Daily Development for Thursday, April 9, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

COMMUNITY ASSOCIATIONS; DEVELOPER TRANSITION:  If
transition from a developer to a community or property owners'
association does not take formally take place because of the developer's
bankruptcy, it will be deemed to have taken place at the time of the
bankruptcy if it was clearly intended that the affected common elements
were to be conveyed to the association.

Poblette v. Towne of Historic Smithville Community Association, Inc.,
355 N.J. Super. 55, 809 A.2d 17 (App. Div. 2002).

The developer of a planned unit development created a nonprofit
corporation (Association) to maintain the development in accordance
with the provisions of a "Declaration."  The Declaration described "[a]n
easement for the present and future installation and maintenance of
electric service, master and/or cable TV service, telephone service, water
(storm water and a sanitary sewer), gas and drainage facilities and the
necessary appurtenances to the same" drawn in favor of the developer,
the Association, and others.  Each Association member's right to
enjoyment and use of the community facilities was subject to that
easement.  The Association had responsibility for the maintenance,
governance, and administration of common facilities as well as the
responsibility for maintenance of certain facilities, not owned by the
Association, but known as limited common facilities.

The development experienced a significant storm and some homeowners
in the development "suffered substantial damage to their homes from
flooding allegedly caused by the overflow of a detention basin on the
Development that was to form part of the storm water drainage system.
Significantly, the developer had gone bankrupt well before the flood had
occurred."  The homeowners sued the Association and others on the
theory that the Association and the others were "under a duty to maintain
and repair the detention basin ... as the holder of an easement granting
exclusive control of said detention basis to [the Association]."

The lower court, on a motion for summary judgment, held that: (a)
transition of the development took place with respect to the storm water
system between the bankrupt developer and the Association; (b) the
Association had responsibility for the basin; (c) the Association, "as the
easement holder, was 'the owner' and 'operator' of the storm water basis";
and (d) the Association "had a duty by way of the easement created by
the [Declaration] to inspect, as an element of its maintenance obligations,
the storm water basin which [was] the subject of [the] litigation."  The
failure of the Association to inspect the storm water basin and discover
and correct the lack of an outflow mechanism and/or the lack of adequate
depth of the structure as the proximate cause of the flooding" was
preserved for determination at trial.  At trial, a jury found the Association
and its management company liable for damages.

On appeal, the Association argued that: "(1) no easement in favor of the
Association existed under the relevant provisions of [the Declaration]
because the detention basis [was] neither a 'Community Facility' nor a
'Limited Community Facility' as those terms were defined, and (2) even
if the basin did meet either definition, no easement was created because
there never was a 'transition' of the duty to maintain the detention basis
from the developer to the Association."

The Appellate Division rejected those arguments.  To the Court, it didn't
matter that the detention basis, by definition, did not fall exactly into
either the category of Community Facilities or Limited Community
Facilities.  That was because the Court concluded "that whether or not
the basin falls within these definitions is not dispositive in determining
whether the Association held an easement to the basin in view of the
broad language contained" in the Declaration.  It then looked to easement
language reserving, to the Association, an easement for the "water [storm
water and sanitary sewer], ..., which easement shall run in favor of the ...
[Association]... ."  To the Court, the import of that language was that the
easement was not "circumscribed to cover only community and limited
community facilities, but to all property within the development."

As to the Association's argument that the easement to maintain the storm
basin "never attached to the Association because there had not been a
formal 'transition' of this responsibility from the developer to the
Association, the Court pointed out that although the Declaration did not
expressly discuss the concept of transition, this would not be the end of
its analysis.  The Court also recognized that New Jersey courts had never
"addressed the precise issue of when a transition has occurred in which
the developer cedes to a homeowner's association, or similarly
empowered organization, the rights and duties under an easement to
maintain common facilities for the benefit of the property owners in a
planned development."

In light of the lack of controlling authority, the Court looked to the intent
of the developer "as to the existence, timing and scope" of such an
easement.  In doing so, it examined the overall Declaration "and the
circumstances surrounding its adoption."  Here, the Court found that the
intent of the developer was "intertwined with the statutory provisions
governing his conduct in developing and offering for sale a community
development."  Under that statutory scheme, a developer must create an
association with the obligation to manage the common elements of the
facility.  The legislative history explains that associations are required to
be formed "to safeguard the interests of the individual owners or
occupants."  Further, a New Jersey statute provides that "[t]he association
shall exercise its powers and discharge its functions in a manner that
protects and furthers the health, safety, and general welfare of the
residents of the community."  To aid in its analysis, the Court pointed out
that when trying to determine the developer's intent, it must recognize
that, "at least in part, [such an attempt must have been] to draft a
declaration in compliance with the requirement of the Act and the
purpose underlying its provisions."  Against that "backdrop," the Court
needed to determine what would happen if a developer went bankrupt
before a "formal transition."

With the circumstances presented in this case, the Court found that the
transition of duties had actually occurred.  This was because "the
detention basis in question was constructed to serve the common
interests of the individual property owners of the development.  Hence,
the detention basis was intended to be a limited community facility as
defined in the Declaration."  More importantly, the Court found "it
inconceivable that it was the intent of the Legislature or of the developer
upon drafting the easement provision described above, that in the event
of the developer's bankruptcy, the easement in favor of the Association
should not be given effect.  To hold otherwise would allow the
Association to disclaim any responsibility as to the very duties it was
almost exclusively formed to assume simply because there was not a
formal declaration that these duties had been transferred to it by the
developer."  As such, the Court concluded that a de facto transfer to the
Association "of those rights and obligations under the easement
provisions contained in the Declaration occurred."

The Court also pointed out the well established general rule that "absent
a contrary agreement, the holder of an easement has a duty to maintain
and repair the property/facility on a servient tenement subject to the
easement."  Further, New Jersey case law has specifically held "that a
duty to inspect property subject to an easement exists as to the easement
holder."  In furtherance of that duty to inspect, the Court looked to
County Development Standards which stated "that detention and
retention basis 'drainage systems' must be inspected on a routine basis to
ensure that they are functioning properly."  According to the Court, had
the Association conducted such inspections, it would have seen that the
drainage basin lacked sufficient outlets.

Comment 1: Someone has got to be in control of these facilities, and it
clearly was the intent of the developer to transfer them at some time to
the Association.  But it does seem to be an unfortunate "gotcha" if the
Association lacked the awareness of its ownership and responsibility in
this case.

The court plays a little loose with the issue of developer's intent.  First, it
ought to be set that the intent ought to be mutual - in other words the
homeowners and the developer ought to agree upon or at least understand
the process by which the facilities are transferred.  Second, it is difficult
to say that either the developer or the owners, at the time the Declaration
was filed, had any intent other than to transfer the facilities at the
appropriate time provided for assuming no bankruptcy.  The developer
didn't intend to go bankrupt, and the homeowners also didn't expect the
bankruptcy.  Consequently, and discussion as to what the partied
"intended" in the event of the developer's bankruptcy is nothing but
castles in the air.

Comment 2: Let us assume, for instance, that the developer had a
considerable amount of work to do on the flood facilities themselves, but
went bankrupt before completing them.  Is it fair to say that the
Association really expected to be in charge of those facilities upon such
bankruptcy?  Isn't another interpretation that the homeowners were
entitled to wait and see what would come out of the bankruptcy - whether
the developer has a successor?  Further, is it possible that the
homeowners, in the event of the developer's bankruptcy, might elect not
to take over the responsibilities, which, because of the bankruptcy and
developer's other derelictions, might be hugely expensive to complete
and maintain - totally out of any rational economic planning by the
association?

In other words, does the Association have the obligation to a few owners
to complete expensive but uncompleted works that the developer
originally promised would be complete prior to transition?   In the
editor's view, there may be "changed circumstances" here that would
preclude the operation of the scheme set forth in the Declaration,
preventing transition from occurring and leaving the affected
homeowners and the Association to negotiate a new relationship in light
of new realities.

Readers are encouraged to respond to or criticize this posting.

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