CONDO TRUST WINS DEVELOPMENT RIGHTS CASE AGAINST LENDER AT MASSACHUSETTS APPEALS COURT

Published on: May 13, 2020

In a development rights dispute between a condominium trust and the original developer’s lender, the condominium trust prevailed, on appeal, in obtaining a ruling that the original developer’s mortgage did not attach to common area.  While such a decision would seem like a given, the Massachusetts Land Court had ruled that the mortgage did in fact attach to undeveloped common area (i.e. common area land upon which units had not yet been built).

While the lender obtained a ruling that development rights to the portions of undeveloped common area land had not expired, the easement for travel across the common area had in fact expired.  Thus, if the developer or its lender intended to develop additional units on the common area, they will need to negotiate with the condominium trust for the right to pass over common area, to access the common area for construction purposes and to use the common area for storage of equipment and the such.

The Court determined that the lender’s mortgagee did not have a lien over common area for two reasons.  First, as the developer sold units, the lender recorded partial releases of its mortgage.  The lender had contended that since its mortgage was recorded prior to the Master Deed, that the mortgage remained in place on the common area land that it submitted to the condominium regime, including specifically the portions of the common area on which it intended to construct additional units.  Each partial release granted by the developer’s lender (when the original units were sold) pertained to that unit’s undivided interest in the common area.  The Appeals Court correctly ruled and recognized that the issuance of partial releases effected an equitable subordination of the Lender’s mortgage interest to the condominium regime, which is an important concept that a lot of general and real estate practitioners, that are not condominium specialists, do not understand.    Second, per MGL. c. 183A and the governing documents, the unit owners are the exclusive owners of the common area according to their respective undivided interests in the Master Deed.  Thus, under the first argument, the mortgagee released its claims to the common area.  By the second argument, the mortgage simply cannot attach to common area.

As noted above, the lender won on the issue of development rights still being active, as the development rights were not limited in time.  However, the developer gave himself an easement over common area for the purpose of construction.  This easement expired 7 years after the recording of the Master Deed by its own terms. So, while the developer still has development rights, and while the lender still has a lien on those development rights, there is no right to cross common area or to place equipment on such common area which profoundly diminishes the value of those rights.  Practically speaking, if anyone is going to develop additional units at the condominium, they will have to pay the Trust for permission to use common area.  What many lenders and developers and even general practitioners do not understand and what this case speaks to: is that condominium development rights typically do not involve an ownership interest in land.  When a condominium is formed, title in the common areas vests from the developer to the unit owners.  The development right is a future interest reserved by the developer to access the common area and build on the common area and submit those additional buildings as units to the condominium.

This case demonstrates the complexity of development rights and the delicate balance between the interests of unit owners, the condominium trust, the developer and its lender in a phased condominium.  Whenever a condominium transitions from unit owner control, the condominium board should meet with its lawyer to analyze and manage the scope of those rights to see if unnecessary litigation like the kind that occurred in this case can be avoided.

MEEB’s Ed Allcock is the only lawyer that has litigated and successfully argued condominium development rights cases in the Massachusetts, New Hampshire and Rhode Island Supreme Courts.  Ed is also President Elect of CAI New England Chapter and President Elect of the National College of Community Association Lawyers. If you would like to discuss this case or condominium development rights with him he can be reached at eallcock@meeb.com or his direct line 781-849-3637.

For a copy of the Decision [click here].