June 2021
In This Issue:
Recent Cases in Community Association Law
Association Cannot Deny Liability for a Breach of its Repair Obligation
Homebuyers Failed to Ensure They Received Property They Contracted to Purchase
Association Not Obligated to Accept Checks with Restrictive Endorsements
Marketable Title Act Extinguishes Subdivision Covenants More Than 30 Years Old Except for Residential Use Restriction
Association Must Provide Member Email Addresses to Any Member Upon Request
Association Breached Master Deed by Adopting Amendment without Successor Developer's Consent
Later-Recorded Covenants Did Not Bind Lots Already Sold
Association Directors Did Not Violate any Duty to the Association by Using Their Own Funds to Buy the Community Park
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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, CAI’s College of Community Association Lawyers prepares a case law update annually. Case law summaries along with their references, case numbers, dates, and other data are available online.

Association Cannot Deny Liability for a Breach of its Repair Obligation

Baker v. Chrissy Condominium Association, No. 20-CV-0312 (D.C. Ct. App. May 27, 2021)

Association Operations: The District of Columbia Court of Appeals held that a waiver in an association's bylaws disclaiming liability for water damage barred an owner's claim for damages to a unit for the initial water loss. Damages due to the association's unreasonable delay in repairing the water leak were not barred.

Chrissy Condominium Association (association) governed a condominium in Washington, D.C. Jennifer Baker owned a unit in the condominium, which she began renting in March 2018.

In May, the unit began to experience a leak along an outside wall. By June, the leak was so bad that Baker had to offer the tenant free rent. Baker informed the association of the leak in July and sent photos to the association's president. The association took no action in response. The tenant decided to leave in November, and Baker could not relet the unit.

Frustrated with the association's inaction, Baker hired an engineer to provide a structural evaluation. The structural evaluation indicated that there were grading issues across the rear foundation wall that caused water to flow toward the unit wall and window wells. The engineer recommended waterproofing the rear foundation wall, providing drainage in the two window wells, and installing a new window at the front of the building. The engineer estimated that the repairs would cost between $14,000 and $25,500. Baker obtained estimates from four waterproofing companies.

Baker shared the structural evaluation with the president, who passed it on to the management company about two weeks later. In December, the president told Baker that the management company had advised the association to complete the repairs, but the association had decided not to undertake the work because it would deplete the reserve account.

In March 2019, Baker sued the association, alleging breach of contract, trespass, negligence, nuisance, and breach of fiduciary duty for its failure to maintain the foundation wall and repair the damage to her unit. Baker sought an order requiring the association to make the repairs (injunctive relief) and pursued damages for the diminished value of the unit and pain and suffering. Since the foundation wall was part of the common elements, Baker said she lacked the authority to make the repairs herself.

The trial court dismissed Baker's claims for injunctive relief, diminished value of the unit, and pain and suffering. The association argued that a damage waiver in the association's bylaws acted as a complete defense against Baker's remaining claims. The bylaws provided that the association was not liable for injury or damage to person or property caused by the elements or resulting from water, snow, or ice that may leak or flow from the common elements or from any pipe, drain, conduit, appliance, or equipment. The trial court agreed, granted summary judgment (judgment without a trial based on undisputed facts) in the association's favor, and dismissed Baker's remaining claims.

Baker appealed. The appeals court agreed that the damage waiver barred any claims for the initial water damage to the unit. However, Baker's complaint included claims for breach of contract, negligence, breach of fiduciary duty, trespass, and nuisance, which were based on the association's responsibility to maintain, repair, and replace the common elements. The bylaws provided that, in the event of damage to or destruction of any of the common elements because of fire or other casualty, the association was responsible for arranging and supervising the prompt repair and restoration. The bylaws also authorized the imposition of special assessments to fund such repairs if proceeds from the association's insurance were insufficient.

The association argued that all of Baker's claims stemmed from the water leaking from the foundation wall and that giving the claims different names did not prevent the damage waiver from barring the claim. The appeals court did not view Baker's claims as a mere reclassification of water damage claims. Rather, they targeted ongoing economic loss attributable to the association's inaction beyond the expense of cleanup from the initial water damage.

The appeals court recognized that there may be a period between the initial, noncompensable water damage and the date when the association's delay is unreasonable, after which the association is responsible for the damages attributable to the delay. The damages due to delay must be later in time and separate from those barred by the damage waiver. The compensable delay damages could include water damage that is distinctly different from the water that generated the original damage and is caused by the delay.

The appeals court said that the association's view that it would never be liable for water damage under any situation was incompatible with its duty to repair the common elements. Since the association had a legal duty to repair, it would mean nothing if an owner were not entitled to sue for relief when the association breached that duty.

Accordingly, the trial court's judgment was reversed, and the case was remanded for further proceedings.

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Homebuyers Failed to Ensure They Received Property They Contracted to Purchase

Benson v. Prevost, No. COA19-962-2 (N.C. Ct. App. May 18, 2021)

Covenants Enforcement: The Court of Appeals of North Carolina held that the first deed recorded takes precedence and that rights in a driveway easement included rights to park in the driveway, absent any language indicating that the easement rights are for ingress and egress only.

Michael Burnham, Daniel Smith, and Denise Smith (the developers) developed a three-lot subdivision in Wrightsville Beach, N.C. The subdivision included a dock with three boat slips extending into the water from the three adjacent waterfront lots along with three boat slips.

Prior to selling any lot, the developers recorded a map depicting a driveway easement over a portion of Lot 1 for the benefit of Lot 2. The garage for the home on Lot 2 faced the driveway easement. The developers had not yet constructed a home on Lot 1, but they originally planned for Lot 1 to also use the driveway easement to access its garage. The developers ultimately decided to locate Lot 1's garage on the opposite side of the lot. A privacy wall was constructed on Lot 1 adjacent to the driveway easement. A back gate led from the driveway easement into Lot 1's backyard, and a side gate provided access into the home on Lot 1.

In 2015, Lee and Scharme Prevost (the defendants) contracted to purchase Lot 2 and Slip A from the developers. Slip A was the better boat slip and included a boat lift. However, before the closing of the purchase occurred, the developers recorded covenants assigning Slip A to Lot 1 and Slip C to Lot 2. Three days later, the defendants closed on their purchase. The deed conveyed Lot 2 and Slip C to the defendants. Unaware of the error, the defendants began using Slip A.

The following year, William Benson and Monique Ribando (the plaintiffs) purchased Lot 1. Their contract with the developers specified that they would receive Slip C. Prior to closing, the plaintiffs were alerted to the fact that the developers had already conveyed Slip C. The plaintiffs said that they wanted to proceed with closing and take the assignment of Slip A. There was evidence that the developers and the plaintiffs' attorney agreed to straighten out the boat slip error later, but nothing was corrected. Since the defendants were already using Slip A, the plaintiffs began using Slip C.

A dispute subsequently arose when the plaintiffs noticed that the defendants were occasionally parking in the driveway easement rather than just using the easement to access their garage. The plaintiffs contended that parked vehicles in the easement blocked their ability to access their back gate. When the defendants refused to stop parking in the driveway easement, the plaintiffs protested that the defendants were using the wrong boat slip. The defendants said they had no knowledge of the error before the plaintiffs brought the issue to their attention.

The plaintiffs sued the defendants to resolve both disputes, and the defendants sued the developers. The trial court ruled in the defendants' favor, holding that they could park cars in the driveway easement and that they were the rightful owners of Slip A. The plaintiffs appealed.

The recorded map labeled the easement area simply as a driveway easement, and the deed given to the defendants conveyed easement rights in the driveway easement. There was nothing that further defined the scope of the defendants' rights to use the driveway easement or that restricted the use for ingress and egress only. The appeals court concluded that the easement rights included the right to park in the driveway easement, primarily because the easement area was short in length but over 20 feet wide.

A narrower easement might have suggested an intent for the driveway to be used for ingress and egress only, but a wide easement right next to a vacation home suggested that it included the right to park vehicles in the driveway so long as parking did not obstruct the entire width of the easement. The appeals court found that the easement width left plenty of room for the defendants to park vehicles in the driveway and still leave room for plaintiffs to use the easement for access to their backyard. The appeals court also noted that, after the driveway easement was conveyed for Lot 2's benefit, the developer chose to obstruct Lot 1's access by constructing the privacy wall.

The appeals court stated that, while parking was generally permitted in the driveway, it still had to be reasonable. In addition, as the owner of the land underlying the driveway, the plaintiffs retained the right to use the driveway for access to their backyard so long as this use did not interfere with the defendants' use rights.

With respect to the boat slips, the deed that is recorded first takes precedence under the North Carolina Conner Act. The defendants argued that the boat slips were not interests in land, so they were not subject to the Conner Act. The appeals court disagreed because ownership of the boat slips was a part of the riparian rights (rights associated with land adjacent to water relating to the water) associated with the lots, which constituted an interest in land subject to the Conner Act. Since both the boat slip covenants and the plaintiffs' deed were recorded, transferring Slip A to Lot 1, the plaintiffs owned Slip A.

The developers testified that they relied on the plaintiffs' oral promise to trade boat slips after closing. The appeals court noted that the developers could have protected the defendants' interest by contractually obligating the plaintiffs to correct the error after closing. The defendants also could have protected themselves by examining their title prior to Lot 1's sale.

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

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Association Not Obligated to Accept Checks with Restrictive Endorsements

Briargate at Seventeenth Avenue Owners Association v. Nelson, No. 19CA2052 (Colo. Ct. App. June 3, 2021)

Assessments: The Court of Appeals of Colorado held that an association was not obligated to accept checks from an owner with directions for applying the payment contrary to the association's payment policies, and the owner was not permitted to reduce payment obligations by the amounts the association owed to the owner for prior judgments.

Briargate at Seventeenth Avenue Owners Association (association) governed a condominium in Denver, Colo. John Nelson owned a unit in the condominium.

Nelson and the association had previously engaged in litigation, which resulted in the association owing judgments to Nelson. In 2015, the association adopted a payment resolution providing, among other things, that owners' payments to the association would be allocated in the following order: legal fees and costs, enforcement and collection expenses, late fees, returned check charges, lien fees, other costs and fees pursuant to the condominium declaration, and, lastly, to regular or special assessments.

In January 2016, Nelson began paying his monthly assessments with checks, including a note on the memo line stating "payment in full" (restrictive endorsement). In February 2016, the association notified the owners of a special assessment for a new roof. Nelson claims he never received the assessment notice, although he had heard rumors of a special assessment. When Nelson had not paid the special assessment by September 2016, the association sent him a delinquency notice stating that he owed $984.99 for the assessment plus late fees and interest.

Between June 2016 and March 2017, Nelson sent the association nine checks for his regular monthly assessments, but he did not pay the special assessment. Each check contained the restrictive endorsement and was deposited by the association. However, beginning in April 2017, the association began returning the checks to Nelson due to the restrictive endorsements.

In June 2017, Nelson wrote to the association that he would begin "setting off" his monthly payments against the association's judgments rather than sending checks and that he would resume making monthly payments to the association when the association's debts to Nelson had been satisfied. A setoff is a debtor's right to reduce the amount it owes to the creditor by any sum the creditor owes to the debtor.

Between June 2017 and July 2018, the association continued to charge late fees and interest to Nelson's account. It also added a second special assessment of $10,860 to the account. Nelson attempted to pay the special assessment by checks in October and November 2018. The association returned the October check because the memo line noted that it was for the October assessment plus special assessment. The November check was returned because it was accompanied by a letter from Nelson stating that the check was for his November assessment plus the final installments of the special assessment. The association contended that it could not accept the checks because they included directions for the money to be applied in a manner contrary to the payment resolution.

In July 2018, the association sued Nelson to collect the unpaid assessments, interest, collection costs, and attorneys’ fees. Nelson argued that the association's acceptance of checks between June 2016 and March 2017 operated as an accord and satisfaction of any prior debt he owed to the association. He contended that the association's rejection of his checks suspended his ongoing assessment obligations and that he was entitled to offset amounts he owed to the association against amounts the association owed to him.

The trial court rejected Nelson's arguments, finding that Nelson unjustifiably breached his obligations to the association. The trial court ordered Nelson to pay the association $21,467 plus prejudgment interest at 8% per annum and $19,219 in attorneys' fees and costs. Nelson appealed.

An accord and satisfaction is where a party to a contract accepts different performance from the other party than what was specified by the contract, in full satisfaction of the second party's contractual duty. To establish accord and satisfaction, the money must be offered in full satisfaction of the demand. It must be such that the party to whom it is offered is bound to understand that if it takes the money offered, it does so subject to the conditions stated.

The Colorado Uniform Commercial Code (CUCC) also provides that a claim is discharged so long as (1) the person against whom the claim is asserted tendered a check or other instrument in good faith to the claimant in full satisfaction of the claim, (2) the amount of the claim was unliquidated or subject to a bona fide dispute, (3) the claimant obtained payment of the check, and (4) the check or accompanying written communication contained a conspicuous statement to the effect that the check was tendered as full satisfaction of the claim.

The appeals court found that Nelson had not acted in good faith as required by the CUCC because he wrote "payment in full" on every check regardless of whether there was any dispute over his account balance. Also, at least one of the checks was written prior to Nelson having any knowledge of a delinquent balance. Nelson provided no evidence that he disputed the amount of the special assessments. Nelson also wrote checks for the same amount every month, despite knowing that he had accrued additional late charges and interest.

If a debtor directs the application of a payment, the creditor has the duty to either apply the money as directed or return it to the debtor. The appeals court stated that the association was not obligated to accept the payments with directions contrary to the payment resolution.

However, the appeals court determined that Nelson's payment obligations were uncertain and suspended while the checks were still in the association's possession. That suspension ended when the association returned the checks to Nelson. Thus, late fees, interest, and penalties did not apply during the suspension periods. The case was remanded to the trial court to recalculate the judgment amounts.

Finally, the appeals court rejected Nelson's claim for setoff. Although the right of setoff is a common law right, the right can be prohibited, waived, or relinquished by statute or contract. The condominium declaration specifically provided that no offsets or deductions were permitted for any reason. Therefore, while the association did have a debt to Nelson for its prior judgments, that existing debt did not excuse Nelson's ongoing payment obligations to the association.

Accordingly, the judgment was affirmed in part and reversed in part, and the case was remanded for further proceedings.

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Marketable Title Act Extinguishes Subdivision Covenants More Than 30 Years Old Except for Residential Use Restriction

C Investments 2, LLC v. Auger, No. COA19-976 (N.C. Ct. App. May 18, 2021)

State and Local Legislation and Regulations: The Court of Appeals of North Carolina held that the North Carolina Marketable Title Act extinguished all restrictive covenants for a subdivision in existence for more than 30 years except one restriction limiting the property to residential use.

C Investments 2, LLC (CI2) purchased seven lots in the Country Colony subdivision in Mecklenburg County, N.C. In 1952, before selling any lots, the original developer recorded a set of nine restrictive covenants against the property. The restrictive covenants limited the property to residential use only and imposed further restrictions on the number, size, location, and design elements of structures on the lots.

CI2 sued the owners of the remaining lots in the subdivision (the owners), seeking a declaratory judgment (judicial determination of the parties' legal rights) to extinguish most of the restrictive covenants based on the North Carolina Marketable Title Act (MTA). The MTA extinguishes all rights, claims, or interests in property which depend upon any act, title transaction, event, or omission that occurred prior to an unbroken, 30-year chain of title to the property, with certain exceptions. The chain of title is the sequence of historical transfers of title to the property. An unbroken chain of title is where there is a continuous chain of recorded transfers of the property without any gap in ownership appearing in the record.

One of the exceptions is that the MTA does not extinguish a covenant applicable to a general or uniform scheme of development that restricts property to residential use. The trial court determined that the residential use covenant fell within the MTA exception and was not extinguished, but it declared that the remaining covenants were extinguished by the MTA.

The owners appealed, arguing that if a collection of covenants governing a uniform scheme of development includes a residential use restriction, the MTA exception applies to all covenants applying that uniform scheme of development. The owners also argued that the MTA exception applied broadly to all covenants relating to residential use, not just the single residential use restriction. Thus, the owners contended that the MTA exception extended to covenants such as the ones imposing size, quantity, and design requirements for single-family dwellings or residences.

The appeals court held that the owners' proposed interpretation contravened the MTA's plain language. In discussing the exception for residential use covenants, the MTA states that the excepted covenant may restrict the property to multi-family or single-family residential use or simply to residential use. The MTA next states that restrictive covenants other than those mentioned that limit the property to residential use only are not excepted from MTA's provisions. Thus, the MTA indicates that it applies solely to the residential use covenant and not to other related covenants that are part of a uniform scheme of development. The appeals court agreed with the trial court that the residential use restriction survived and that that the covenants governing setback requirements, subdivisions of lots, and architectural matters were extinguished.

However, the appeals court found that two of the covenants merited further analysis. The covenants barred any structure other than one detached, single-family dwelling. Another covenant stated that only one residence could be erected on a lot. Since the MTA specifically referenced only uses and not structures, the appeals court determined that the MTA saved only those covenants restricting how the structure is used, not those addressing the type of structure on the property. The appeals court concluded that these two covenants restricted only the type and quantity of structures and said nothing about how the structures were used. As such, the covenants were extinguished by the MTA.

The owners complained that extinguishing the covenants would destroy the common scheme of development for Country Colony. The appeals court pointed out that its job was to interpret the statutes as written, not to rewrite the statutes to achieve what it imagined were the legislature's intended policy goals.

Accordingly, the trial court's judgment was affirmed.

Editor’s note: CAIfiled an amicus brief in this case. CAI files amicus curiae (friend of the court) briefs to inform courts about important legal and policy issues in cases relevant to community associations. If your association, municipality, or state is faced with a poorly formulated legal opinion, consider submitting a request for an amicus brief. Contact Phoebe E. Neseth, Esq., at pneseth@caionline.org​ with any questions.

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Association Must Provide Member Email Addresses to Any Member Upon Request

Harkins v. Grant Park Association, No. A20-0937 (Minn. Ct. App. May 24, 2021)

Association Operations: The Court of Appeals of Minnesota held that an association must provide a member with the email addresses of the membership because it was obligated to give access to all records, and the email addresses were among these records.

Grant Park Association (association) governed a 323-unit condominium in Hennepin County, Minn. Aaron Harkins owned a unit in the condominium.

In May 2018, Harkins requested contact information, including names and email addresses, of all association members to solicit support for a special meeting to approve proposed amendments to the association's bylaws. The association manager responded that such information was not provided, except for association business. The association's board of directors (board) informed Harkins that it would provide him with members' names and addresses but not email addresses.

A few weeks later, Harkins followed up with the board about his request but received no response. In May 2019, Harkins sent a final request for association records. The association responded with a list of member names only without addresses. Harkins filed suit against the association, alleging that the association violated the Minnesota Common Interest Ownership Act (act) and breached its contractual obligations under the bylaws.

The association responded with a counterclaim seeking its attorneys' fees under the act. The association later conceded that it would give out the members' postal addresses but not email addresses.

The act requires an association to keep "adequate records" of its membership. It also provides that "all records," with some limited exceptions, shall be made reasonably available for examination by any unit owner. Harkins argued that the members' email addresses in the association's possession were association records that must be made available under the act. Harkins alleged that the association regularly conducted communications with members by email. Thus, the email addresses were included in the association records.

The trial court had concluded that the meaning of the phrase "all records" in fact did not actually mean all records. The act required the association to keep an adequate minimum level of records. The trial court concluded that the records the association was obligated to provide were the minimum required records. Since the association's bylaws did not require members to provide email addresses to the association, the trial court did not view any member email addresses that were provided as among the required minimum records.

The trial court granted judgment in favor of the association, but it declined to award any attorneys' fees. Harkins appealed.

The two phases "adequate records" and "all records" each address a different topic and therefore serve two different purposes. The two sentences containing the phases did not follow one another and were separated by a sentence discussing financial records. The appeals court found that the reference to "adequate records" set the minimum required records to be kept by the association. The reference to "all records" established the requirement that an association must make its records available for review by unit owners.

The appeals court also compared the words "all" and "adequate." The word "all" was defined as the entire or total number, amount, or quantity. It would contradict the ordinary meaning of these words to conclude that "all" meant "adequate." Given the stark difference between the two words and the fact that the act did not give any indication that "adequate" was meant to serve as both a floor and a ceiling for what was encompassed in "all records," the appeals court held that the "all records" requirement was not limited to adequate records.

The act did not require the association to collect or maintain records of members' email addresses, but the fact that the association did obtain them made the email addresses a "record" of the association that was required by the act to be made available for inspection by members.

Harkins also claimed the association breached the bylaws by failing to provide the email addresses. The bylaws required that "all association records" be made available for examination by owners for a proper purpose, except for records containing privileged or confidential information. The bylaws did not define "association records" as a specific term, but instead, it described the types of documents the association had to keep. Since the bylaws plainly stated that all association records were to be made available for examination by unit owners, Harkins had a viable claim for breach of contract.

Accordingly, the appeals court reversed the trial court's judgment, and the case was remanded for further proceedings.

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Association Breached Master Deed by Adopting Amendment without Successor Developer's Consent

Infinity-Brownstown LLC v. Dove's Pointe Homeowners Association, Nos. 351827, 351845 (Mich. Ct. App. May 27, 2021)

Developmental Rights: The Court of Appeals of Michigan held that developmental rights were transferred with title to the real property, absent any statutory or contractual provision to the contrary, so a successor developer acquired the development rights reserved under the condominium master deed.

In 2003, King/Inkster II, LLC (King/Inkster) created the Dove's Pointe condominium in Wayne County, Mich., by recording a master deed. The master deed identified the "developer" as King/Inkster and its successors and assigns.

The master deed provided that unit owners could lease their units for single-family residence purposes, but the developer had the right to lease any number of units in the condominium without approval from the Dove's Pointe Homeowners Association (association). The master deed could be amended with the consent of two-thirds of the owners, but any amendment required the written consent of the developer so long as the developer continued to offer units for sale or had the right to add units to the condominium. The master deed further provided that any of the developer's rights could be assigned to another entity by a recorded assignment signed by the assignor and assignee.

In 2012, King/Inkster's mortgage company foreclosed on King/Inkster's remaining interests in the condominium after King/Inkster defaulted on its loan. The mortgage company was the successful bidder at the foreclosure sale. In 2013, the mortgage company sold the interests acquired to Infinity-Brownstown LLC (Infinity) for $525,000. The mortgage company transferred five partially built units and vacant parcels of land for 39 more units by deed to Infinity. It also executed a separate notice of ownership transfer stating that the developer's rights were transferred to Infinity Homes & Co. (IHC), a management company owned by Infinity. The five unfinished units were completed and sold around 2015.

In 2018, the unit owners voted to amend the master deed to impose a leasing cap requiring association approval to lease a unit and prohibiting more than 10% of the units from being leased. The amendment was approved by two-thirds of the owners, but neither Infinity nor IHC consented to the amendment.

Infinity sued the association, asserting that it anticipated building the 39 remaining units to lease, but it was prohibited from doing so by the amendment. Infinity asserted that it was damaged by the ongoing loss of rent revenue. It also contended that the association tortiously interfered with its business expectancies. In addition to money damages, Infinity requested a judgment that it had the right to lease as many units as it desired at any given time.

The trial court determined that Infinity was the successor to King/Inkster and acquired the developer rights. The trial court reasoned that the developer rights were included in the foreclosure deed conveying all of King/Inkster's right, title, and interest in the condominium project to the mortgage company, and the mortgage company subsequently conveyed all its right, title, and interest to Infinity by deed. The trial court held that Infinity alternatively qualified as a successor developer under the Michigan Condominium Act (act) and succeeded to King/Inkster's contractual rights. The trial court further held that the amendment violated the master deed's terms since it was not approved by Infinity.

However, the trial court determined that Infinity could not prove the damages claimed because they were too speculative. It said that Infinity would have to build the units, find prospective renters who agreed to rent the units, and then incur damages if the association interfered with the leases. Both parties appealed.

The appeals court determined that when title to real property is transferred from one entity to another, the latter entity becomes a successor or assign of the first party, absent other statutory or contractual language compelling a different conclusion. The developer rights were conveyed to the mortgage company and then to Infinity through a valid chain of title; it did not matter that Infinity did not acquire the rights directly from King/Inkster.

The master deed referred to the developer in the singular, thus contemplating that there would be only one developer at a time. However, the definition of "developer" referred to successors and assigns in the plural, so the master deed clearly contemplated the possibility of there being multiple developers over the life of the project, provided there was only one at any given time. Therefore, the association breached the master deed's requirements by adopting the amendment without Infinity's consent.

The appeals court stated that those damages that were the direct, natural, and proximate result of the association's breach may be recovered by Infinity, but Infinity still had to prove the amount of damages with reasonable certainty. Some uncertainty as to the amount of damages is allowed, but uncertainty as to the fact of the damages caused by the breach is not permitted.

The appeals court determined that Infinity showed that it was harmed by the association's action. At a minimum, Infinity had to delay constructing the new units. Claims for lost profits are not unduly speculative even where the business has not been established and there are no actual customers. Infinity may not be able to ultimately prove the amount of its damages or that it was damaged at all, but it needed to be given the opportunity to present evidence of its damages. The trial court prematurely dismissed Infinity's damage claims without allowing Infinity to present evidence.

Accordingly, the appeals court affirmed the trial court's judgment that the association breached the master deed, but it reversed the dismissal of Infinity's damage claims. The case was remanded for further proceedings.

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Later-Recorded Covenants Did Not Bind Lots Already Sold

Phillips v. Hatfield, No. E2019-00628-SC-R11-CV (Tenn. June 1, 2021)

Covenants Enforcement: The Tennessee Supreme Court held that restrictive covenants recorded after the conveyance of lots were insufficient to create a common scheme of development or to bind lots already sold.

Mark Hatfield owned property at the corner of Sunnybrook Drive and Volunteer Parkway in Bristol, Tenn. Ritchie and Roma Phillips (the Phillips) owned the property immediately up Sunnybrook Drive, which abutted a portion of Hatfield's property.

Hatfield's property was zoned as general business, which permitted retail business. Hatfield proposed to tear down the existing structure on the property, construct a new building and parking lot, and open a retail store. Upset by Hatfield's plan, the Phillips sued Hatfield, seeking an injunction (order prohibiting or mandating certain action) and declaratory judgment (judicial determination of the parties' legal rights) that restrictive covenants prohibited nonresidential structures on Hatfield's property.

Both properties were part of the Sunnybrook subdivision, which was platted in 1953 by J.C. and Mary Virginia Chambers (the Chambers). The plat divided the property into eight sections containing a total of 79 lots. Volunteer Parkway, a divided highway, bisected the subdivision, and Sunnybrook Drive served as a connector across the highway.

Over the course of 1953 and 1954, the Chambers sold 67 of the lots. The deeds for most of these lots included restrictive covenants (the original covenants), which limited the lots’ use for residential purposes only, imposed a minimum square footage requirement for homes, and set minimum setback requirements for them. The original covenants stated that they ran with title to the land and were binding for a period of 20 years. Both Hatfield's and the Phillips' properties were among the lots originally sold during this period.

In 1955, the Chambers recorded additional restrictive covenants (the 1955 covenants) against all 79 lots, including those they had already sold. The 1955 covenants included the same use and building requirements as the original covenants and purported to bind the land for 20 years. However, the 1955 covenants stated that they were to renew automatically for successive 10-year periods unless a majority of the then-owners agreed to change the covenants. The Phillips asserted that the 1955 covenants applied to Hatfield's lot.

None of the deeds conveying Hatfield's lot to successive owners ever referenced the 1955 covenants. Some of the deeds to Hatfield's predecessors contained general language stating that the conveyance was subject to valid restrictive covenants of record, if any. Neither the original covenants nor the 1955 covenants appeared in Hatfield's chain of title.

The trial court concluded that Hatfield's property was restricted to residential use and entered declaratory judgment in the Phillips' favor. The trial court concluded that the Chambers had established a general plan of development for the subdivision by recording nearly identical restrictive covenants for each section and by intending that the 1955 covenants apply to the entire subdivision. The trial court found that Hatfield was on notice of the property's restrictions due to the 1955 covenants being recorded in the public records and based on the general nature of the property.

Hatfield appealed to the Tennessee Court of Appeals, which upheld the trial court's judgment. Hatfield appealed further to the Tennessee Supreme Court.

Tennessee law recognizes the implied negative reciprocal easement or common development scheme doctrine. Under this doctrine, when an owner subdivides land and sells the lots with deed restrictions in accordance with a general plan, the restrictions may be enforced by any lot owner against another lot owner, even where the restrictions were not included in the deed for a particular parcel.

For the doctrine to apply, the parties must have derived their property from a common grantor, the common grantor must have had a general plan for the property, the common grantor must have intended for the restrictive covenant to benefit the property involved, and the grantees must have had actual or constructive knowledge of the restriction when they purchased the property. The supreme court determined that this doctrine did not apply to the Sunnybrook subdivision.

The Chambers sold most of the subdivision lots subject to the original covenants, which specifically expired at the end of 20 years with no provisions for renewal. By the time the Chambers recorded the 1955 covenants, they owned only 12 of the original 79 lots, which were spread sporadically through only six of the original eight sections of the subdivision. The supreme court concluded that, at this point, the Chambers were no longer acting in the capacity of common grantor necessary for the common development scheme doctrine to apply.

Accordingly, the supreme court reversed the decision of the court of appeals. The case was remanded to the trial court to enter a declaratory judgment that the 1955 covenants did not apply to Hatfield's property.

©2021 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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Association Directors Did Not Violate any Duty to the Association by Using Their Own Funds to Buy the Community Park

Summerland Key Cove Park, LLC v. Murphy, No. 3D19-801 (Fla. Ct. App. May 19, 2021)

Powers of the Association: The Court of Appeal of Florida held that directors of an unfunded, voluntary homeowners association did not usurp a corporate opportunity of the association by creating and contributing personal funds to a limited liability company to purchase the subdivision park from the developer. The park owner also could use the park in any manner that did not unreasonably interfere with the subdivision owners' easement rights in the park.

A plat for the Summerland Key Cove subdivision in Monroe County, Fla., was recorded in 1957. The subdivision consisted of about 130 lots, a park with a small lake, canals, and footpaths. The plat dedicated the park, lake, canals, and footpaths for the exclusive use of the lot owners. The lots were sold over the years, but the developer retained ownership of the park.

In 2007, lot owners Walter Cain, Charles Eidschun, and Orval Gaster (collectively, the directors) incorporated Summerland Key Cove AMD Homeowners Association, Inc. (Old HOA) to serve as a voluntary homeowners association for the community. In 2014, the developer approached the directors to see whether Old HOA would purchase the park from the developer. The directors unsuccessfully tried to persuade the developer to simply give the park to Old HOA but were able to get the purchase price lowered to $15,000.

Old HOA had never collected any dues, so the directors attempted to raise funds by asking for contributions from the owners. This fundraising effort was unsuccessful. The directors incorporated Summerland Key Cove Park, LLC (LLC) and contributed their own money to fund the park purchase price. LLC purchased the park from the developer. Shortly thereafter, the directors administratively dissolved Old HOA.

LLC proceeded to clean up and manage the park. It also imposed rules and restrictions governing the owners' use of and access to the park. In particular, LLC prohibited after-dark use of the park, required a $50 monthly fee for vehicle/vessel access, erected a locked gate and limited entry only through the gated entrance, erected a cable across the lake shore to prevent unauthorized boat launching, and required a liability release for the use of the park (collectively, the rules).

Unhappy with the new rules, lot owner John Murphy incorporated Summerland Key Cove Homeowners' Association, Inc. (New HOA) to serve as a new voluntary homeowners association. New HOA recruited 37 other owners to be members and raised $26,000 for the purpose of purchasing the park from LLC.

In 2015, Murphy filed suit against LLC and the directors both on his own behalf and on behalf of the dissolved Old HOA. Murphy alleged that the rules unreasonably interfered with his easement rights in the park. He also asserted that the directors usurped a corporate opportunity belonging to Old HOA by creating LLC and purchasing the park.

The trial court concluded that the owners' easement rights precluded imposing any restrictions on their park use, however reasonable the rules. The trial court ruled that Murphy could use the park at any time, use whatever entrance he wanted, and launch watercraft from the park without preapproval or any fee. It also held that, although the directors had good intentions, they and LLC usurped a corporate opportunity of Old HOA. The trial court required that LLC hold the park in trust on behalf of the dissolved Old HOA. Upon reinstatement of Old HOA, LLC was obligated to transfer the park to Old HOA in exchange for the $15,000 park purchase price. LLC and the directors appealed.

The appeals court viewed the plat's exclusive use dedication as not permitting anyone other than lot owners to use the park, but it did not view the easement language as absolutely precluding the park owner from imposing any restrictions on park use. The appeals court held that the park owner had the right to use the park in any manner that did not unreasonably interfere with the owners' lawful use of their easement rights.

A director or officer usurps a corporate opportunity, and thus breaches the duty he or she owes to the corporation, by exploiting, for his or her own profit, a beneficial opportunity that rightly belongs to the corporation. To be entitled to relief under this doctrine, a plaintiff must establish that there was a business opportunity that the corporation was financially capable of undertaking and that the opportunity fit into the present activities of the corporation or into an established corporate policy that acquisition of the opportunity would promote.

The trial court determined that Murphy had proven all three elements of the corporate opportunity doctrine, but the appeals court found the analysis of the financial capability element to be lacking. The trial court focused on the fact that Murphy had raised more than enough money for New HOA to buy the park as evidence of Old HOA's ability to buy the park.

The appeals court said that the focus should be more narrowly on the time period when the developer had offered to sell the park since that was when the corporate opportunity arose. There was no evidence that Old HOA was ever financially capable of purchasing the park. The appeals court was not willing to presume that Old HOA's fundraising efforts should have been successful, particularly since the later-imposed rules might have been the motivating factor of Murphy's fundraising efforts. The appeals court also was unwilling to impose on directors and officers of a nonprofit corporation what would amount to a fiduciary duty to fundraise.

Accordingly, the appeals court reversed the trial court's judgment and remanded for the trial court to examine the reasonableness of the rules.

©2021 Community Associations Institute. All rights reserved. Reproduction and redistribution in any form is strictly prohibited.

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