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A recent Massachusetts court decision
has given condominium associations a new legal tool – or at least,
sharpened an existing tool – for dealing with disputes over
liability for unpaid condominium fees.
Interpreting
Mass. General Laws Chapter 60 Section 77 (governing municipal tax
takings) for the first time in a condominium context, the Supreme
Judicial Court held in Town of Milford v. James S. Boyd
that the town had benefited from the community association’s
“continued care and maintenance” of the common areas, and thus
should pay its proportionate share of the common area expenses.
While the foreclosure proceeding erased the condominium
association’s lien, the court agreed, that action did not negate
the town’s liability for the unpaid condominium fees incurred from
the date of the taking until the foreclosure judgment was entered.
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The case began
when the town of Milford initiated tax title proceedings
against 11 commercial condominium units owned by Caruso
Builders, the developer of the complex. The recession of
the late 1980s had left the units seriously underwater from
all directions, worth considerably less than the outstanding
mortgage or the unpaid taxes. With resale prospects
limited, to say the least, neither the town nor the banks
holding the mortgages were much inclined to foreclose.
So the units remained in limbo for almost two years, with
condominium fees continuing to mount all the while.
Finally, in an effort to stop the bleeding, the condominium
association moved to foreclose, claiming that it had a
priority lien on the units (a contention the association
ultimately dropped) and that the town was liable for the more
than $200,000 in accrued condominium fees – the central issue
that the court decided in the association’s favor.
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It Means What it Says
The legal
arguments focused on the wording of the state statute governing
municipal tax takings, the key provision of which specifies:
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“Before foreclosure, so much of the
provisions of any covenant or agreement running with the land as
calls for the payment of money by the owner thereof shall not be
enforceable against a town which is the owner of record of such
land under a tax title taking, except as hereinafter provided.”
After some intervening language, this section continues: “In
no event, however, shall such provisions calling for the payment
of money be so suspended and inoperative during any period in
which such town directly or indirectly in any capacity accepts or
receives the benefit of such covenant or agreement or of any right
or privilege created or affected thereby.” |
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Milford argued
that only the language barring enforcement of payment obligations
against a municipality applied. The exception language, the town
contended, was unrelated to this central rule.
The Land Court
rejected that argument, concluding that the statute was clear and
that its plain language meant what it said. The foreclosure
extinguished the condominium’s lien for unpaid common expenses
(permitting the sale of the units), the court said, but it did not
erase the town’s liability for unpaid common expenses accrued
before the foreclosure decree. The SJC had no trouble
affirming that opinion. “To conclude that the last sentence
does not provide an exception to the first sentence would render
the modifying clause nugatory,” the state high court asserted in a
unanimous opinion.
Say It Ain’t So
In its appeal,
the town had emphasized a second argument, challenging the Land
Court’s finding that the town had, in fact, benefited from the
upkeep of the condominium common areas after taking tax title to
the condominium units. Under the Land Court’s interpretation
of the statute, the town noted, municipalities would always
benefit from common area maintenance and thus would automatically
become liable for condominium fees for at least six months (the
required wait before filing a foreclosure petition) whenever they
initiated tax title proceedings against a condominium unit.
The SJC did not
find that prospect nearly as troubling as the town suggested it
should be. “The town may have accurately predicted the
consequences of the Land Court’s interpretation,” the SJC agreed.
“But we see nothing incongruous about those consequences.
Rather, they are consistent with the statutory language and
overall statutory scheme….Although it may be difficult to imagine
a situation in which the payment of a common area charge would not
benefit a town,” the court added, “we do not foreclose such a
possibility.”
Undisputed Benefit
The key issue,
the court emphasized, is the benefit the town derives from the
maintenance of the common areas – a benefit that, the court
concluded, is impossible to deny. “Common areas of a
condominium unit are inextricably connected to the condominium
units themselves,” the decision notes. “The units literally
could not exist without them.”
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Common area
expenses were particularly important in this development, the
court added, because the 11 units at issue represented more
than 38 percent of the condominium “and therefore 38 percent
of the condominium expense budget.” Eliminating the town’s
obligation to pay those condominium fees, the court said,
would threaten the financial viability of the condominium as a
whole. |
The decision
noted similarities between this case and previous tax title cases,
in which the SJC had found communities liable for injuries
incurred before the foreclosure proceedings. “…[I]n the
present case, the town could not permit the units and their
corresponding share in the common areas to fall into a state of
disrepair or dilapidation,” the court observed. “It would
have had to incur expenses for the ongoing maintenance of that
property.” Given that the town clearly benefited from the
community association’s efforts to maintain the property, the
court concluded, “the Land Court’s construction of the statute
requiring the town to pay its proportionate share is eminently
logical and reasonable.”
Incentive to Act
As a practical
matter, this decision probably won’t change current condominium
association practices. Even with the current economic
downturn, property values remain strong and it is difficult to
anticipate a foreclosure situation in which units would lack
sufficient value to pay off all outstanding liens. Certainly
in a residential context, it is unlikely that an owner who has
stopped paying property taxes would continue paying condominium
fees for long enough to accumulate a large tax deficiency before
someone – the town, the lender, or the association – acts.
However, we are
entering a period that will almost certainly see a period of
slower growth in property values than we have seen in recent
years, and could see some depreciation. Given a steep and
prolonged downturn, this case should give community associations a
measure of added comfort. It also should underscore the need
for local officials to move quickly in a tax title situation to
limit the liability that the courts have made it clear,
municipalities will not be able to deny.
LEGAL BRIEFS
| Forced
Access Appeal. The “forced access” battle isn’t over
yet. The Massachusetts Department of Telecommunications
and Energy (DTE) and the Smart Buildings Project are appealing
a Superior Court decision overturning DTE rules requiring
property owners to give all telecommunications companies
access to office buildings and multifamily dwellings. |
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The
DTE and the telecom providers, represented by the Smart
Buildings Policy Project, argued that the state had a
legitimate interest in providing “open” access to ensure that
tenants received the lower costs and breadth of services that
competition among varied telecom companies would bring.
The real estate interests argued that the unrestricted access
the DTE rules represented an unconstitutional taking of
private property without compensation. The court sided
unequivocally with the property owners in this closely watched
litigation. The challenged regulations will remain
unenforceable pending the appeal.
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Piercing the Veil.
Corporate shareholders and officers can be held personally liable for
violations of the Federal Housing Act, the U.S. Court of Appeals for
the 9th Circuit ruled recently. The decision came in a suit
filed by an interracial couple against a real estate broker who had
refused to convey their purchase offer to a homebuilder. The
couple and the builder filed separate suits against the agent and
against David Meyer, an officer of Triad, Inc., the California realty
firm with which the broker was affiliated. The district court
dismissed the liability claim against Meyer, agreeing that corporate
officers generally are immune from liability for corporate acts. |
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But the appeals court overturned, noting
that the Federal Housing Act specifically assigns liability to “those
who direct or control or have the right to direct or control the
conduct of another with respect to the…sale of a dwelling.”
Meyer and the National Association of Realtors have asked for a
rehearing by the entire court. If the ruling stands, it would
apply only in the 9th Circuit, which encompasses Alaska,
Hawaii, and many states in the west. But other federal courts
could use the decision as a precedent in similar fair housing
complaints. “We think the ruling is a mistake,” Laurie Janik,
general counsel for the NAR, said in press reports. “The
liability should stop with the corporation. The ruling is an
aberration,” she added, and “it is very frightening.”
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State Superlien Overrides Bankruptcy
Stay. A bankruptcy filing may stay other actions, but it
did not stay a move by Massachusetts officials to impose a “superlien”
on contaminated property. That ruling, by the Court of Appeals
for the First Circuit, came in a suit involving Main Street Ltd.
Partnership, owner of a property from which pollutants had
contaminated nearby drinking water wells, requiring the state to
initiate emergency clean-up efforts. When the state notified the
group of its intent to file a superlien on the property to recover the
cleanup costs, the partnership filed a Chapter 11 bankruptcy petition
with a notice of automatic stay. The partnership asked the
bankruptcy court to hold the state in contempt for trying to enforce
the superlien over the stay, but the bankruptcy court refused and the
partnership appealed. The district court sided with the state
and the appeals court upheld that decision, finding that the
exemptions from the automatic stay applied not just to actions to
perfect a lien, but also to actions to perfect “an interest in
property.” The partnership argued that the state’s interest
consisted of the lien, which was filed after the bankruptcy petition.
But the court concluded that the state’s interest was broader than the
lien and not synonymous with it.
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Open Records.
As
Congress moves to add tougher money laundering laws to the
anti-terrorism arsenal, financial institutions are growing
increasingly concerned about potential conflicts between their
obligation to cooperate with law enforcement officials, and their
obligation to protect consumer privacy. A recent court
decision, although unrelated to the terrorist attack, suggests
clearly that the tide has shifted away from privacy and toward
enforcement. The decision, by the Kansas Supreme Court, held
that the state’s securities commissioner had the authority to
prohibit Bank of America from notifying a consumer when the bank
received a subpoena for that consumer’s financial records, even
though the bank’s privacy policy specifically required
notification. |
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The state’s high
court upheld a lower court’s finding that the bank’s customers had
no reasonable expectation of privacy in their bank records.
Two justices dissented, arguing that the majority view failed to
recognize adequately the legitimate privacy interests of bank
customers. “Although I concede a bank customer in Kansas has
no constitutional expectation of privacy in his or her bank
records,” Kansas Court of Appeals Judge David Knudson wrote in his
dissent, “most customers surely believe that their banker will
notify them if some government agency is snooping around in their
records and accounts. I do not believe the legislature
intended to negate that entirely rational and understandable
expectation by the banking public,” he added.
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For further
information about this case or about real estate issues generally,
contact via e-mail at
mailto:@meeb.com
or call 781-843-5000.
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