Developers’ Rights Decisions: Puzzling, Perturbing, and Problematic
Litigation is unpredictable. That’s no surprise to anyone who fights court battles regularly. It is also a theme reflected in three recent court decisions dealing with developer rights.In the first case, Condominiums at Lilac Lane v. Monument Garden, LLC, the New Hampshire Supreme Court ruled that additions to an existing condominium were not subject to time limits and other statutory restrictions on phased developments.The New Hampshire Condominium Act created the framework for this dispute between my association client (Lilac Lane) and the developer – Monument Garden. The statute defines two types of phased condominiums: Additions built on “convertible land” – common area that is part of an existing condominium; and “expandable” additions constructed on land that is adjacent to the condominium but not part of it. Convertible phases are subject to a five-year time limit; expandable phases have a seven-year time limit.The statute additionally requires developers to identify in the declaration the ‘convertible land’ on which future phases will be constructed; and it specifies that before adding buildings to an existing condominium, developers must amend the declaration and attach a certificate verifying that the buildings have been “substantially completed.”The declaration creating Lilac Lane called for five buildings with 24 units in each. One of the buildings was in place when the new condominium was formed; two of the remaining four buildings (numbered 13 and 14) were completed or substantially completed close to, but within, the five-year ’convertible’ time limit; the remaining two buildings (14 and 15) had not been constructed when this dispute was litigated. The first building was completely sold out to third party owners. The developer maintained ownership of the second two buildings and leased them like apartment buildings.Disputes arose between the developer and the owners in the first building about the management of the condominium. The developer (Monument) contended it could control the board by virtue of its ownership of units in the second and third buildings and then do whatever it pleased. But the board fought back, contending that:
Because the developer had neither amended the documents to add buildings 12 and 13 nor attached the required certificates of substantial completion, those buildings had not been created legally and so were part of the common area that belonged to the association.
The five year time limit for adding buildings on “convertible” land had expired, erasing Monument’s right to complete buildings 14 and 15.
Monument argued that the declaration had accurately described the plan to construct 120 units in five buildings, and that was sufficient to establish and preserve the future development rights, eliminating the need to comply with the time limits and other statutory requirements for phased developments built on “convertible” land. The developer further contended that the common area on which future or past buildings had been constructed was neither not “convertible land” nor “common area”, even though it fit the statutory descriptions. The developer contended he could avoid the convertible land requirements simply by not calling the land convertible. The New Hampshire Supreme Court astoundingly (in our view) agreed.
A Third Development Option
To reach that conclusion, the court accepted the trial court’s reasoning that the statute permits (though it does not actually describe) a third type of phased development that is neither “convertible” nor “expandable.” Under this theory, the court said, “a condominium can be created prior to the completion of construction all units, without the need to classify portions of the condominium land as convertible.” The court went on to explain: The site for the future buildings would be “convertible” only if it was common area. But because the developer always planned to construct these buildings, the site was never intended to be common area; it was always intended to be buildings. “Because the units in dispute were always identified as units, they were never part of the ‘common area,’ and there is, accordingly, no need to convert the common area into units,” the court said.The court added one more piece to this argument, agreeing with the developer that the future units were not really units to be completed in common area (and thus subject to convertible land requirements) but were actually “improvements,” requiring only that the developer describe them as either “not yet begun” or “not yet completed.”If you find yourself scratching your head over this reasoning, you’re not alone. The purpose of the phased development restrictions in the New Hampshire statute (mirroring those in the 1977 version of the Uniform Condominium Act on which the New Hampshire statute is based) is to give developers the flexibility to complete a development over time, but with reasonable time limits, so the development rights are not endless. This protects lenders, who won’t provide infinite financing, in any event; and it protects condominium owners, ensuring that they will not have to live forever in a partially built community the developer is unable or unwilling to complete. The requirement for a substantial completion certificate also protects condominium buyers by ensuring that the units they purchase exist in reality and not just on a development plan.
Consumer Protections Erased
The Supreme Court ruling obliterates all of those protections. It tells developers they can avoid the time limits, substantial completion and amendment requirements simply by identifying the units they plan to create in the future. This is not inconsistent with the statute’s purpose, the court insisted, because “so long as the site and floor plans depict the requisite information, potential unit owners will be fully informed.”The legal stretch required to conclude that this interpretation is a) reasonable and b) remotely consistent with the statutory intent would tax a contortionist. Additional units are “improvements” like a swimming pool or a clubhouse? The common area on which future units are to be built is itself a unit and not common area? My guess: An accurate reading of the statute would have required the court to affirm that the two completed buildings belonged to the association, and this distorted legal analysis was the only way to avoid that result. The decision is entirely result oriented.The potential implications for New Hampshire condo owners could be distressing, to say the least. Developers may no longer create condominiums subject to the convertible land restrictions. Why would they when, based on this decision, they can create developments with no phasing restrictions or time requirements at all?Maybe that won’t be the result. Most of the developers who have constructed condominiums in the past 20 years have followed the statute, using the convertible land structure; my hope is that going forward they will continue to do so, notwithstanding this outlier of a decision.If a developer tries in the future to get around the statutory restrictions, as the developer did in this case, I’d advise a condominium association to mount another legal challenge in the hope that the Supreme Court will reconsider the questions raised here — and answer them correctly the next time.My client hasn’t given up hope of reversing this decision. We’ve filed a petition for rehearing with the New Hampshire Supreme Court, which we don’t expect the court to accept. But the petition raises a Constitutional issue: The court’s decision that the condominium’s common area really wasn’t common area constituted a judicial “taking” that illegally transferred the association’s property to the developer. If the rehearing petition is denied, we plan to appeal directly to the U.S. Supreme Court, which has ruled previously that a judicial body can engage in a “taking” by making a decision that eliminates established property rights. We’ll see where this goes.
Developers Win Again
In the meantime, we have the two other cases I mentioned, which, like this one, seem to advance developer rights over consumer protections. Both involve restrictions on the ability of condo owners to sue developers for construction defects.In Vallagio at Inverness Residential Condominium Ass’n v. Metropolitan Homes, Inc., the Colorado Supreme Court upheld provisions in the condominium declaration requiring arbitration to resolve construction defect disputes. Although owners could amend the covenants with a supermajority (67 percent) vote, the declaration allowed the developer to veto any amendment that altered the construction defect arbitration requirement, and the court upheld that provision as well.Dissenters argued that the decision permits developers “to control homeowners’ associations’ affairs into perpetuity simply by drafting self-serving provisions and then including a consent-to-amend provision that allows the declarant to demand consent to the amendment of any provision in the declaration.”I’ve advanced similar arguments in a Massachusetts case (The Trustees of the Cambridge Point Condominium vs. Cambridge Point, LLC) challenging a provision requiring 80 percent of owners to approve litigation against the developer – impossible for this association, because the developer still controls 20 percent of the units. A lower court concluded that this provision, though clearly designed to insulate the developer from litigation, did not unfairly disadvantage owners and was not “contrary to public policy.” The Condominium Association has appealed the issue on the grounds that anti-litigation provisions contained in condominium documents are inconsistent with the Massachusetts Condominium Act, are contrary to public policy and deny denies access to the courts, which is a right contained in the Massachusetts Constitution.The Massachusetts Supreme Judicial Court has agreed to review the lower court’s ruling. Briefs have been filed and CAI, the Real Estate Bar Association (REBA) and the Massachusetts Abstract Club have filed amicus briefs on behalf of the Condominium Association. We expect oral arguments in the case to be scheduled for the fall or the winter of 2017.There is one significant distinction between the Massachusetts and Colorado cases: In Colorado, the association at least had the ability to have its grievance heard, albeit by an arbitration panel instead of a jury. In Massachusetts, if the anti-litigation provision is allowed to stand, the condominium association is left without any remedy at all for over 2 million dollars in construction defects.It is tempting to see in these three decisions an emerging pattern in which the courts are increasingly favoring developers. But I think the more accurate reading is the one I suggested at the beginning of this article ─ the courts are unpredictable.Sometimes they follow the law or agreements as written, but not always. In some cases, they make decisions based on public policy or equitable fairness. In others, they may strictly and narrowly interpret a statute, regardless of the adverse real world effects, leaving it to lawmakers to address the problem. This seems to describe the Massachusetts and Colorado poison pill decisions. (A judicial preference for arbitration agreements may also explain the Colorado decision.) And in other cases (the New Hampshire decision is an example), the courts may ignore or distort the clear meaning of a statute in order to achieve a desired legal result, or avoid an undesirable one.The bottom line: Courts are capable of choosing any one of these routes— and you never know which way they will go.