunch. A honeymoon suite and overnight accommodations were offered in the house for up to 30 guests, and on-site "glamping" (glamorous camping) was available for additional overnight guests. Saliga hosted at least two events that were publicized as vendor showcases at which people planning weddings could meet vendors providing wedding-related services.

Saliga asserted that she was not bound by the declaration because she was a bona fide purchaser who had no notice of the declaration prior to purchasing the property. She also argued the declaration was not binding on the property because it was signed by the wrong party. The declaration stated that it was made by SGL, Ltd., but the owner of the property at the time the declaration was recorded was SGL Development, Ltd.

At trial, the attorney who prepared the declaration admitted that the property owner's name was incorrect. He filed a document correcting the mistake, but it was not recorded until after the lawsuit had been filed.

Saliga said she would not have bought the property had she known there were restrictions on the property. It was important to her that the purchase contract stated that there was no homeowners association. Saliga also asserted that the neighbors had waived the right to enforce the commercial use restriction because another lot was being used for a for-profit substance abuse treatment facility that housed up to 16 patients at a time.

A buyer is bound by restrictive covenants only when it has actual or constructive notice of the limitations on the title. The trial court found that the failure to correctly identify the owner of the property in the declaration resulted in the declaration not properly encumbering the property, and Saliga was not deemed to have notice of the declaration at the time of her purchase.

The trial court determined that Garden Grove was not a business open to the public in violation of the declaration because it operated by appointment only and did not have employees. Garden Grove only engaged contractors to provide services as needed to help run the events. The trial court further found that the home was primarily used as Saliga's family home. It entered judgment in Saliga's favor, and the neighbors appealed.

The appeals court determined that the relatively minor discrepancy of the property owner's name in the declaration did not completely invalidate the declaration. The names were sufficiently similar to have at least placed Saliga on notice that she should investigate whether there were encumbrances on the title. Although Saliga's deed did not reference the declaration specifically, it did state that the conveyance was subject to the covenants and restrictions of record, and the county's property records indicated that the declaration was in effect.

In addition, both the title insurance policy and the survey Saliga obtained in connection with her purchase provided Saliga with actual notice of the declaration, and Saliga was responsible for reading the contents of her closing documents.

The appeals court found that using the property as an event venue violated the commercial use prohibition. Although Saliga claimed there were no employees, she did advertise having an on-site manager and a professional chef as amenities provided. She also advertised the property to the general public for event rental and invited the general public to the vendor showcase events. Further, Saliga rented the property for overnight stays similar to a bed and breakfast.

The fact that the neighbors never complained about the treatment facility was not sufficient to constitute a complete waiver of the use restrictions. There was no evidence that the treatment facility disrupted or harmed the community to the same degree as the event venue. Accordingly, the trial court's judgment was reversed, and the case was remanded for further proceedings.

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Board Could Interpret Bylaws as Not Granting Broader Rights Than Statute

Star v. Sierra Los Pinos Property Owners Association, No. A-1-CA-36136 (N.M. Ct. App. July 2, 2019)

Association Operations: The Court of Appeals of New Mexico held that an association board could interpret a bylaws requirement to make its books, records, and papers available for inspection by the association members to mean the same as records required by the New Mexico Homeowner Association Act.

Sierra Los Pinos Property Owners Association (association) served a community in Jemez Springs, N.M. Suzanne Star owned a home in the community.

Star became concerned over an increase in delinquencies and the accuracy of financial reporting by the association's board of directors (board). In December 2014, she sought to inspect the association's records. The board granted Star access to some financial and other records, but it did not produce for inspection bank statements, the general ledger, invoices, accounts receivable aging reports, open invoice reports, or communications between board members and the New Mexico Office of the State Engineer.

After several unsuccessful attempts to gain access to the requested records, Star filed suit against the association for breach of her inspection rights under the association's bylaws and the New Mexico Homeowner Association Act (HOAA). The trial court determined that the association had satisfied its obligations to Star. It found that all required information had been made available for inspection on a reasonable basis, and the financial information had been provided on the association's website.

The trial court stated that the association could redact "personal adverse financial information" from records it produced for inspection. It also determined that the terms "audit" and "review" were interchangeable when interpreting the bylaws, so the association had not breached its duties under the bylaws for an annual financial review and triennial audits. Star appealed.

The bylaws stated that the association books, records, and papers shall be subject to inspection by any member during reasonable business hours. The bylaws empowered the board to interpret the bylaws. The board interpreted the terms "books, records, and papers" as such documents were defined in the HOAA. The HOAA listed 11 types of records the association was required to keep and make available for inspection. The appeals court determined that this interpretation was reasonable since it was consistent with statutory authority addressing the same subject matter.

Star argued that it was improper to interpret the bylaws consistent with the HOAA since the HOAA was not even in existence when the bylaws were adopted. She argued that the HOAA could not invalidate the bylaws. The appeals court found that the board did not rely on the HOAA to invalidate any provision of the bylaws. Rather, the board simply concluded that the book, records, and papers required by the bylaws should be the same as the financial records identified in the HOAA. The appeals court saw no reason the HOAA could not be used as the relevant framework for interpreting the bylaws, particularly since the bylaws gave the board the power to interpret them.

The bylaws gave the board the power to exercise all of the association's powers, duties, and authority that were not reserved to the membership by the bylaws or articles of incorporation. In accordance with that authority, the board adopted a policy that access was restricted to members' personal identifying information, such as account numbers and the names of delinquent members. Star argued that she was entitled to such information. The appeals court concluded that, consistent with the broad powers granted to the board by the bylaws, the association could withhold certain personal information of members from disclosure.

Based on the accepted interpretation of "books, records, and papers," the association was not required to provide all of the records Star sought, but it was obligated to produce financial statements and accounts and all current contracts. The association's president testified that financial statements and accounts were primarily found in the treasurer's quarterly reports, which were posted on the association's website. These reports included a profit and loss statement, balance sheet, details from invoices, and month-to-month income and expenses. Also posted were summaries of the quarterly reviews performed by the association's accountant and year-end reviews, the budget, audits for the past two years, and reports showing everything in each account. The appeals court determined this information satisfied the association's requirement to make its books, records, and papers available to the members.

The appeals court declined to decide whether the terms "audit" and "review" were interchangeable, finding the issue moot because the association had obtained an audit each year. It held that an audit could satisfy the bylaws requirement for an annual review, and the association was free to exceed the bylaws' requirements.

Accordingly, the trial court's judgment was affirmed.

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Association Barred from Suing Contractor for Property Damage Since Insurance Covered the Damage

United National Insurance Company v. Peninsula Roofing Company, Inc., No. 18-1427 (4th Cir. Jun. 19, 2019)

Insurance: The U.S. Court of Appeals for the Fourth Circuit held that a subrogation waiver in a construction contract barred an association's insurance company from suing the association's contractor for substantial property damage caused by the contractor's negligence.

The Council of Unit Owners of Pelican Beach Condominium (association) governed a condominium located in Maryland. The association contracted with Peninsula Roofing Company, Inc. (Peninsula) to replace the condominium's roof.

The roofers parked their truck in the condominium's parking garage, even though the contract told them not to. The roofers powered the tools they were using on the roof by running extension cords down to a generator sitting in the truck. The generator caught fire and the fire spread, causing about $3 million in property damage.

The association's property insurer, United National Insurance Company (United National), covered the association's damages. United National then brought a subrogation (succeeding to the rights of another) suit against Peninsula for negligence and breach of contract to recover the amount it paid to the association. An insurer asserting a subrogation claim is viewed as standing in the shoes of the insured so that the insurer's rights are equal to, but no greater than, those of the insured.

Peninsula argued that the association had contractually waived the types of claims United National was attempting to assert. The contract specifically provided that the association and Peninsula waived all rights against each other for damages caused by fire or other causes of loss to the extent it was covered by property insurance. United National claimed the subrogation waiver was either inapplicable or unenforceable because the waiver referred only to damage caused by contractually authorized work. Since the truck and the generator were parked in the garage without permission, the fire damage was not caused by contractually authorized work.

The trial court ruled that the subrogation waiver was enforceable and that it barred United National’s claims. United National appealed.

Under the contract, each party waived all rights against the other party for fire damages to the extent it was covered by property insurance applicable to the work. “Work” was defined as the construction and services required by the contract documents, whether completed or partially completed, and included all other labor, materials, equipment, and services provided or to be provided by Peninsula to fulfill its obligations. United National argued that the language limited the waiver’s scope to damages caused by the activities permitted by the contract.

The appeals court disagreed, finding that the phrase "applicable to the work" did not have the limiting effect proposed by United National. The appeals court found the phrase simply modified the preceding phrase "property insurance." It found that the subrogation waiver barred claims arising from fire damage to association property if the association had property insurance applicable to the work and such insurance covered the fire damage.

United National also argued that Maryland’s public policy prohibited subrogation waivers for claims involving gross negligence. The Maryland Supreme Court previously held public policy prohibited a waiver of liability clause in a contract from shielding a party from liability for its own gross negligence. However, the appeals court found that the same public policy considerations did not apply for subrogation waivers in construction contracts. Importantly, the subrogation clause at issue in this case contemplated that the injured party would be able to recover its losses.

United National further asserted that Maryland law rendered subrogation waivers void to the extent that they would bar recovery for a contractor's sole negligence. Again, the appeals court disagreed. Subrogation waivers play a useful role in construction contracts by encouraging parties to anticipate risks associated with construction and to procure insurance covering those risks.

Accordingly, the trial court's judgment was affirmed.

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