Daily Development for Thursday, August 12, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

ASSOCIATIONS; DEVELOPER CONTROL; ASSESSMENTS: Although Developer-controlled board has fiduciary responsibility to association, such duty is subordinate to provisions of Declaration providing that Developer-owned units may not be assessed for capital improvements or reserves.

Seven Bridges Courts Ass'n v. Seven Bridges Development, Inc., No. 2-98-0729 (Ill. App. 2nd Dist. 7/23/99)

The development in question was a "townhome" development, and not a condominium created under Illinois' condominium statutes. The Declaration provided expressly that during marketing Developer would not be responsible for assessments on Developer-owned units except for those units' pro rata share of actual maintenance expenditures. The provision specifically excepted "capital expenditures, amounts to be set aside as a reserve for contingencies or replacements, repair items or inventory items to the extent attributable to subsequent periods." The exemption did not apply to Developer-owned units that Developer had leased or sold under an installment contract.

While controlling the Association during the Developer control period, the Developer did not collect assessments for a reserve from any of the units, including its own.

The trial relied upon Maercker Point Villas Condominium Ass'n v. Szymski, 275 Ill. App. 3d 481 (1995), which had found that a developer controlled board did owe a fiduciary responsibility to the Association as a whole, and this included the responsibility to create reasonable reserves out of assessments.  It ruled on summary judgment that the Developer in the instant case was in violation of that duty, which prevailed over the specific language of the Declaration.

The Developer first argued that Maercker was distinguishable because it involved a condominium - a creature of statute - and not a townhome association controlled solely by the contract embodied in the Declaration. The court rejected that argument, concluding that all common interest associations are bound by the same fiduciary duty.

The Developer's primary defense, of course, was the language of the Declaration itself, which exempted it from assessments for reserves. The Association argued that this provision was unenforceable as against public policy and, in any event, subordinate to the overall fiduciary duty of the Developer during the Developer Control Period. The court responded that Illinois precedent, embodied in a series of cases culminating in Kelley v. Astor Investors, Inc., 106 Ill. 2d 505 (1985), established that the Declaration indeed could limit the common law duties and liabilities of the board of directors of an association, even though any limitation on liability should be strictly construed. By extension, it apparently applied the same reason to the developer that controlled such board during a control period.

The appeals court reversed the trial court's grant of summary judgment and remanded (apparently) for a determination of whether the failure to establish a reserve amounted to a breach of fiduciary responsibilities under the circumstance that the developer-owned units would have been exempted from assessments for these purposes.                     Comment:  The case is right, although the result is wrong. The editor believes that developers should not be permitted to stuff their Declaration documents with exculpatory provisions that exempt them from assessments that necessarily maintain and enhance the value of the units that they are developing. But we should not expect too much of common law courts. If these contracts are bad contracts, they should be outlawed by the legislature.

The law pertaining to interpretation of developer-exculpatory provisions in common interest developments is consumer law. It is not contract law. The developer controls the forms and the way information is presented. Even though written documents may clearly state special benefits for the Developer, these documents are presented by salespeople whom the Developer retains and controls. Such personnel sometimes are trained to steer prospective purchasers away from critical language, or to minimize their reach.

This is not to say that developers ought not to be able to include reasonable provisions to address the special differences between the developer-owned units and units already sold. But the balance between what is "reasonable" and what is overreaching is one that ought to be drawn on a statewide, uniform basis by legislation, not worked out piecemeal in individual disputes under the common law. Developers themselves ought to recognize this reality and seek legislation to clarify the issue.

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 Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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