SJC Decision Creates Uncertainty for Condominium Owners, Buyers and Attorneys

Published on: May 9, 2011

The Massachusetts Condominium Law (Chapter 183A) is an enabling statute, designed to give condominium developers and community associations the flexibility required to address circumstances that can change over time. It is generally assumed, however, that within this flexible structure, some statutory requirements are fixed — if not unalterable, alterable only with considerable difficulty and unanimous, or close to unanimous, owner approval. A recent Massachusetts Supreme Judicial Court decision (Scully v. Tilley) suggests that may not be the case. The court decided that a board and a developer could agree to alter the statutory formula for calculating percentage ownership interests even if the owners affected adversely by the change objected to it.

The issue arose at the Cape Codder Condominium, a phased development, the first phase of which, consisting of 20 units, was created in 1989. The Master Deed contemplated that the second phase – to be completed within 10 years – would include 48 more units and a clubhouse. The deed also specified that the owners of Phase I units would own 31.41 percent of the completed community with the remaining 68.59 percent divided among owners of the 48 units to be built in Phase II.

After completing the first phase, the developer assigned Phase II development rights to another developer (Cape Codder Enterprises), who proposed a scaled-back plan, which the board rejected. Cape Codder Enterprises, in turn, assigned its rights to a third developer (Stuborn Limited Partnership), which submitted another scaled back plan that the board also rejected.

Owners’ Interests

When Stuborn (living up to its name) commenced construction anyway, the association’s governing board filed suit in Land Court. The board and Stuborn subsequently negotiated a settlement agreement under which Stuborn was allowed to construct 20 units instead of the 48 initially planned, with a total floor area for Phase II about one-third smaller than contemplated in the Master Deed.

Notwithstanding that revision in the project’s scope, the agreement left the original allocation of percentage interests between owners of Phase I and Phase II units unchanged. It also divided management costs equally between the two phases, but allocated all other common expenses under the original (31.41/68.59) formula. Finally, the agreement specified that at least 67 percent of Phase I owners would have to approve any future changes adversely affecting their interests.

Fast forward now to late 2003, when Phase II owners asked the board to have an appraiser assess the market value of all units as of the date in 1999 when the master deed was revised to incorporate the terms of the settlement agreement. The appraiser found that Phase I at the time represented 51.49 percent of the community’s market value and Phase II 48.49 percent.

Phase II owners asked that the percentage interests be recalculated on that basis to comply with the statutory requirement that ownership interests reflect “the approximate relation that the fair value of the unit on the date of the master deed bears to the then aggregate fair value of all the units.” Phase I owners balked; their vote fell short of the 67 percent approval the settlement agreement required for a change adversely affecting their interests, and the board rejected the Phase II owners’ request.

When the Land Court upheld the board’s decision, the Phase II owners appealed, and the SJC accepted the case on direct review. The key question before the court: Could the board and the developer agree to waive the statutory requirement for calculating the percentage interests of condominium owners? The SJC concluded that the waiver was permissible because it “would not frustrate the public policies of the statute” and because Phase II buyers had notice of the percentage interest change before they purchased their units.

A Disturbing Distinction

The notion that the application of certain statutory provisions may be waived by agreement is not new. The principle that buyers must have notice of any change affecting their percentage interests and/or consent thereto is also well-established. What is new and disturbing in this decision is the distinction the SJC makes between public interests and the interests of private parties in analyzing the Condominium Act.

“Within this overarching purpose of the condominium statute,” the court said, “the proportionality provision…defines the property rights of individual condominium owners vis-à-vis one another; it does not, as the Phase II owners argue, protect the public by mandating uniform requirements as to the percentage interest ownership of common areas and facilities in all condominia in the Commonwealth.”

The court’s conclusion that, at a minimum, certain statutory provisions in the Condominium Act govern only the private property interests of owners who voluntarily purchase units and does not protect the public at large is difficult to comprehend. Anti-discrimination laws in the employment context don’t protect “everyone”; they protect only individuals who have voluntarily chosen to find jobs and, as a result, were victims of discrimination. But these laws are designed to protect and benefit society as a whole. They provide assurance on which all can rely that discrimination is not permitted. The condominium statute, similarly, doesn’t simply define the private interests of condominium owners; it protects members of the public – condominium owners and potential buyers – in what is likely to be the most significant economic undertaking of their lives. To conclude otherwise fails to acknowledge the long-established consumer-protection function of the Condominium Act and breathes new life into the clearly disfavored concept of caveat emptor.

Uncertain Footing

Admittedly, the Scully case was decided on unique and narrow facts. The SJC clearly based its holding on the fact that the association and the developer were parties to the agreement – the identified wavier was not the unilateral act of the developer. The SJC also presumably considered the context: The agreement was a negotiated resolution of a lawsuit that was pending at the time of its execution. But these distinguishing facts could have supported a similar outcome on different grounds than those on which the court relied, creating far less uncertainty than this decision is likely to generate.

The distinction the court makes between “public” rights meriting protection and “private” ones that don’t is troubling, because that analysis could theoretically be applied to any provision of the condominium statute, making all of them, potentially, subject to change. It’s like discovering that a bridge you thought was resting solidly on stone pilings is actually resting directly and precariously on the sand. You may continue to cross the bridge in the future, but with considerably more trepidation than in the past.

While the court didn’t say its analysis of the percentage interest provision would apply to every other provision in the condominium statute, it also didn’t say that its reasoning applied to this provision alone. The decision, thus, creates an element of uncertainty for condominium buyers, owners’ associations and attorneys that didn’t exist before. Buyers can’t rely with certainty on the requirements the condominium statute imposes and the protections it affords, and attorneys can’t tell them with certainty that even the most basic requirements are fixed or that the most fundamental protections secured.

We know there are few guarantees in life. But as a result of this decision, an already short list has become a little shorter.