CAI Law Reporter - December 2014 (Plain Text Version)

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Assessments Levied by Master Association Must Be Determined by Cost

Chappell v. Wyngate Homeowners Association, Inc., No. COA14-285 (N.C. Ct. App. Oct. 21, 2014)

Assessments: A North Carolina appeals court held that a sub-association had standing to bring a claim against a master association for levying inequitable assessments against the sub-association’s members.

The Park at Westgate and Wyngate are residential subdivisions in Wake County, N.C., separated by a public street and right-of-way. Homeowners in The Park at Westgate subdivision are members of both The Park at Westgate Townhouse Association, Inc. (Park) and Wyngate Homeowners Association (Wyngate) under the declaration of covenants, conditions and restrictions for The Park at Westgate (Park Declaration). The Park Declaration further provides that members “shall have all rights, privileges, and benefits as well as the obligations, assessments, and restrictions of [Wyngate].”

In August 2012, Park, Ron E. Chappell and six other Park members sued Wyngate, seeking a declaratory judgment (judicial determination of plaintiff’s legal rights) that the assessments Wyngate charged Park members should be based on Wyngate’s costs to provide services to Park.

Wyngate charges each of its members, including Park members, an annual assessment. It assessed Park members the same as its other members. After Park members complained that their assessments were too high, Wyngate began in 2002 to pay Park members an annual rebate, but discontinued it in 2013.

Wyngate’s declaration of covenants, conditions and restrictions (Wyngate Declaration) provides that assessments for a membership sub-class should be Wyngate’s actual or reasonably anticipated cost “of carrying out the purposes of assessments, as applied to the sub-classes of memberships.”

Park filed a motion for summary judgment (judgment without a trial based on undisputed facts), which the trial court granted. The trial court ordered Wyngate to charge Park members assessments based on Wyngate’s costs. Wyngate appealed.

Wyngate asserted that the appeals court lacked subject matter jurisdiction to hear the appeal because Park did not have standing to bring suit on behalf of itself or its members. Standing is a necessary prerequisite to the court’s proper jurisdiction over the matter. The appeals court disagreed with Wyngate. Even assuming that Park did not have individual standing, Park had representative standing.

A homeowners association can bring suit as a plaintiff either on its own behalf or as a representative of harmed association members. Here, Park had standing to bring suit on its members’ behalf if: (1) the members would have standing to sue in their own right; (2) the interests it sought to protect were germane to its purpose; and (3) neither the claim asserted nor the relief requested required all members to participate in the lawsuit. However, an association typically lacks standing to sue for monetary damages on its members’ behalf if the damage claims are not common to the entire membership or are not shared equally, thus requiring individualized evidence to prove the fact and extent of the injury.

Park satisfied the first requirement because its members were also Wyngate members and subject to the contested assessments. Thus, its members would have standing to sue in their own right.

With regard to the second requirement, Wyngate argued that the interests Park sought to protect were not germane to its purpose. However, the Park Declaration states that its purpose is “enhancing and protecting the value, desirability, and attractiveness of the real property.” The alleged overcharge of assessments affected all areas covered in Park’s mission statement. Therefore, the interests Park sought to protect were clearly germane to its purpose.

Finally, Wyngate asserted that Park could not satisfy the third requirement because the relief sought in the complaint required individual Park members to participate. However, Park members were also Wyngate members. Thus, the relief sought in the complaint was common to all Park members and did not require all owners to participate.

The trial court’s judgment was affirmed.

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Declaration Amendment Violates Covenant of Good Faith and Fair Dealing

The Arbors at Sugar Creek Homeowners Association, Inc. v. Jefferson Bank & Trust Company, Inc., No. ED99730 (Mo. Ct. App. Oct. 28, 2014)

Covenants Enforcement/Association Operations: A Missouri appeals court ruled that the action of a bank, which owned a majority of a subdivision’s lots, to amend a declaration advanced the bank’s own financial interest in a manner contrary to other owners’ interests and violated an implied covenant of good faith and fair dealing.

In 2005 and 2006, Evolution Developments L.L.C. (Evolution) obtained two loans, secured by deeds of trust, from Jefferson Bank & Trust Company, Inc. (Jefferson), to develop The Arbors at Sugar Creek in St. Louis County, Missouri. The subdivision consists of 18 lots that are subject to a declaration of covenants, conditions and restrictions (declaration).

The declaration provided for an association named The Arbors at Sugar Creek Homeowners’ Association (Arbors Association). The declaration also set forth architectural design criteria for new home construction and required the written approval of the association’s board prior to construction.

Jefferson consented to the declaration’s terms and agreed to subordinate its deeds of trust to the declaration. Evolution created Arbors Association in 2005. However, Evolution failed to appoint officers and directors, conduct any meetings or file annual registration reports with the Missouri Secretary of State. Consequently, Arbors Association was administratively dissolved by the Secretary of State in 2006.

In March 2010, Evolution defaulted on its loans, and Jefferson foreclosed on the 13 remaining unsold lots. Jefferson entered into an agreement with McKelvey Homes, L.L.C. (McKelvey), giving McKelvey an option to purchase, build on and sell the remaining lots.

When McKelvey began to advertise its construction plans, several homeowners formed their own neighborhood association and appointed a design review committee to review plans depicted in McKelvey’s marketing materials. The homeowners notified Jefferson and McKelvey that the plans violated the declaration’s architectural covenants. McKelvey refused to alter the plans.

The homeowners brought suit against Jefferson and McKelvey (collectively, defendants) in May 2010. They alleged the defendants planned to build tract homes that violated the architectural covenants.

In September 2010, because the Arbors Association had been dissolved, Jefferson formed ASC Homeowners’ Association, Inc. (ASC) and called a meeting of the lot owners. At the meeting, Jefferson exercised the votes for its 13 lots (72 percent of the total votes) to amend the declaration to replace references to the Arbors Association with ASC. Jefferson elected three of its executives to serve on the ASC board. In November 2010, these directors approved McKelvey’s plans.

Jefferson filed a motion for partial summary judgment (judgment without a trial based on undisputed facts) with respect to whether ASC was the authorized successor homeowners association. The trial court ruled that ASC was the duly authorized association.

The homeowners called an ASC meeting in early 2011 to elect three residents to the ASC board because the declaration provided that all directors must be subdivision residents following expiration of the declarant control period. Jefferson attended the meeting and exercised its 13 votes to reject the homeowners’ nominees. Jefferson then voted to amend the declaration a second time to remove the residency requirement. Following the amendment, Jefferson voted to ratify its executives’ prior action approving McKelvey’s plans. It then voted again to elect its executives to serve on the board. McKelvey began constructing a house on Lot 13.

Both sides filed competing motions for summary judgment and claims for declaratory relief. In December 2012, the trial court ruled that Jefferson had properly amended the declaration to remove the residency requirement; therefore, its executives were qualified to serve as ASC directors. The trial court further found that the board properly approved McKelvey’s construction plans, and the plans did not violate the architectural covenants. The homeowners appealed.

The homeowners argued ASC did not have authority to govern the subdivision because it was not the association named in the declaration and because ASC did not receive an assignment of rights from Arbors Association, which is required to qualify as a successor under Missouri law. Jefferson responded that it was entitled to create ASC under an assignment of rights Jefferson received from Evolution. In addition, the amended declaration designated ASC as the association.

The appeals court found that Jefferson was mistaken in its belief that it could install ASC as the subdivision governing body through Evolution’s assignment of rights because the declaration did not give the declarant a right to form additional or successor associations.

However, the appeals court noted the declaration clearly permits amendments to be adopted by the vote or agreement of lot owners holding 67 percent of the association votes. Thus, Jefferson, with 72 percent of the votes, could amend the declaration to replace Arbors Association with another association that served the same role.

Moreover, the declaration defined the governing association as Arbors Association “and its successors and assigns.” This language expressly contemplates that another entity might succeed the original Arbors Association.

The homeowners argued that Jefferson violated an implied covenant of good faith and fair dealing when it amended the declaration to remove the director residency requirement. The appeals court agreed.

Good faith is an obligation imposed by law to prevent opportunistic behavior. An implied covenant of good faith and fair dealing is breached if Jefferson’s actions violated the declaration’s spirit and denied other lot owners an expected declaration benefit. Examples of bad faith recognized in Missouri include (1) utilizing contract language that allows unilateral action to improperly deny the other party of expected contract benefits, and (2) effectuating a declaration amendment through a devious attempt to circumvent the declaration’s intent.

The declaration provided homeowners with the significant benefit of self-governance by ensuring that only residents could hold office after the declarant control period. The appeals court found that Jefferson exploited its newfound control to remove the residency requirement and stock the ASC board with bank executives, who rubber-stamped McKelvey’s plans, advancing Jefferson’s own interests rather than the interests of the newly disenfranchised residents the board is supposed to represent.

Jefferson argued that it held the declarant rights and that the residency requirement did not apply during the declarant control period. However, the appeals court held that Jefferson did not qualify as the declarant. The declaration defined the declarant as Evolution and “its successors and assigns, if such successors or assigns should acquire more than unimproved Lot from the Declarant for the purpose of constructing a Dwelling Unit thereon.” (Emphasis added.) The evidence indicated that Jefferson did not acquire the lots to construct houses. Rather, following foreclosure, Jefferson immediately began looking for a developer to purchase the property in an effort to recoup its losses.

Furthermore, since the ASC board was wrongfully composed of bank employees, the appeals court held that all of the board’s actions were null and void. The trial court’s ruling was reversed and the case remanded for further proceedings.

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Prohibitions Against Political Signs and Solicitations Do Not Violate Homeowners’ Constitutional Rights

Fletcher v. Diamondhead Country Club and Property Owners Association Inc., No. 1:13CV223-LG-JCG (S. Dist. Miss. Oct. 27, 2014)

Covenants Enforcement/Use Restrictions/Federal Law and Legislation: A U.S. District Court held that an association’s prohibitions against political signs and door-to-door solicitations did not violate homeowners’ First and Fourteenth Amendment rights because the association’s conduct did not constitute state action.

Diamondhead is a common interest development (CID) in Mississippi established in 1970. Its owners are members of Diamondhead Country Club and Property Owners Association Inc. (association).

The City of Diamondhead was incorporated in 2012. The boundaries of the association and the city are nearly identical, and the majority of the city’s residents live in the association's jurisdiction. The city adopted the association’s name and logo and leased office space from the association until it moved into a new city hall in 2013.

The CID is subject to master covenants that prohibit most signs, including political signs, on residential lots. In addition, the association has adopted rules that prohibit door-to-door soliciting. The association enforces the restrictive covenants and maintains the significant common amenities, including a country club, golf course, pools, marina and an airport.

Unlike the association’s master covenants, the city’s zoning ordinances allow residents to place political signs on private property. The city does not enforce the master covenants or association rules. No association officer or director is allowed to serve concurrently on the association’s board and the city’s governing body.

John Fletcher and other association members (collectively, plaintiffs) sued the association, claiming that its prohibition on displays of political signs and door-to-door soliciting violated their First and Fourteenth Amendment rights under the U.S. Constitution because the association was a state actor, inexorably intertwined with the city.

The association filed a motion for summary judgment (judgment without a trial based on undisputed facts), arguing that it was separate from the city and, thus, not a state actor subject to the plaintiffs’ suit.

The parties agreed that the plaintiffs’ constitutional claims, brought pursuant to 42 U.S.C. Section 1983, required state action. The plaintiffs argued the association was a state actor under a “company town” theory. The U.S. Supreme Court has treated a company-owned town as a state actor where the private enterprise assumes all of the attributes of a municipality, exercises semi-official municipal functions, performs the full spectrum of municipal powers and stands in the shoes of the state.

The court found that the association effectively demonstrated it did not perform major municipal functions such as providing police or fire protection, utility services or operating public schools.

The plaintiffs argued that because almost all homes in the city were part of the association, the association was de facto a company town. However, the city’s business district was not within the association.

The question was whether the city was responsible for enforcing the association’s prohibitions on political signs and door-to-door soliciting. A private association will be considered a state actor where the state actor is so pervasively entwined in the private entity’s management and decisions that the private entity’s actions should in actuality be attributed to the state.

Relevant considerations include whether the association is composed mostly of public institutions or public officials, whether public officials dominate the association’s decision making, whether the association’s funds are largely generated by public institutions and whether the association is acting in lieu of a traditional state actor.

The court found that the plaintiffs failed to create a genuine issue of material fact to survive summary judgment with respect to whether the city was so entwined in the association’s management and decisions that the association’s actions were fairly attributable to the city. Because the city and the association had similar boundaries did not automatically convert the association’s private action into state action.

The court granted the association’s motion for summary judgment and dismissed the action with prejudice.

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Golf Course May Have to Remain if It Served as an Inducement to Lot Purchasers

Riverview Community Group v. Spencer & Livingston, No. 88575-3 (Wash. Nov. 20, 2014)

Development Rights; Covenants Enforcement: The Washington Supreme Court held that an equitable servitude may be applied to prevent a golf course from being redeveloped as residential lots if the golf course owner used the course to induce purchasers to buy lots surrounding the course.

Charles Spencer and George Livingston formed a partnership (developer) to develop rural property in Lincoln County, Wash., over a period of 20 years beginning in the 1980s. The development included the Deer Meadows and Deer Heights subdivisions as well as Deer Meadows Golf Course Complex, containing a golf course, restaurant, hotel, store and club.

The developer recorded a plat identifying the golf course, which was used to advertise the subdivision properties. A local newspaper quoted Spencer saying he built the golf course complex “so it would help sell the residential lots around here.” After Spencer died and most of the lots were sold, Livingston closed down the golf course complex and began platting the golf course into residential lots.

Believing they had been promised the golf course would remain a permanent fixture, some of the Deer Meadows and Deer Heights homeowners formed the Riverview Community Group (Riverview) and filed suit against the developer seeking, among other things, to bar the sale of the former golf course for individual homes. Riverview sought to impose an equitable servitude (restriction on land use, which may be enforced in equity) on the golf course that would limit its use to golf or impose some other type of relief such as barring the developer from building homes on the course. Riverview also sought an injunction.

Whether an equitable servitude can be created by implication (not specifically mentioned in covenants but implied by circumstances or the parties’ conduct) had not been considered in Washington. Therefore, the trial court granted summary judgment (judgment without a trial based on undisputed facts) to the developer to expedite appellate review. Riverview appealed.

The Court of Appeals concluded that Washington recognized equitable servitudes, but it affirmed summary judgment to the developer because it would be irrational to require the developer to maintain and operate a failing business. Riverview appealed to the Washington Supreme Court.

The Washington courts had previously held that covenants may be enforced against property owners even though no covenant was recorded against the land. The courts have also recognized that words on a plat can establish an equitable covenant limiting the land’s use. Further, justice may prevent a party from repudiating its conduct, representations and actions with another party. Taking all of these principles together, the Washington Supreme Court held that an equitable servitude may be implied.

The question was, did the developer induce purchasers to buy lots with a promise that the golf course would remain a permanent fixture of the community. The Supreme Court determined that Riverview presented sufficient evidence to survive summary judgment and proceed to trial.

The Supreme Court acknowledged the concern raised by the Court of Appeals that it would be inequitable to require the developer to operate an unprofitable golf course. However, it found the evidence insufficient to support the conclusion that the golf course was indeed unprofitable. The Supreme Court held that the question of an appropriate equitable remedy would only arise if Riverview established, on remand, that someone with the authority to encumber the golf course did so through its actions. At that point, both parties could present evidence and argue the nature and scope of any appropriate equitable and injunctive relief.

The Supreme Court reversed the Court of Appeals’ dismissal and remanded the case to the trial court for further proceedings.

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Condominium Association Cannot Bar Construction of Additional Units

Highridge Condominium Owners Association v. Killington/Pico Ski Resort Partners, LLC, 2014 VT 120, No. 14-066 (Vt. Nov. 14, 2014)

Development Rights; Documents: The Vermont Supreme Court held that a successor declarant retained the right to construct additional condominium units, even though more than 21 years had passed since the last construction.

In 1983, the North Ridge Development Corporation (North Ridge) created the Highridge Condominium in Killington, Vt. Highridge Condominium Owners Association (association) was formed to manage and maintain the condominium.

North Ridge, as the declarant, recorded a condominium declaration, which indicated it intended to build no more than 250 units in phases. The declaration listed the phase-one units and provided that the remaining units would be constructed in subsequent phases as and when determined by the declarant.

The declaration gave the declarant the right to amend the declaration (without further owner consent) so that, should it create additional units, it could adjust each unit’s common area percentage interest using a specific formula. The declaration also gave the declarant the right to add to the condominium some or all of a specific parcel and to modify the plans according to the phased development plan.

Additional property was added to the condominium in 1984, and the declaration was amended eleven times to reflect North Ridge’s construction of additional units. The most recent amendment was executed in May 1990, five months after North Ridge turned over association control to the unit owners.

In March 1991, North Ridge’s lender obtained a foreclosure judgment against North Ridge’s remaining property, and in June 1995 conveyed all the foreclosed property to Killington, Ltd. The deed stated that all North Ridge’s rights, title and interest as declarant were conveyed to Killington, Ltd. In August 1995, North Ridge also gave a quitclaim deed to Killington, Ltd., conveying all its rights, title and interest as the condominium declarant. In May 2007, Killington, Ltd. conveyed its interest in the condominium to Killington/Pico Ski Resort Partners, LLC (K/P).

In March 2011, K/P applied to the Killington Planning Commission for approval to build additional condominium units. The association filed suit against K/P, seeking, among other things, a declaratory judgment (judicial determination of plaintiff’s legal rights) that the declaration did not reserve any additional development rights.

Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court ruled in the association’s favor, finding that the declaration does not reserve the right to construct additional units at any time without the association’s consent but reserves only the right to alter each unit’s percentage interest in the event additional phases are developed or other land annexed.

The trial court determined the declaration inferred that the construction of additional units required the association’s consent due to the absence of an explicit mention of construction rights. The trial court also found the 21-year gap between the last unit construction and the current assertion of construction rights persuasive. K/P appealed.

The association argued that the right to build additional units is distinct from the right to adjust units’ percentage interests. The appeals court rejected this argument, finding that the declaration permitted the declarant to build up to 250 units without further association consent.

When the condominium was created, the Vermont Condominium Ownership Act (act) was still a first-generation act, which had not been amended since enacted in 1968, and the original act did not address declarant expansion rights. In 1999, the act was amended to address future development with more specificity, but the revisions did not apply retroactively—and the development rights here were created under the original act.

The appeals court found it significant that the declaration laid out a procedure for the declarant to make unilateral adjustments. The declarant could alter site plans, seek construction permits and adjust unit percentages to accommodate additional units, all without further consent by the association or unit owners.

Nothing in the act gives the association the authority to block future land development that is not within the common area. Further, nothing in the declaration suggests that the association assumes or acquires the declarant’s development rights when the declarant relinquishes association control.

The appeals court concluded that the declarant clearly reserved to itself the right to expand the condominium up to the stated maximum number of units and to adjust the percentage interests accordingly. Moreover, time does not alter this analysis. The development rights in the declaration were not limited by time, which was consistent with the version of the act in effect when the rights were created. Finally, the fact that the association acquiesced to earlier construction is immaterial since its approval was not required.

The appeals court reversed the summary judgment grant to the association and remanded the case to the trial court with instructions for judgment to be entered in favor of K/P.

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Association Has Third-Party Beneficiary Status to Enforce Development Agreement

College Woods Homeowners Association v. Trappe Borough, 96 A.3d 465 (Pa. Commw. Ct. Jul. 7, 2014)

Municipal Relations: A Pennsylvania appeals court held that an association could enforce an agreement between a developer and a town that obligated the developer to construct public improvements and dedicate them to the town, and the town would accept such improvements.

College Woods is a subdivision in the Borough of Trappe, Penn. (Borough). In 1995, the Borough approved a subdivision developer’s plans on the condition that the developer would construct certain public improvements, post security to assure completion and create a homeowners association. Later that year, the developer and the Borough entered into an agreement that obligated the developer to construct the public amenities and improvements in compliance with the Borough’s standards and offer them to the Borough.

In 2001, the Borough engineer confirmed that the project had been completed in compliance with the agreement, and the Borough released the escrowed security funds to the developer. In 2005, College Woods Homeowners Association (association) asked the Borough to accept two subdivision streets and emergency access ways (collectively, streets), but the Borough refused.

In September 2009, the association sued the Borough, claiming that the agreement obligated the Borough to accept the streets. Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts).

The trial court denied the association’s motion and granted the Borough’s motion. The trial court determined that the association was not an intended third-party beneficiary of the agreement and, therefore, could not enforce it. The trial court also held that the agreement did not obligate the Borough to accept the subdivision public improvements. The association appealed.

Generally, for a party to be considered a third-party beneficiary of a contract with the right to enforce it, the contract must affirmatively indicate the contracting parties’ desire for the third party to be a contract beneficiary. However, the Pennsylvania Supreme Court has adopted Section 302 of the Restatement (Second) of Contracts, which recognizes an exception to this rule for intended and incidental beneficiaries.

Based on the Restatement, the Supreme Court has established a two-part test for determining whether a party qualifies as an intended third-party beneficiary: (1) recognizing a right for the beneficiary must be appropriate to effectuate the contracting parties’ intent; and (2) contract performance must satisfy the promisee’s obligation to pay money to the beneficiary, or the circumstances must indicate that the promisee intends to give the beneficiary the benefit of the contract’s performance.

The appeals court held that the agreement contained a promise by the Borough to accept dedication of the streets and that it was appropriate for the association to have the right to enforce that promise to effectuate the Borough’s and the developer’s intentions.

The appeals court found the association to be the primary beneficiary of the Borough’s promises because the original agreement approving the subdivision obligated the association to maintain the streets until the Borough accepted dedication. Therefore, once the developer sold all the lots and the funds in escrow were released, the developer no longer had an interest in enforcing the agreement, leaving only the association.

The appeals court determined that the agreement intended to benefit not only the developer and the Borough, but also lot purchasers. One of the agreement’s express purposes was to ensure the development would be completed in accordance with certain standards. The appeals court held that, while these provisions may offer a benefit to the Borough, they largely benefitted purchasers.

The agreement repeatedly contemplates a dedication offer or requirements for the developer to offer the streets for dedication after specific conditions had been satisfied. Although the agreement did not contain an explicit obligation for the Borough to accept such dedication, the appeals court determined that it assumed the Borough would accept the dedication as long as the agreement’s conditions had been met. Since the engineer confirmed such conditions were met, the Borough must now accept dedication.

Accordingly, the appeals court reversed the trial court’s grant of summary judgment to the Borough and remanded the case for further proceedings.

The Editor would like to thank Hal Barrow with Barrowlaw in Warminster, Pennsylvania for submitting this case.

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New Jersey Bureau of Homeowner Protection Did Not Properly Administer New Home Warranty Claims

Aristocrat Condominium Association v. 48 Street Weehawken, L.L.C., No. A-5437-11T2 (N.J. Super. Ct. App. Div. Nov. 14, 2014)

State and Local Legislation and Regulations: A New Jersey appeals court found the New Jersey Bureau of Homeowner Protection improperly denied an association’s claims for common element defects under the New Home Warranty Program as being outside the warranty period.

The Aristocrat Condominium in Union City, N.J., is managed by Aristocrat Condominium Association (association). The project was developed by 48 Street Weehawken, L.L.C. (developer), owned by Arthur Christy and Ernesto Garcia.

While the building was under construction in December 2008, the first unit was sold to Jared Smollik. Only a temporary certificate of occupancy had been issued to the developer at the time of sale. No additional units were sold until after May 2009, when a final certificate of occupancy was issued.

Immediately after purchase, Smollik began notifying Christy regularly of defects in the common elements. Smollik testified that Christy told him he could not file a claim under the state’s home warranty program because the developer still controlled the association, and only the association could file a common element claim.

The New Jersey Bureau of Homeowner Protection (bureau) administers the New Home Warranty Program (program). The program was created under the New Home Warranty and Builders’ Registration Act (act) and provides funds to pay claims made by owners of new homes for covered defects. The fund pays homeowners to correct a covered defect if the builder is unable or unwilling to correct it. The act authorizes the Commissioner of the Department of Community Affairs to implement the program and process claims, including assessing the validity of each claim.

Others who bought units later in 2009 also notified Christy or Garcia of defects. By December 2009, owner Benjamin Quinones asked the building manager, Ana Castro, to file a common element defect claim under the program. Castro told Quinones the association must first ask the developer to correct problems; indeed, the developer was sending someone immediately to take care of leaking water.

Other residents made attempts to get Christy to correct building problems in late 2009 and early 2010. After association control was turned over to the owners, Christy attended the association’s first meeting in March 2010 at which he admitted to cutting corners as money ran short. However, he affirmed that the developer would work with residents to fix the resulting problems.

The developer did not fix the problems, and two homeowners filed claims with the bureau in March 2010. The bureau denied their claims because only the association could file common element claims.

The association filed a claim with the bureau in April 2010. The bureau conducted an inspection and denied 13 of the association’s 18 common element claims because they were not filed within the one-year warranty period. The association appealed the bureau’s ruling first to the Office of Administrative Law and then to the Superior Court, Appellate Division.                                    

The act provides three different warranty periods—one year for faulty workmanship and defective materials; two years for faulty installation of plumbing, electrical, and heating and cooling systems; and ten years for “major construction defects.” The one- and two-year warranties provide that the dwelling “shall be free from defects” for one or two years, as applicable, “from and after the warranty date.”

The appeals court determined this meant that a defect arising during the warranty period is covered, not that the claim had to be filed within the warranty period. The appeals court held that bureau’s denial of the claim because it was filed beyond the warranty period was in conflict with the act.

The appeals court also found that requiring owners to file claims within the warranty period would frustrate the legislature’s plain intent to require them to work with the builder before filing a claim.

The act specifically requires the owner to notify the builder of the defect and give the builder a reasonable time to make the repair before filing a claim. The commissioner’s regulations further require the owner to give the builder 30 days to respond and to file a claim notice with the bureau not later than 14 days after the builder’s 30-day cure period expires. The regulations also state that an owner cannot submit a claim notice until 120 days after the warranty expires. The appeals court found this provision clearly contemplated a filing date well beyond the warranty period.

The regulations provide that common element claims must be made by an association representative. However, where the developer controls more than 50 percent of the association votes, a unit owner may file a claim with the bureau. Yet, the bureau denied the claims filed by the individual owners instead of the association.

If the one-year warranty began in December 2008 when the first unit was sold, the association could never have filed a claim within the appropriate time frame because the developer retained association control until March 2010, well past the one-year warranty, and the developer was not going to make such a claim for the association.

The appeals court concluded that the bureau and the commissioner did not meet their obligations to resolve the claim fairly, reasonably and in conformity with the act and the regulations. The bureau’s decision was reversed, and the case remanded for further proceedings.

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Association Has Third-Party Beneficiary Status to Enforce Development Agreement

Club Envy of Spokane, LLC v. The Ridpath Tower Condominium Association, No. 31913-0-Ill (Wash. Ct. App. Nov. 18, 2014)

State and Local Legislation and Regulations; Documents: A Washington appeals court held that the Washington Condominium Act’s one-year statute of limitations to challenge a declaration amendment’s validity does not apply to failure to approve the amendment.

Ridpath Tower Condominium in Spokane, Wash., was created in February 2008 when a condominium declaration was recorded that converted the Ridpath Hotel into an 18-unit condominium. The developer, Washvada Investments, LLC, also created The Ridpath Tower Condominium Association (association) to manage and govern the complex.

Originally, Unit 18 spanned 12 floors. In June 2008, the developer recorded a first amended declaration subdividing Unit 18 into Units 18 and 19. A second amended declaration was recorded in August 2008, further subdividing Unit 18 into Units 18, 20 and 21 and converting some common elements to private ownership. These changes reduced all units’ percentage votes.

In January 2013, Ridpath Revival, LLC (Revival) purchased Units 3, 20 and 21. While a majority of unit owners wanted to use their units as low-rent micro-apartments, Revival planned to develop rooftop Units 20 and 21 into a luxury hotel. Club Envy of Spokane, LLC, and several other unit owners (collectively, owners) filed suit against Revival to declare the second amended declaration void. They claimed Revival failed to obtain the required owner approval and asked the court to terminate Revival’s interests in Units 20 and 21.

Both parties filed motions for summary judgment (judgment without a trial based on undisputed facts). The trial court granted the unit owners’ motion and denied Revival’s motion. Revival appealed.

Revival argued the unit owners’ claim was barred by a one-year statute of limitations in the Washington Condominium Act (act). The act provides that “[n]o action to challenge the validity of an amendment adopted by the association pursuant to this section may be brought more than one year after the amendment is recorded.” (Emphasis added).

The Washington courts have not specifically addressed whether all amendments must be challenged within one year or only those adopted by the association under the act. However, relying on similar Washington cases and the Rhode Island Supreme Court’s analysis of a nearly identical statute, the appeals court held that, if the amendment was void from its inception because it was not properly amended in accordance with the statute, the statute’s time limitation does not apply. Therefore, the appeals court determined the unit owners’ challenge to the amendment’s validity was not barred by the one-year limitation.

Next, the appeals court examined the amendment’s validity. The act provides that general amendments may be adopted by a vote or agreement of 67 percent of the association votes or any larger percentage the declaration may specify. Amending the Ridpath declaration required the approval of at least 90 percent of the voting interests.

Further, the act requires that every owner of an affected unit must approve any amendment that may increase the number of units, change any unit’s boundaries or change any unit’s allocated interests. Since the second amended declaration changed every unit’s voting interest, the amendment required the approval of all unit owners.

The second amended declaration, signed by two association officers, stated that the amendment was approved by the required percentage of association votes. However, several unit owners submitted sworn statements that they did not approve the amendment. The only evidence to the contrary was the unsworn statements of the two association officers.

The appeals court held that such unsworn statements were insufficient to meet the act’s approval requirements. The appeals court held that the second amended declaration was not approved by all unit owners and was, therefore, void from the outset.

Accordingly, the trial court’s grant of summary judgment to the unit owners was affirmed.

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