Published on: June 1, 2010
The Massachusetts Supreme Judicial Court issued an opinion on May 14, 2010, affecting the ability of developers and Condominium Board’s to waive certain provisions of the Massachusetts Condominium Act, Chapter 183A. In the case of Scully v. Tillery, the SJC held that the developer may waive the provisions of c. 183A, provided that the organization of unit owners agreed to such waiver, and that subsequent owners have record notice of the waiver provisions.
At issue in the case was a litigation settlement agreement whereby the Developer and Condominium Board agreed to set percentage interests for future phases differently than otherwise proscribed by statute.
The Massachusetts Condominium Act, G.L. c. 183A, §5(a), provides that percentage interests are supposed to be set based on relative fair value of the units as of the date of the Master Deed. Furthermore, Section 5(b)(1) provides that those percentages cannot ordinarily be altered without 100% unit owner consent.
In this case, the percentages were arbitrary and set ultimately to benefit the Phase I Unit Owners, again as part of the litigation settlement. The Phase II Unit Owners bought with notice of higher percentages (meaning higher condominium fees). The Phase II unit owners subsequently brought suit holding that the percentages established (by virtue of the Settlement Agreement) violated Section 5(a) of the Condominium Act, as they were clearly not based on value. The Phase I Unit Owners countered with the argument that they can waive portions of the Condominium Act in connection with a negotiated settlement.
The Land Court found for the Phase I owners, and held that the master deed, as amended, was valid and enforceable. The SJC affirmed the Land Court’s ruling. In its opinion, the SJC held that §5(a) was waived by the developer, waiver of this provision is not precluded by any public policy; and that the waiver is effective against Phase II owners who purchased with notice of the recoded provisions/amendments. The SJC reasoned that waiver of statutory rights is permissible when the purpose of the statute is the protection of the property rights of individual parties, rather than the protection of the general public. In §5(a), the SJC noted that it is a private property right that is protected, not the public interest. Further, the Court stated that c. 183A is an enabling statute that merely sets out a framework for development and provides the developer with flexibility. The SJC also emphasized throughout its decision the importance of upholding carefully negotiated settlement agreements, where parties are represented by counsel.
In MEEB’s opinion, the decision is also significant for what the SJC did not say and/or the parties to the case apparently did not argue. Specifically, Section 5(c) of the Condominium Act provides that the provisions of this section may not be waived. For some reason none of the parties raised the possible application of Section 5(c) in their arguments to the Court and the SJC seems to have ignored it. Furthermore, there is a provision at Section 5(b)(2)(iii) that allows a condominium board to set percentages differently than required by Section 5(a) if the agreement involves a revival or extension of development rights, which the Settlement Agreement appears to have done in this case. Presumably Section 5(b)(2)(iii) could have been dispositive of the entire issue, and the SJC suggested as much in a footnote, but preferred to make its decision based on the waiver issue.
While MEEB feels that the decision is limited to and based upon very unique factual circumstances, obviously it could have a very broad impact on Condominium development, litigation and operation going forward. The decision clearly opens the door for more creativity and flexibility in addressing condominium disputes in the future. The decision appears to give condominium boards the power to deviate from certain statutory constraints in structuring developer litigation settlements that affect the future operations of the Condominium.
Additionally, Condominium practitioners will need to pay close attention going forward to prior settlements and resultant document amendments that purport to waive provisions of the Act. On the down side, the decision may open the door for possible future developer mischief however, it seems unlikely that a Court would allow the decision to be stretched to such bounds.
In any event, there are still certain provisions of the Condominium Act that specifically state they cannot be waived by agreement. As noted above, Section 5(c) seemingly provides that and it would still be possible if that issue were actually presented to a Court in the future, the decision in Scully would be entirely different. Section 6(c) (addressing priority liens) also seems to prohibit waiver. Section 12(d) also provides that By-Laws may not contain provisions inconsistent with the rights afforded by the Act.
The decision, while recognizing the enabling nature of c. 183A, ignores the separate and well-settled consumer protection function which c. 183A was designed to perform. The inherent imbalance of bargaining positions between a condominium declarant engaged in the business of developing, marketing and selling condominium units and group of purchasers in a newly formed, and perhaps partially constructed project, is readily apparent. Therefore, whether or not the ultimate outcome of the case finding that this specific agreement was enforceable is desirable, the basis of the Court’s decision is concerning.
As you read this article you might wonder what, if any, impact this decision will have on my association – unfortunately, the answer is not a simple one, but a review of your association’s documents should provide some clarity. In particular, we would look for inconsistent provisions not only within the documents themselves, but also with c. 183A. Also, a review following a developer transition in order to fix any inconsistencies would be extremely beneficial so as to avoid problems in the future. Finally, in light of this decision, it is perhaps most important to closely review other documents or agreements recorded at the time of the original master deed by the developer to look for provisions that circumvent those contained in c. 183A.
While the impacts of the decision remain to be seen, it appears that despite decades of jurisprudence moving in the opposite direction, the Court’s reasoning has breathed new life into the old adage buyer beware.