Saturday, December 3, 2016

Waste Not, Forfeit Not

Mongeon Bay Properties LLC v. Malletts Bay Homeowner’s Association, 2016 VT 64

By Thomas M. Kester

“Liquid sunshine” can dampen anyone’s camping spirit. 

Allan Sherman waxed that while, “Camp is very entertaining,” the truth was, “They say we’ll have some fun if it stops raining.” So while everyone is soaking in the serene environment, lakefront property is continually embroiled with a fearsome foe hidden in plain sight: H2O. Because an Act 250 permit application to drain Lake Champlain for “erosion control measures” wouldn’t hold much water, that means a long-term battle plan is required for littoral property (and, I imagine, even if you tried for a permit, like an algae bloom, an ocean of red stuff would stand in your way). You must vigilantly (and proverbially) “put one’s finger in the dike” before things snowball. Who must do what and the ramifications that flow therefrom are the questions the SCOV examines in this case.

Here is the sweet and condensed version of the facts: there are over twenty-five camps within the Mallet’s Bay Homeowner’s Association (“Association”) and ten of them “are situated immediately on the shore of Lake Champlain at the eastern edge of Malletts Bay, all perched above a twenty to twenty-five foot embankment.” The Association entered into a ground lease, whereby (over time) the Mongeon Bay Properties (“MBP”) solely owns all the land and leases the land to the Association for a yearly fee.

The lease agreement states that the Association will not “impair the value or usefulness of the Land or any part thereof” and the Association “at its own expense will keep the Land and premises in good and clean order and condition and will make all necessary or appropriate steps to keep them in good condition.” Importantly, the Association “shall not permit the Land to be overloaded, damaged, stripped, or defaced, nor suffer any waste.” (emphasis added). When the lease expires, the land must be returned “in good order and condition.” If the Association doesn’t do that stuff, then this may constitute default if not remedied within forty-five days. If default occurs, then “upon issuance of a writ of possession, the rights of the Lessee [Association] . . . shall immediately cease and become void.” Also, the Association “shall be responsible for all of Lessor’s [MBP’s] attorney’s fees and costs of litigation” in the event of default.

Back in spring 2011, Lake Champlain’s surface level was at “its highest-ever recorded level” and caused a lot of lakefront damage. Below those ten Association-related properties near the lake edge, “there is a significant slope running down to the water’s edge, and the then-existing seawall protection was spotty at best. The area below the ten camps was significantly impacted.” This land was greatly impacted “because of the lack of adequate seawall protection at the foot of the embankment area, lack of appropriate bank stabilization, and inadequate vegetation and other erosion control measures on the bank itself,” and the erosion problems “were and are preventable by reasonable and ordinary required repairs and upkeep that the Association was obligated to perform under the ground lease terms.”

One camp in particular was more affected than others, and, in September 2011, MBP sent a notice of default under the ground lease to the Association. In December 2011, the Association “denied that any default existed” and “took no steps to remedy the situation within forty-five days of MBP’s notice of default.” MBP filed suit against the Association in January 2012 “seeking damages and a declaration that the ground lease is void and forfeited because of the Association’s violations.” Also, the town also issued violation notices requiring action be taken about that one camp in particular.

The Association and its members, up until spring 2011, “have taken the position that each individual camp owner is solely responsible for all repairs to and maintenance of that owner’s structure, including adjacent grounds and more particularly the embankment alongside the ten camps” in question. This view was held “despite the clear obligations the ground lease imposes on the Association collectively, and not on individual camp owners.”

The Association hired contractors; their work was judged so-so by MBP, and MBP got a consultant whose plan (which fixes all of the lakefront properties) is estimated to cost roughly $93,150-$164,150.

The trial court ruled in MBP’s favor, finding that the Association’s failure was “waste.” But, it did not award MBP a lease forfeiture believing it was “especially inequitable” and “out of proportion to the lease violation,” and, instead, awarded $135,000 (“the expected cost of remediation and restoration of the bank”) and the responsibility to complete the work to MBP. MBP was also awarded attorney’s fees and costs.

Both parties appealed to the SCOV. The Association argues it didn’t breach its lease obligations and contests MBP being awarded attorney’s fees and costs. MBP argues that the trial court should have terminated the lease.

Let’s start with the Association’s argument that it didn’t breach its lease obligations. The Association raises four point in favor of this argument. #1: the lakeside embankment was not subject to the ground lease; #2: course of dealing established erosion-control matters were outside the lease; #3: what occurred is “ordinary wear and tear”; and #4: facts didn’t establish how much ground was lost so waste-related damages cannot be determined.

Point #1: the SCOV finds a lot of evidence in the record to support the trial court’s conclusion, among them, that “the Association itself acknowledged that the embankment along the lake is within the scope of the lease.” With all this evidence pointing one way, “the Association offered no countervailing evidence suggesting” otherwise.

Point #2: The SCOV supports the trial court’s legal analysis here. First, the trial court “noted that no legal precept requires a lessor to constantly remind a lessee of its obligation under a lease, especially where it is a long-term commercial ground lease entered into by two sophisticated entities each represented by counsel.” Secondly, the trial court didn’t buy this argument, especially “in particular, MBP’s silence on the issue prior to 2011, showed that the Association had no obligation to maintain the embankment.” While “course of dealing” can supplement or clarify terms, there was “no evidence of repeated transactions between the parties, or even a course of communications in which MBP accepted or endorsed” this understanding.

Point #3: “Waste” is a property law concept that has been around since the middle ages. My legal dictionary defines “waste” as “an act, by one in rightful possession of land who has less than a fee simple interest in the land, which decreases the value of the land or the owner’s interest,” and, for illustration purposes, think of a tenant-landlord situation where the tenant does something to decrease the value of the landlord’s property. Waste comes in a handful of styles but the three main ones are: ameliorating, permissive, and voluntary. Personally, “ameliorating waste” is the interesting one as it involves doing an unauthorized act that increases the value of the property (i.e., tenant removes cruddy kitchen cabinets and replaces them with higher quality ones). One of the formative waste cases involves Captain Frederick Pabst (namesake of the Pabst Brewing Company) and whether he committed waste by leveling the family’s Milwaukee mansion against the wishes of the mansion’s heirs.

Not every “act” will constitute waste because that would place an onerous burden on the tenant, stifles the use of property, and it is kind of hard to stop natural occurrences from…well…naturally occurring (gravity and entropy are both so gosh darn pesky to prevent). The law understands and permits “ordinary wear and tear” to occur on property. What is “ordinary” for property is specific to that property and how it is used. Thus, “whether degradation of property represents ordinary wear and tear depends on the reasonableness of the lessee’s use of the property with respect to that degradation,” and “the concept [“ordinary wear and tear”] is context-dependent and may vary with the use and type of property” are two legal “guiding principles” that courts employ.

If you have ever lived in a good ol’ Vermont residence, you are probably familiar with their unique, yet homely, quirks. The foundations love to sink like the Titanic, causing structural supports to warp like the Enterprise, and that, in turn, makes things misalign, protrude, etc. Whether this could be “reasonable wear and tear,” again, depends on the totality of property-specific facts. This doesn’t mean that a tenant can sit back and neglect to take certain reasonable measures on the property (like if an old exterior door falls off its hinges and the tenant (rather than getting a new door or alerting the landlord to fix it) just rejoices that “this will add the cheap rustic touch to the front room that I have been searching for”). Leases may plan for/mitigate against some of these costly occurrences by setting out that tenant is responsible for X, is permitted to do Y, and the landlord will handle Z.

What amounts to “ordinary wear and tear” involves the “character and use of the property in question” and the “age, class, and general condition of the property.” The SCOV sees that trial court had ample evidence to base its holding on: for instance, it “heard extensive expert testimony from both parties about what measures were reasonable to secure the property from unreasonable levels of erosion” and the “recommendations were not extraordinary.” It is commonplace to have measures on lakefront property and the Association didn’t follow through with its obligation. Furthermore, the “erosion sustained to date was substantially more than what would have occurred naturally” due to the Association’s use of the property and failing to take erosion-control measures.

Point #4: The amount of damages can be determined (even when you don’t know the “diminution in the value of the land”) because waste can include “repairable damage to property and that the cost of repair is an available measure of damages for waste.” So the Association’s argument is “factually accurate but legally inconsequential” to the SCOV and it was appropriate to base damages on “The reasonable cost to repair the embankment and protect it from further waste.”

I’m going to skip over the issue about awarding attorney’s fees and costs through a contractual fee-shifting provision. If you are hard pressed to be educated about how lawyers can make money, you can always go out, find a lawyer, and contractually pay them to educate you about how it’s done (or you can read the opinion yourself or do something else. The SCOVBlog won’t judge).

Now to look at MBP’s argument and, in support thereof, MBP raises two points. #1: equitable award was not appropriate and the lease’s language called for forfeiture; and #2: even if the trial court was permitted to exercise said equitable discretion, it exceeded its discretion.

Points #1 and 2: The “general proposition [is] that forfeiture under a lease is disfavored by law” but this is a “general statement of policy” that can give way when four criteria are, in some fashion, met. The fourth one is that “the law requires a timely affirmative act by the lessor to invoke the forfeiture provision.”

The SCOV dedicates some time to explaining the fourth criteria and relevant case law. In its review, the SCOV states that “although the law disfavors forfeiture clauses, this Court has never declined to enforce a contractual forfeiture provision when the landlord timely invoked the forfeiture right.” The SCOV notes “this is a case of first impression,” being there was a timely invocation of the forfeiture clause and election of termination but the trial court used equitable considerations in lieu thereof.

Remedies are an interesting facet of the U.S. legal system because of the historical divide that occurred between “law” and “equity.” In ye olden days there was (at least in the English court system) a court of law and a court of equity (known in England as the “court of chancery”). A main difference between the two was the available remedy. The legal dyad merged into a single court system toward the end of the 19th century. The result is that courts now have both legal and equitable remedies at their fingertips. Because law and equity have to amicably exist together, a jurisprudence developed about when, how, and if equity can be invoked. A general theme found in the maxims of equity—besides wordy Latin phrases—is that you first look at the law and then, if necessary or warranted, equity is brought in.

The SCOV balks at the suggestion of “setting aside clearly applicable, contracted-for remedies” as the SCOV has “never suggested that in the context of a long-term ground lease negotiated by sophisticated parties, one party may be relieved of the contracted-for consequences of its breach on equitable grounds” (i.e., law > equity in this case). The SCOV cites and agrees with an influential legal reference drafted by some academic smarties which states that “the election to terminate a lease belongs to the landlord, not the defaulting tenant or the trial court,” and the landlord solely gets to elect among the available remedies. In the end, the SCOV holds that MBP was entitled to a writ of possession for which it elected.

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