Daily Development for
Tuesday, March 17, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

ASSOCIATIONS; RIGHTS AGAINST DEVELOPERS: Association has standing to bring lawsuit based upon developer's breach of promises to construct amenities and transfer them to association even where developer made promises to individual land purchasers prior to formation of association.

Chess v. Watts, 1998 WL 85366, WD 52746 (Mo. A.P. , W.D., 3/3/98)

Developer subdivided a tract of land into building lots and sold the lots, without houses, to individual parties who later built homes on the lots. As part of the sale process, the developer had built an elaborate entrance to a model home and sales area, heavily landscaped. The developer personally visited with each of the plaintiff lot purchasers prior to the sale, and walked a number of them around the property, describing in colorful detail how the landscaping theme and quality set by the entrance to the model would be carried out all along the creek that ran through the development and was its central visual amenity.

The developer also told the prospective purchasers that there would be a covered bridge, "mill pond," waterfalls, substantial property set aside for recreation, including playgrounds, picnic areas, barbecue pits and shelters, and nature trails. The developer in fact indicated the precise parcels within the subdivision that would be common areas. The developer told purchasers that these properties would be conveyed to a homes association for common usage, and would be part of a general recreational amenities package. The developer also stated that the purchasers would not be able to qualify for individual septic disposal permits, so they would not have to hook up to a sewer, even though the developer knew that percolation tests had shown that the land would not qualify for septic systems on these lots.

The developer distributed a brochure to prospective owners that stated "Cedar Creek has been preserved with utilities (water and electricity) underground, split rail fencing, a private country lane, nature trails, and stream-side picnic areas." As many of these improvements had not yet been built, the court concluded that the distribution of the brochure implied that they would be.

In the end, after selling the lots, the developer did deed two of three identified common ownership parcels to a homes association the developer formed, but never provided practical access to these parcels over the rough terrain and failed to convey the third parcel at all. The developer built no bridges, playgrounds, hiking trails or millponds, and did not carry out the landscaping scheme along the creek side that he had established at the entrance. Further, the developer obtained variances to narrow the road from the originally planned dimensions, and to forgo the curbs and storm drains. The developer's road, however, did not in the end meet even the revised City code requirements.

The developer constructed a sewer, and the lot owners were able to hook up to it, but were charged a $1500 fee, and the sewer was above ground at some points and did not meet city code requirements. In upholding the claim of the homes association against the developer, Judge Lowenstein, for the majority, pointed to prior Missouri authority that had established the notion that a homes association was a third party beneficiary of promises made by the developer to individual homeowners. The damages awarded for breach of contract in this case covered the cost to the association of carrying out all the developer's promises - the construction of the amenities and a promised drainage system, the undergrounding of the sewer, and the repair of the roads. The court was not troubled here that the association had not been formed at the time of the promises made by the developer, nor by the fact that not all of the homeowners had heard the developer's promises. The association was a surrogate for homeowner's interests even if only one homeowner had been injured with regard to promises concerning common amenities. (The third common ownership parcel was conveyed to the association during the course of litigation.)

Comment 1: The court's finding here that the homeowner's association had standing to sue is not without precedent, nor is its use of promissory estoppel to make oral promises of subdividers binding. But the combination of the two techniques concerned a dissenting member of the panel, who saw a Pandora's Box where the majority saw only a neatly wrapped package. The dissent was concerned that disappoint homeowners will be able to bring a greater range of suits cases in which there are few legitimate claims. But even the dissent appeared to agree that in this case the developer had made the representations in question. Therefore, the court can keep the lid on the Pandora's Box by being cautious, as always, in reviewing evidence of important contracts arising only out of verbal promises.

Comment 2: The court's decision to let stand the judgment of the association for damages in amounts sufficient to actually construct the promised amenities worked against the individual plaintiffs to a certain extent, because the court properly reversed the separate damages award to two of them based upon diminution in market value. Presumably the construction of the amenities and repair of the road and other benefits would restore the homeowners to their expectations.

A third homeowner, who since had sold his home, was awarded damages for diminution in market value.

Comment 3: A difficulty does arise for homes associations faced with claims from individuals or small groups of homeowners that the association should use association resources to vindicate that individual's asserted claims based upon verbal promises by developers or others. Should the association fail to do so, is it in breach of its duty to the homeowners? Should it react with a lawsuit, is it sqaundering resources to enforce rights that the other homeowners don't particularly care about, even if they are proved to exist? For instance in this case, one of the homeowners testified that he didn't give a pin about the recreation areas, amenities, etc., but only cared about the developer's promises of streets and sewers.

Even if the association does get involved in the lawsuit, how does it react when there is a settlement offer that, for instance, would fix the streets and sewers but "short" some of the amenities?

VENDOR/PURCHASER; MISREPRESENTATION; PROMISSORY ESTOPPEL: Individual homeowners and homes association can recover against developer for breach of oral promises made prior to sale of lots where homeowners relied upon such promises in purchasing their lots.

Chess v. Watts, 1998 WL 85366, WD 52746 (Mo. A.P.. , W.D., 3/3/98)
The facts of this case are set forth in the discussion under the heading: "Associations; Rights Against Developers."

The court found that the association had standing to sue to enforce promises made to homeowners, and relied in part upon implicit promises made in a sales brochure. A substantial portion of the court's holding, however, depended upon oral representations made by the developer to individual home purchasers as they toured the property prior to purchase. The developer argued that these representations constituted "mere puffery" and in any event were oral promises relating to the sale of land and were unenforceable under the Statute of Frauds. The developer did not argue that they were "merged" into the sale agreement, but he well might have tried such an argument. Reading between the lines of the court's opinion here, the merger argument would not have succeeded.

The court cited cases from Illinois, South Carolina and other jurisdictions as well as the Restatement, Second of Contracts to conclude that the developer was estopped to deny his promises to the homeowners because of promissory estoppel. Their acquisition of the lots in reliance of his promises was sufficient to justify a conclusion that the court could grant equitable relief.

Comment: Note that the court was not required to enforce the promise per se. When there is equitable estoppel based upon reliance, the court is free to grant a wide range of equitable remedies, from specific performance through reliance damages, expectation damages, or restitution. This distinguishes the estoppel remedy from the part performance doctrine, which would have given the exact contract to the purchasers.

VENDOR/PURCHASER; MISREPRESENTATION; FRAUD: Developer is liable for fraud and punitive damages where he fails to carry out oral promises made at time of sale - mere fact of developer's knowledge and intent that promissees are relying on his promises is enough to support a finding of fraud where developer does not carry the promises out, notwithstanding developer's assertion that he intend to keep promises at the time he made them.

Chess v. Watts, 1998 WL 85366, WD 52746 (Mo. A.P.. , W.D., 3/3/98)
This case is discussed more fully under the headings: "Associations; Rights Against Developers" and " Vendor/purchaser; Misrepresentation; Promissory Estoppel."

Here, the court determined that a fraud claim will lie where the developer makes assertions that necessarily depend upon his carrying out his promises in the future, knows that the promissees are intending that he do so, and knowingly fails to carry out those promises. The developer, for instance, had actual knowledge that the property he represented a suitable for septic systems had not passed a percolation test and would have to attach to sewers. Nevertheless, he later charged for sewer hookups and provided a substandard sewer. The developer knew that he had promised (this time in writing) that a drainage system would be construction, and then did not retain the "name" landscape architect that he said would design that system. The developer knew that he had told purchasers that he would provide a certain tract as a common ownership area, but instead used the area as his own front yard for a house that he built.

Under these circumstances, a court can conclude that the developer's failure to carry out his promises demonstrated that he had fraudulent intent when he made them.

Comment: Although we had egregious facts here, this aspect of the court's holding may lead to mischief in the subsequent cases. Fraud is tortious, and support punitive damages awards (as it did here). Courts should be circumspect about expanding ordinary contract cases into fraud claims. The consequent increase in litigation and settlement pressure from plaintiff's attorneys may not be justified by the relatively few cases in which it is appropriate to award an unhappy promissee with more than simple contract damages.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.