CAI Law Reporter - March 2013 (Plain Text Version)

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Association Not Entitled to Insurance Proceeds for Damage to Units

Bay Colony Condominium Association v. Scottsdale Insurance Company, No. 11-4865(NLH-JS) (D.N.J. Dec. 26, 2012)

Risks and Liabilities: A New Jersey district court ruled that a condominium association was not entitled to insurance proceeds for damage to system components that serviced individual units.

Bay Colony Condominium is located in Atlantic City, N.J., and is managed and maintained by Bay Colony Condominium Association (association). In 2009, the association purchased an insurance policy from Scottsdale Insurance Company. Under the condominium’s master deed, the association was obligated to provide coverage for the buildings’ common elements, and unit owners were individually responsible for purchasing insurance to cover their units. The definition of “unit” included—to the extent that it served the individual unit—all framing; heating, plumbing, ventilating and air conditioning systems; electrical and cable television wiring; circuit breakers and outlets; equipment; appliances and machinery. The narrow definition of “common elements” included only “common systems and equipment, including mechanical, electrical, plumbing, ventilating, sprinkler, and fire suppression systems.”

In September 2009, a fire occurred at Bay Colony. It affected a significant portion of the building and damaged a majority of the units and common elements. The association notified Scottsdale and retained a licensed insurance adjuster. Scottsdale also retained an adjuster to handle the claim.

Over the course of several months, the parties attempted to reach a settlement; however, when they were unable to do so, they opted to take part in an appraisal procedure pursuant to the policy’s terms. Adjusters for each party submitted monetary estimates that reflected what they believed to be the proper amount of the association’s loss to the dispute “umpire.” The umpire assessed both parties’ estimates and conducted his own property inspection. In July 2011, the umpire released his report, stating that the total loss due to the fire was $996,547.81. He separated the loss into two categories: (1) loss to the common elements; and (2) loss to the “non-condo association unit components.” He allocated $335,530.04 to the common elements category and $661,017.78 to the unit components category. He divided those systems that could be attributed to both categories, such as electricity, HVAC, plumbing, framing, and architectural and engineering fees, between the two categories.

Scottsdale paid the association approximately $291,000. The association sued Scottsdale, seeking additional proceeds. Both parties filed motions for summary judgment (a determination made by a court without a trial).

The association argued that it was entitled to additional proceeds from Scottsdale because the umpire based his findings on an incorrect definition of “common elements.” The association alleged that it should receive $219,069.06 of the portion Scottsdale allocated to the unit owners to cover damages done to the buildings’ electricity, HVAC, plumbing and framing. The association claimed that the estimated actual cost to rebuild the common elements was $750,000, and it was entitled to coverage for common element reconstruction up to the $1,974,000 policy limit.

Scottsdale alleged that the association claimed items for damage that were considered part of the individual units and not part of the common elements. The master deed was clear that the association was only required to obtain insurance coverage for the common elements, and individual unit owners were responsible for insuring their individual units.

Essentially, the master deed provides that if an item is part of a system’s central line, it is considered to be a common element. However, once the item breaks off from the central line and provides service or energy to an individual unit, it is deemed to be part of the unit. Stated differently, the wiring and piping attributable to individual units are the arteries stemming from the main power sources at the heart of the building.

The association argued that the buildings’ electric, HVAC, plumbing, heating and framing were common elements, and, therefore, the association was required to obtain insurance coverage for those items. Both the master deed and the New Jersey Condominium Act (act) make clear, however, that common elements are solely comprised of central power sources that serve all units. The record indicated that the items the association sought additional coverage for solely provided service or transmitted energy to individual condominium units.

Based on the buildings’ structure and system layout, Scottsdale provided coverage for the central “hubs” of energy and refused to cover damage to the wires and pipes that served individual units. The court noted that under the master deed and the act this satisfied the extent of coverage Scottsdale was required to provide.

The association produced no evidence that Scottsdale failed to provide coverage for any portion of a common system that belonged to the centralized hub. Furthermore, the record showed that Scottsdale covered a majority of the damage done to the buildings’ carpentry, and only refused to cover damage done to the framing and interior partitions within boundaries of a unit. There was no dispute that the items for which the association sought additional insurance coverage were not common elements. Therefore, Scottsdale was not responsible for covering them under the master deed.

The court denied the association’s motion for summary judgment and granted Scottsdale’s cross-motion with respect to the association’s request for judgment in its favor.

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Association Entitled to Not Renew Maintenance Agreement

Country Club South Homeowners Association, Inc. v. Warren Country Club Villas Condominium Unit Owners Association, Inc., 1012 Ohio 5835 (Ohio Ct. App. Dec. 10, 2012)

Powers of the Association: An Ohio appeals court affirmed a ruling that after the developers of a condominium relinquished control of the association’s board of directors, the newly elected board of unit owners was entitled to rescind a maintenance agreement executed by the developer-controlled board.

Country Club South is a residential development located near a private country club in Warren, Ohio. The development contains traditional homes and condominium units. When only a few homes had been sold, the developers and existing homeowners formed Country Club South Homeowners Association, Inc. (HOA), and when condominium units began to sell, the developers formed Warren County Club Villas Condominium Association, Inc. (condominium association).

In November 2000, the HOA and the condominium association entered into an agreement concerning maintenance of the property adjacent to the subdivision’s entrance. The maintance agreement provided that the HOA would pay 40 percent of the expenses to maintain the property, while the condominium association would pay the remaining 60 percent.

Both associations complied with the maintenance agreement over the ensuing nine years, during which the developers controlled the condominium association’s board of directors. However, in 2010, the developers relinquished control of the condominium board to the unit owners; soon thereafter, the board chose to discontinue paying the condominium association’s portion allocated under the maintenance agreement.

The HOA sued the condominium association, seeking a declaration that the agreement was enforceable. The case was tried to determine whether the condominium association was entitled, under the Ohio condominium statute, to terminate the agreement after the developers relinquished control of the board.

The HOA argued that the statute only enabled the condominium association to not renew a management agreement. The condominium association argued that the statutory authority not to renew an existing agreement extended to any type of contract executed by a developer on behalf of the association.

The trial court held that the condominium statute permitted the condominium association to decide not to renew any type of contract that had previously been executed by the developers, but the decision not to renew could only take effect one year after unit owners assumed control of the board. Even though the agreement was not legally enforceable after June 2011, the condominium association was liable for maintenance expenses through June 2011. The HOA appealed.

The HOA argued that the trial court’s interpretation of the statute was not supported by its plain wording. It contended that the statute was only intended to apply to one type of contract, one relating to actual management of the association itself. The HOA further maintained that since the agreement did not pertain to management of the condominium association, the agreement was not subject to rescission.

The Ohio Condominium Property Act provides that any condominium instrument pertaining to a condominium development must include the following provision:

Neither the unit owners association nor the unit owners will be subject to any management contract or agreement executed prior to the assumption of control required by division (C) of this section for more than one year subsequent to that assumption of control unless such a contract or agreement is renewed by a vote of the unit owners pursuant to the bylaws required by section 5311.08 of the Revised Code. (emphasis in original)

The trial court had relied solely on language contained in Belvedere Cond. Unit Owners’ Assn. v. R.E. Roark Companies, Inc., 617 N.E.2d 1075 (Ohio 1993), where the Ohio Supreme Court emphasized that the statute was created to protect condominium owners from developer abuse. The Supreme Court had held that the statute entitled the board, once fully elected by the unit owners, to cancel contracts entered into by the developer-controlled board. The statute protects unit owners from unfair contracts and agreements. Moreover, the court’s analysis did not contain any reference to “management.”

Accordingly, this appeals court concluded that the term “management” was not intended to modify both “contracts” and “agreements” in division (D) of the statute. Hence, under the Belvedere analysis, the ability to cancel a contract entered into by the developer extends to any type of legal agreement.

More importantly, the appeals court concluded that, even if it were to hold that the precedential value of the Belvedere analysis was limited, the analysis should still be followed because it is persuasive. If the statute were construed to apply only to management contracts, it would mean that the developer would have the authority to bind a condominium association to any type of legal agreement for an indefinite period of time.

As the trial court correctly held that the statute applied to the maintenance agreement between the HOA and the condominium association, it followed that the condominium association could choose not to renew the agreement. Furthermore, since it was stipulated that the condominium association never voted to renew the agreement, it was only binding on the association for one year after the unit owners took control.

The order and judgment of the trial court was affirmed.

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Parking and Storage Spaces Not Association Property upon Turnover of Developer Control

Courvoisier Courts, LLC v. Courvoisier Courts Condominium Association, Inc., 105 So.3d 579 (Fla. Dist. Ct. App. Dec. 19, 2012)

Developmental Rights/Covenants Enforcement/Contracts: A Florida appeals court held that a condominium developer did not improperly transfer parking and storage spaces to itself prior to turning over control of the association to unit owners, thereby preventing those limited common elements from becoming the association’s property.

Courvoisier Courts, LLC (developer) built Courvoisier Courts Condominium in Miami-Dade County, Fla. The condominium was created by a declaration filed by the developer in April 2005, and is governed by Courvoisier Courts Condominium Association, Inc. (association). All  Courvoisier Courts Condominium unit owners are members of the association.

After filing the declaration, the developer assigned parking and storage spaces as limited common elements to units as units were sold. In July 2006, the developer, who had ownership of the association’s unsold units, executed a transfer of unassigned units. This transfer ultimately assigned the remaining parking and storage spaces to one of the unsold units. Two weeks later, the developer turned over control of the association to the unit owners.

In July 2007, the association sued the developer, claiming that it had improperly transferred the remaining parking and storage spaces to itself just prior to the turnover. The association sought a declaration from the trial court to determine whether the transfer was valid.

The court ruled in the association’s favor and ordered the developer to immediately turn over any limited common elements still in its possession to the association. The developer appealed.

It was undisputed that the developer still owned the condominium’s unsold units. Section 3.3(a)(i), of the declaration, entitled “Automobile Parking Spaces and Storage Spaces,” provides that parking spaces and storage spaces shall initially be assigned by the developer, and any parking spaces and storage spaces that have not been assigned by the time the developer has sold all units will become a part of the common elements.

The association argued that the developer’s rights to the remaining parking and storage spaces ended when it turned over association control to the unit owners. Specifically, the association contended that the rights of the developer under Section 3.3(a)(i) were limited by Section 3.4(i) of the declaration, which states:

Notwithstanding the foregoing, Developer’s rights to the common elements shall terminate upon transfer of association control, or when Developer ceases to offer units for sale, whichever occurs first.

The association maintained that this meant the developer was allowed to assign the limited common elements until it had either stopped offering units for sale or had turned over the association to the unit owners, whichever occurred first.

The court found the association’s interpretation of the declaration unacceptable. Although the court agreed that a contract’s legal effect must be determined from the words of the entire contract, it recognized that courts must not violate the clear meaning of a contract to create an ambiguity. The court noted that Section 3.4 of the declaration concerned easements, not the limited common elements, which were expressly addressed by Section 3.3.

Given that the language the association relied upon was located at the end of Section 3.4(i) and was prefaced by the words, “[n]otwithstanding the foregoing” (which means “not regarding what was previously stated”), the court concluded that the language more appropriately read as a limitation on the easement rights granted to the developer in the text immediately preceding it, namely that of Section 3.4(i), and did not apply to the limited common elements specifically addressed by Section 3.3(a)(i).

Because the court held that the limited common elements did not become the association’s property upon turnover but, rather, remained the developer’s property, it did not need to address the issue raised by the association concerning the validity of the developer’s transfer of the limited common elements prior to the turnover.

The court reversed the trial court’s order that had been in the association’s favor and remanded the case for entry of a judgment in the developer’s favor.

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Board’s Mismanagement Is Insufficient Reason to Annul Owners’ Assessment Obligation

CSL Community Association, Inc. v. Meador, 973 N.E.2d 597 (Ind. Ct. App. Aug. 13, 2012)

Assessments/Covenants Enforcement: An Indiana appeals court ruled that a homeowner was obligated to pay assessments, even though the association’s financial mismanagement led to a failure to maintain improvements and amenities in the community.

Country Squire Lakes Community in North Vernon, Ind., was established as a gated residential community in the 1970s. It includes approximately 4000 lots, more than 30 miles of paved roads, and many recreational facilities, including a swimming pool, tennis courts, playgrounds, clubhouses, picnic areas, a marina, lakes, beaches and a campground. The community is governed by CSL Community Association, Inc. (association).

Clarence Meador purchased two lots in the community, subject to restrictive covenants contained in the deeds. The covenants provide that each lot owner is a mandatory member of the association and must pay assessments to help maintain the common amenities, regardless as to whether or not the owner uses the facilities.

As years passed and the economy fluctuated, many investment buyers purchased lots in the community. As the community shifted from owner-occupied properties to renter-occupied properties, owners frequently stopped paying their assessments, leaving the association with a $3–$4 million revenue shortfall. As a result, assessments were used to only cover the essentials, leaving insufficient funds to maintain the recreational amenities. The swimming pools were empty and needed repair; the surface of the tennis court was rubble, and the court had no net; the lake was contaminated with raw sewage; the boathouse was saturated with mildew; and there was just one tire swing on the children’s playground. Residents could no longer use the clubhouses, and arsonists had burned down the pavilion. There was no longer a full-time security force, and the security gates had been removed.

In addition to demographical changes, the association suffered from years of financial mismanagement and money had not been placed in a reserve fund, as required by the covenants.

Meador, who had lived in the community for 15 years and regularly paid his assessments, tried to influence the association’s budgetary decisions but was rebuffed by the board. Eventually, he stopped paying assessments for one of his lots and was not allowed to vote at the 2009 annual meeting. Thereafter, he sued the association, seeking a declaration as to whether he was a member of the association and whether he had been illegally denied his right to vote. He also asked the court to annul his obligation to pay assessments because the association had not maintained the common areas and amenities.

The court found that community’s changes were so radical that the original purpose of the deed restrictions had long been defeated. Therefore, it terminated Meador’s obligation to pay assessments and ruled that Meador could still vote at association meetings. The association appealed.

A restrictive covenant is an express contract (a contract in which all elements and terms are specifically stated) between the grantor and the grantee that restrains the grantee’s use of his land. Although the law does not favor restrictive covenants, the contractual nature of these restrictions has led courts to enforce them in equity as long as they are not against public policy. However, public policy requires restrictive covenants to become invalidated when changes in the property’s character are so radical as to destroy the agreement’s essential purposes.  

Although the appeals court acknowledged that significant changes in the property’s character had occurred, it held nonetheless that the requirement to pay assessments was for the benefit of all property owners, and that the property owners were still in a position to benefit from those payments. The court concluded that the trial court erred in annulling Meador’s obligation to pay assessments.

The court recognized that the association’s financial mismanagement and a change in the community’s demographics had led to the association’s inability to maintain the community’s amenities. It appreciated the trial court’s attempt to provide relief following the untenable circumstances; however, the relief was not one afforded under Indiana law.

Because the evidence did not support the trial court’s conclusion—that changes in the community were so radical from the community’s original purpose that the deed restrictions was destroyed—the appeals court reversed the trial court’s ruling.

In a dissenting opinion, Judge Crone stated that in his view, the relevant facts overwhelmingly proved that changes had occurred in the community over the past decade or so that were far more radical than a mere lack of recreational amenities. He noted that “[r]eal estate speculators have turned what once was a well-appointed, well-financed, well-maintained, and well-patrolled retirement and recreational community into an economically and infrastructurally devastated eyesore.” As such, he believed the trial court did not err in annulling Meador’s obligation to pay dues and assessments under the covenants. However, because a lot owner’s ability to vote was contingent upon his payment of dues and assessments, he reversed the trial court’s ruling so that Meador would retain his voting rights.

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Association Entitled to Tax-Exempt Status

Fort Ticonderoga Association, Inc. v. Town of Orwell, Nos. 220-9-11 Ancv, 221-9-11 Ancv (Vt. Super. Ct. Nov., 2012)

Tax and Tax Legislation/Municipal Relations: A Vermont court overturned the Town of Orwell Board of Listers’ decision that denied tax-exempt status to a nonprofit corporation, which was created to maintain Lake Champlain’s historical properties.

Fort Ticonderoga Association, Inc. (association) is a not-for-profit corporation based in New York and registered in Vermont. It owns Fort Ticonderoga and the surrounding land in New York. It also owns a parcel of land in Orwell, Vt., at Mount Independence, a historic fortification on Lake Champlain that played a significant role in the American Revolutionary War.

The association owns land on the northern half of the peninsula, and the State of Vermont (state) owns the southern half. The Vermont State Division for Historic Preservation operates a historic site, including a visitor’s center and museum, on the state’s portion. There is an informal agreement between the association and the state that allows the state to use and maintain the association’s property as part of the historic site. The state’s promotional literature does not distinguish between state and association land, and the state sometimes leads tours of Mount Independence through association land. There are historically significant structures all over the mountain, on both state land and association land. Generally, the state ensures that trails are clear and signs are visible on both lands.

In 1971, the state issued an opinion letter declaring that the association’s property in Orwell was tax-exempt. As a result, the Town of Orwell (town) did not tax the association for approximately 20 years. In 2011, the assessed value of the association property had risen to over $600,000.

In June 2011, the association contested the town’s assessment of the property’s value. The Town Board of Listers (the entity in charge of appraising property values for tax purposes) ruled that the association was not entitled to its tax-exempt status. The association appealed the board’s decision to the Town Board of Civil Authority, which denied the appeal. The association then sued the town in the Addison County Superior Court.

Under Vermont law, real property used for public, pious or charitable use is exempt from taxation. The taxpayer has the burden of establishing its entitlement to a tax exemption. To claim a tax exemption, a taxpayer must prove: (1) the property is dedicated unconditionally to public use; (2) the property’s primary use directly benefits an indefinite class of persons (a broad group of people) who are part of the general public; and (3) the property is owned and operated on a not-for-profit basis.

The town claimed the association’s involvement at Mount Independence was passive, and its contribution to preserve the historic site was limited to opening its land to the public. The association’s failure to promote programs or events on its property signified that the land was not dedicated to public use. The town argued that the association’s property was not dedicated to public use because many of the site’s visitors entered through the state’s property.

The court observed that the state’s utilization of the association’s land for public benefit did not defeat the association’s claim of tax-exempt status. It was possible to access the association’s land by water without crossing state land and, during the off-season, without paying a fee. In addition, the fact that the state charged an entrance fee was not a barrier to the association’s claim of tax-exempt status, especially considering the association did not receive any portion of the fee.

The town claimed that the lack of detailed signs on the association property made it difficult for visitors to appreciate the property’s historical significance without a brochure provided by the state. It also argued that during the off-season, the association’s land was no different from any other piece of land in Vermont.

The court found, however, that, together with the State Division for Historic Preservation, the association had committed its property to public use: it allowed the public to freely access the property and the historic sites that are located there, and worked together with the state to allow the public to view and learn about the history of Mount Independence.  

The court explained that the indefinite-class-of-persons test was intended to distinguish whether the property uses benefitted the general public or only a select few. The focus is not on the number of beneficiaries, but rather the extent to which the property is available only to a specific segment of the public. While it might be true that a fairly small number of people access the association’s land each year, those individuals are part of society at large, not a specific segment of society. There is no application or screening process to determine who may gain access to the association’s property. The association lands are held open to all members of the public, not just a select few.

The town produced evidence that visitors used the association’s property for recreational purposes. It theorized that during the off-season, people used the property to walk the land, observe flora and fauna, bird watch or picnic, swim, fish or hunt. The association acknowledged that some visitors might use the property for recreational purposes, but it characterized those uses as incidental to the property’s primary function as a historical site. The court agreed.

The undisputed facts showed that the association’s land was an integral part of Mount Independence. Both the state and the association treated the mountain as a single historical site, used primarily to preserve historic artifacts and to inform the public about American history. On a practical level, the two sites are treated as one by the state, the association and the public.

The court ruled in the association’s favor.  

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Insurance Dispute Over Storm Damage Must Be Tried

Homestead Hills Homeowner Association v. American Family Mutual Insurance Company, No. A12-0703 (Minn. Ct. App., Nov. 26, 2012)

Risks and Liabilities: A Minnesota appeals court reversed a grant of summary judgment in a suit filed by a homeowners association against its property insurer because a genuine issue of fact existed as to whether the insured property was damaged by a storm or whether the damage resulted from a manufacturing defect.

Homestead Hills subdivision is located in Washington County, Minn., and is managed and maintained by the Homestead Hills Homeowners Association (association). A storm in July 2009 caused significant wind and hail damage to roofs of the subdivision’s homes. A homeowner reported to the association that the storm had dislodged a significant number of shingles from his roof. The association submitted a claim for the damage to its insurer, American Family Mutual Insurance Company.

After inspecting five of the 34 roofs in the subdivision, the American Family adjuster concluded that they had been damaged by hail. An association representative who had observed the inspection agreed with the adjuster’s assessment. Subsequently, a supervising adjuster from American Family led a second inspection and concluded that a manufacturing defect had caused the shingles to deteriorate and that there was no hail damage.

The following spring, the association sought an additional review of its claim and coverage policies. American Family restated its position that the association had not sustained storm-related damage and requested a “detailed and itemized estimate documenting the cause of loss and the cost of repairs.”

The association authorized a contractor to perform an inspection and estimation of the cost to repair the property that was covered under the insurance policy. The contractor estimated the cost of the repairs to be in excess of one million dollars.

The association sued American Family, alleging a bad-faith denial of coverage. The association sought a declaration from the court that: (a) the storm constituted a covered cause of loss to the association’s covered property; (b) American Family was contractually obligated to pay for direct physical loss of or damage to the association’s covered property caused by or resulting from the storm; and (c) no proper and legitimate basis existed for American Family to deny the association’s claim.

With the association’s motions pending, a registered roof consultant submitted a 10-page report, plus attachments and photographs, to American Family. The report, prepared after three inspections of the roofs, concluded that “[t]here was no hail-caused damage to shingles” on the roofs and that “[n]o hail-related repairs were needed to the shingles.”

The court concluded there was insufficient evidence to prove that the roofs were damaged by hail, and American Family had established certain policy exclusions based on a showing that the roofs were damaged by a combination of neglect, wear and tear, and hidden or latent defects. It granted summary judgment (a determination by the court that, because there is no genuine issue of material fact, the party filing for summary judgment is entitled to prevail as a matter of law) to American Family on the association’s claims. The association appealed.

In its appeal, the association asserted that the trial court erroneously granted summary judgment to American Family. It argued that genuine issues of material fact (a disagreement between opposing parties on facts legally relevant to a claim) remained in dispute.

It was not disputed that a storm occurred in the association’s general vicinity on July 24, 2009. It also was not disputed that the association’s roofs were damaged. However, the parties did dispute whether the storm caused the roof damage.

The association presented multiple pieces of evidence to the trial court, including a printout from the National Weather Service reporting wind and hail near its property on July 24, 2009, and a report from a homeowner two weeks after the storm stating that he had collected shingle granules that had been dislodged from his roof as a result of the storm. The association submitted an article explaining the connection between hail and the loss of shingle granules, as well as provided an affidavit from the association’s representative—a contractor—who observed American Family’s inspections. The affidavit stated that after inspecting five roofs, both representatives of American Family and the association concluded that the roofs had been damaged by hail from the storm.

The appeals court concluded from the trial record that the association had presented sufficient evidence to establish a genuine issue of material fact as to whether the damage to the roofs was caused by the storm. Thus, the trial court erred by granting summary judgment to American Family.

The appeals court reversed the trial court’s judgment and remanded the case for trial.

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Association Authorized to Govern Community

Osmond Lane Homeowners Association v. Landrith, 2013 UT App. 20 (Utah Ct. App. Jan. 25, 2013)

Covenants Enforcement: A Utah appeals court affirmed an association’s ability to enforce a community’s declaration, even though the association was not named in said declaration.

In 1992, George Landrith bought a home in Osmond Lane Estates Subdivision in Provo, Utah. A declaration of protective covenants was recorded against all lots in the subdivision. The declaration contemplated organizing the “George Osmond Estates Council” (council) to provide facilities and services to the subdivision; however, the council was never formed. In 1979, Osmond Lane Homeowners Association (association) was incorporated and acted as the subdivision’s governing body to operate and maintain the common area and collect annual assessments to fund the costs.

Landrith paid annual assessments 1992 until 2007. Sometime during the first two years after he bought his home, an irrigation pipe froze and broke, causing water to flood his backyard and erode a hole at the rear property line, which runs along a deep ravine. In the ensuing years, multiple sprinkler breaks and leaks caused further erosion. The association repeatedly requested that Landrith address the erosion by filling in the hole with dirt. Believing that the erosion was merely an element of the ravine’s terrain, he refused.

In 2003, the association again expressed concern to Landrith about the hole and requested that he remedy the problem. Subsequently, Landrith moved away, leaving the property unattended. After receiving notice from the association that he must fix the problem within two weeks, Landrith met with the association’s president and a contractor to discuss potential solutions. He was informed that filling the hole with dirt was no longer acceptable; a permit and engineering services would now be necessary to repair the eroded area. Landrith subsequently listed the property for sale.

The erosion had progressed over the years and threatened the structural integrity of concrete stairs and an existing retaining wall that was located at the rear of the property. Neighbors became concerned for their children’s safety and the impact the damage had on surrounding properties’ market value.

Based on these concerns, the association, without Landrith’s knowledge or consent, paid a contractor $32,000 to construct two retaining walls along the southeast corner of Landrith’s property and billed him for the cost. He did not respond or pay the bill, and a lien was filed against the lost.

In 2006, the association began proceedings to foreclose its lien. Both parties filed motions for summary judgment (a determination by the court that, if there is no genuine issue of material fact, the party filing the motion is entitled to prevail as a matter of law) to establish whether the association had authority to act in place of the council that was listed in the declaration. The court denied Landrith’s motion and granted the association’s motion for summary judgment, finding that Landrith had authorized the association’s authority to act in the council’s place when he purchased his home in the association. The court also pointed out that the association was recognized in a district court action as the appropriate entity to collect assessments in the subdivision.

At the close of evidence, the trial court granted the association’s motion for a directed verdict (a determination by the judge that there can only be one outcome on the issue as a matter of law) on Landrith’s defenses that the association failed to mitigate its damages, materially breached the declaration, waived its right to recover the walls’ cost from Landrith, and breached the implied covenant of good faith and fair dealing.

The jury returned a verdict in favor of the association on these remaining issues, awarding it more than $33,000. Landrith appealed.

Landrith’s appeal focused on two issues: (1) the trial court erred in finding that the association was authorized to act as the council pursuant to the declaration; and (2) whether the trial court properly granted the association’s motion for a directed verdict.

It was undisputed that the property owners regarded the association as having authority to govern the subdivision and impose assessments: They had consistently paid assessments to the association, and the association had managed the property pursuant to the declaration’s terms for 30 years. No competing association had emerged, and the association was judicially recognized as authorized to levy assessments. Moreover, the declaration was recorded many years before Landrith bought his property, and the property owners’ pattern of compliance with the association’s actions was sufficient to establish that the association assumed the authority delegated to the council by the declaration.  

The court emphasized that the association’s authority to make capital improvements was restricted to the common area. There was no dispute that the retaining walls constructed were on Landrith’s property, not the common area. Thus, the restriction on performing capital improvements did not apply.

A study of the declaration led the court to conclude that the question as to whether the retaining walls’ construction was authorized under the declaration needed to be decided by a jury. Careful consideration of the trial court records convinced the appeals court that the issue had been presented to and decided by the jury, notwithstanding the directed verdict.

The directed verdict, however, did not preclude the jury from considering whether the retaining walls constituted exterior maintenance authorized under the declaration. To the contrary, the trial court expressly allowed Landrith to argue that the association’s action did not constitute exterior maintenance.

The court affirmed the jury’s verdict and the ensuing trial court judgment.

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Amendment Removing Budget Approval Requirement Invalid

Pole v. Sterling Woods Condominium Association, No. 304001 (Mich. Ct. App. Aug. 7, 2012)

Assessments/Powers of the Association: A Michigan appeals court affirmed a finding that an amendment to condominium documents—which removed the requirement that unit owners must approve the annual budget—was a material alteration of owners’ rights and required approval of two-thirds of the owners before it could be adopted.

Sabrena Pool owned a unit in Sterling Woods Condominium, a development in Macomb County, Mich., that is managed and maintained by Sterling Woods Condominium Association (association). The bylaws provide that assessments be paid in accordance with an annual budget that has been approved by an affirmative vote of two-thirds of all unit owners.

In 2010, the developer recorded the consolidating master deed and new bylaws to supersede and replace the 2000 master deed and bylaws. In May 2011, Pole and other owners sued the association, alleging that the board of directors elected in 2009 made substantial changes to the condominium’s operations. Specifically, they alleged the board had failed to obtain owner approval of the 2010 budget, attempted to forego approval of the 2011 budget, and did not maintain a ten percent reserve fund as required under the 2000 bylaws. Despite not having a properly approved budget, the association spent money, incurred debt and attempted to levy assessments against the unit owners. It continuously refused owners’ requests to inspect the association’s financial documents—in which, according to the 2000 bylaws, owners had a right to see—and refused to hold a special meeting for the purpose of removing and replacing the current board of directors.

The association filed a motion for summary judgment (a determination made by a court without a trial) and argued that the 2000 master deed and 2000 bylaws were superseded by the consolidating master deed and 2010 bylaws. Therefore, the owners’ claims were barred because they had no right to approve the annual budget.

The owners maintained that the consolidating master deed and 2010 bylaws were void because they were adopted in violation of the original master deed. Specifically, the 2000 master deed only allowed the developer to make amendments to the master deed and bylaws that did not materially affect (to significantly or relevantly change or alter something) the rights of any owner; otherwise, the amendment must be approved by 66.67 percent of all owners.

The court ruled in the owners’ favor, finding that removing the budget approval requirement was a material alteration of the owners’ rights; therefore, the amendment must be approved by 66.67 percent of all owners. Also, because the developer failed to properly amend the 2000 master deed and 2000 bylaws, the court held the consolidating master deed and 2010 bylaws were invalid and void. The association appealed.

In its appeal, the association argued that the 2000 master deed allowed the developer to “eliminate or modify portions of the Condominium Documents that were inapplicable due to passage of time, change in circumstances, or other appropriate consideration.” Further, the 2000 master deed provides that all owners “shall be deemed to have irrevocably and unanimously consented to such amendments to this Master Deed as may be proposed by the Developer.” Therefore, even if owner approval was necessary, the owners were deemed to have consented to the amendment. This issue, however, was not raised at trial, so the court declined to address it on appeal.

The 2000 master deed provides that the master deed may be amended with the consent of 66.67 percent of all owners. This provision is consistent with the Michigan Condominium Act, which provides that the condominium documents may be amended without the consent of owners if the amendment does not materially alter or change the rights of an owner, and if the condominium documents specifically reserve the right to amend for that purpose for the developer or the association. Otherwise, the act requires that amendments be approved by owners holding at least two-thirds of votes in the association.

The association attempted to raise several other arguments. However, since these arguments were not presented at trial, the appeals court declined to address them for the first time on appeal. The appeals court concluded that removing the requirement that owners must approve the annual budget was a material alteration of the owners’ rights. Therefore, the trial court properly granted summary judgment to the owners.

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