Thursday, July 30, 2015

Condominium Wizardry

Arapaho Owners Association Inc. v. Alpert, 2015 VT 93

By Elizabeth Kruska

You just know you’re in for a good SCOV (or any court) opinion when it starts with “[t]he case began its journey through the legal system . . .” It starts at Platform 9 ¾. No, actually it starts at the beautiful Woodstock courthouse. This case involves not only a condo association, but one formed in 1979. We’re talking over thirty-five years of potential condo problems.

This goes sideways kind of early on, actually. The condo plan and declaration was to create 50 condo units. In reality, 54 units were constructed; two were split, and one was an additional townhouse-type unit that never got built. The thing to do at that point would have been to amend the declaration so it conformed to what was actually built, but that didn’t happen.

Thirty or so years go by, and in 2008, some issues were raised because not everyone in the association was paying the same share of common expenses. The ownership share should get recalculated, but due to condo rules, bylaws, statutes, vagaries of syntax, Mercury in retrograde, and whatnot, changing ownership shares required a 100% approval vote by the owners. Now, I live in a condo association. I can tell you from firsthand experience, there just simply is no way to get 100% of condo owners to agree to something. You could say you’re giving away ice cream and free snuggles with fuzzy puppies and that still wouldn’t get 100% agreement.

Part of the problem was that there were actually 54 units instead of 50, which muddled things. If I’m reading this right, that could cause some confusion about what 100% actually means. Then, the Board of Directors thought that maybe they really only needed 75% of the owners to vote because the condo declaration said there needed to be a 75% vote to make an amendment. They were thinking, “Hey, this is an amendment . . . maybe we can do it this way.” So, they put it to a vote, and although they got votes from over 75% of the total ownership interest, it was less than 75% of the scheduled ownership interests. The board, undeterred, decided this was okay and filed it with the land records in Ludlow.

According to Justice Skoglund, “[a]ttorneys were summoned.” I can just see an angry group of condo owners and/or directors, pointing their magic wands, yelling, “Accio!” in an attempt to summon their lawyers, Harry Potter style. Then I can also picture them getting advice they don’t like or seeing their bills and trying to figure out a banishing charm to get rid of those same lawyers. Anyway, the lawyers, upon being summoned, said, “Whoa, there! This amendment isn’t legal. It also doesn’t fix the title problem.”

The Board, or, the House of Ravenclaw, as I’m now thinking of them, filed in the Superior Court asking that the declaration be reformed to reflect what was actually built and to state each individual unit’s ownership interest. They also wanted to clear the title to the existing units. People who owned the split units, or the Hufflepuffs, as we shall now call them, opposed that. Their argument was that first, there wasn’t a unanimous decision as required by the bylaws. Second, they sought an injunction against the newly assigned assessment values, because it caused their condo fees to go up. Since it wasn’t agreed-upon by 100% of the owners, their argument was that the assessment hike wasn’t legal, so they shouldn’t have to pay it.

Condo fees are tied to a common ownership interest. Owners of the individual units buy their units, and in doing so end up owning a percentage of the association. This percentage was set by a formula declared in the original condo declaration. There are a few different ways I can think of to do this; it could be based on the percentage each unit represents, or it could be done per capita (meaning 50 units would give each owner a 1/50 interest). Common expenses and fees cover things like snow and trash removal, lawn maintenance, Quidditch courts, swimming pools, association insurance, and that sort of thing.

The trial court decided that ownership interests could not be amended without 100% consent of all the owners. This was required under the condo statutes in place at the time Arapaho was created and built. Thus, the Ravenclaw/Board idea that 75% of the votes were enough for an amendment didn’t work. The court also looked at the two different condo statutes—the old statute that was around at the time Arapaho was built, and the new statute that went into law in 1999.

The trial court also considered reformation of the declaration. The Board wanted the trial court to amend the declaration to not only reflect the number of units, but also to recalculate the formula to figure out each unit’s common-expense share. The problem now was that the declaration called for a certain number of units, but in reality there was a larger number of units, including these half-units. There was also, as Justice Skoglund called it, a phantom unit that never got built. These differences could cause problems with title, which causes problems for anybody who might want to try to buy or sell one of these condos. The trial court told the parties that if it was going to be amended, they’d have to agree on the formula to use.

More motions were filed (possibly by Owl Post) over various things, including whether such an amendment needed unanimous consent, the formula to be used to figure out ownership interests, how to deal with the phantom, how to deal with the split units, and attorney fees. Nobody ended up happy, so there’s an appeal. SCOV is asked to consider whether amending the formula has to be unanimous, whether the court has the power to reform a declaration, and what amount of attorney fees is appropriate to be awarded.

SCOV first tackles the ownership-interest situation. They look back to the statute that was in place at the time Arapaho was built. Common expenses are tied to each individual unit’s related property interest. Under the old law, and even under the new law, SCOV finds that changing the property owners’ actual property interests requires unanimous consent. QED.

Second, SCOV considers reformation. Trial courts have this equitable power, and can reform a declaration if its needed to correct a mutual mistake. Where the parties agree that a declaration didn’t convey their intent or that it’s clear from some other way what the intent actually was, the court can make the declaration fit the intent.

Here, the developer had this intent to make a certain number of units plus a townhouse unit. That ended up not happening, and some of the units that got built got split. The original declaration set forth a certain ownership interest for the townhouse unit. Since it didn’t get built, that ownership interest sort of isn’t accounted for.

The Ravenclaws/Board and the Hufflepuffs/Homeowners all wanted this to get reformed so that there wouldn’t be title problems. They all needed the court’s help for this, and SCOV agrees that a declaratory judgment is the right way to do it. SCOV says that the 1979 condo declaration is the clearest expression of what the developer meant to do, so the trial court is within its discretion to take its guidance from that declaration.

But how to deal with the split units? Over the years, the unit owners have been taking what had been their allocated interest and splitting it so that the upper unit paid some and the lower unit paid some, based on their respective square footages. The newer law allows units to be subdivided into new units in any reasonable manner.

The Board had wanted to start completely anew and figure out a new formula. They argued that with these new half units paying only part of the original unit’s allocated expenses, that each of those owners ends up enjoying the same common areas but at a lesser price than everyone else. They also argued that there’s this phantom interest from the unbuilt townhouse that needed to get allocated somehow. A proposal was to re-allocate the phantom townhouse over the split units.

SCOV says the right way to do this is based on the value formula. So, if one unit’s percentage in the community is 5%, that owner pays 5% of the costs. If a different unit has a greater or lesser percentage, that’s the percentage that gets paid.

SCOV finally looks at attorney fees. Normally, in Vermont, we follow the American rule, which is “pay your own darn fees.” That’s what we do, unless there’s some provision by statute that allows for recovery of fees. The statutes governing condos allow for recovery. But, it’s discretionary, and the court decides what’s reasonable.

It’s not as if the Ravenclaws/Board had a nefarious intent in filing suit. If they did, I’d have called them the Slytherins and would have pointed out that nobody can read a declaration if it is written in Parseltongue. I’m not even totally sure that’s a written language so much as it is a hereditary talent and/or a dialect, so that might not have worked anyway. It was clear that everyone in the condo association would have felt the impact of title problems, and everyone living there would have had an interest in getting this mess cleared up.

The Hufflepuffs/Homeowners were certainly within their rights to have to defend the action, though. Because of the confusion created by the declaration and whether an amendment could be done in the way it was, the court really did have to get involved. The Hufflepuffs had a legitimate counterclaim that the way the value and property interests were being reassessed. Also, since there was a declaration and an old law and a new law, it was going to take some work to figure out what the right fee was.

The court didn’t think it was fair to make the Ravenclaws pay the full amount of the $99,000 (or so) bill, and reduced the amount to $40,000.


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