If you’re working with investors considering buying unbuilt condominium space in California, be sure they read the condo governing documents before the purchase. If the covenants, conditions and restrictions (CC&Rs) tie the payment of assessments to the completion of the first condo in the development, buyers must pay assessments on their “air lot” or face foreclosure, a California appellate court has ruled in Bear Creek Master Association v.

If you’re working with investors considering buying unbuilt condominium space in California, be sure they read the condo governing documents before the purchase. If the covenants, conditions and restrictions (CC&Rs) tie the payment of assessments to the completion of the first condo in the development, buyers must pay assessments on their “air lot” or face foreclosure, a California appellate court has ruled in Bear Creek Master Association v. Edwards.

The holding is the first in California applying California’s Davis-Stirling Act, which governs how homeowners’ associations operate, to a case in which the association’s governing documents pre-dated the act yet called for owners to pay assessments from the date the first condo in a sub-development was completed, according to Adrian Adams, a Los Angeles attorney with Adams AuCoin & Kessler LLP, who specializes in California condominium law.

“It’s long been the practice in California with regard to CC&Rs that the completion of the first unit can trigger assessments for all lots,” said Peter Racobs, an attorney with Fiore, Racobs & Powers in Riverside, Calif., who represents the Bear Creek Master Association. “But we didn’t have an appellate case on point. This case has taken this long-existing practice and moved it out of the realm of Department of Real Estate regulations to the statutory and regulatory scheme in California.”

Racobs says that since Bear Creek’s inception, the development has required owners of unbuilt lots to pay assessments to the master association “whether you build a home on the lot or not. That’s based on CC&Rs,” he said, “which must be approved by the California Department of Real Estate as ‘reasonable arrangements.'”

Racobs calls such provisions “reasonable given the nature of a master association.” According to Racobs, the Bear Creek Master Association maintains greenbelt common areas, a swim and tennis club, miles of private streets, and gates with restricted access. “The association is maintaining all those things for the benefit of the property owners whether owners have a house on their lot or not. Our costs of operation aren’t affected in any significant way by whether there’s a home on a particular lot.”

The California Department of Real Estate allows CC&Rs to include an exception permitting associations to forego the “portion of assessment that has to do with maintenance of a residential structure if that structure isn’t built,” said Racobs. The Bear Creek CC&Rs don’t include such an exception.

The case arose when a trust controlled by Dr. Parlan Edwards and his wife foreclosed on eight lots in a subdivision of the Bear Creek Master Association to recover a debt owed him by the previous owner. Eight condo units were planned for the trust’s property, out of a phase of 16 in the subdivision, but none of the units on the trust’s lots had been constructed.

After taking possession of the property, the trust refused to pay homeowners’ association assessments, arguing that assessments are chargeable only to a condo unit. Since there were no built-out units on the trust’s property, no assessments were due, it claimed.

The association disagreed, arguing that under the CC&Rs, payment of assessments for all lots – even “air lots” – were triggered by buildout of the first unit in the subdivision. It filed a breach of contract and foreclosure action against the trust for failure to pay assessments.

The trial court held in favor of Bear Creek and granted it attorneys’ fees of $129,915.50, bringing the total judgment to $249,026.71.

The appellate court affirmed, holding that the definition of condominium under California law was amended in 1984 to include an interest in “space,” as described in a recorded document, the boundaries of which “could be filled with air, earth, or water or any combination thereof,” and “either in existence or to be constructed.”

The court specifically rejected the trust’s argument that the pre-1984 definition of condo governed Bear Creek’s CC&Rs because they were written before the amendments. The trust argued that because the CC&Rs specified that they should be interpreted according to the law of the place where the CC&Rs were created, the “place” was pre-1984 California, when a condo was defined as a structure, not space. The court held the trust was “attempting to import a ‘law of time’ (pre-1984) rather than a ‘law of place’ (California) into the CC&Rs,” which the court declined to adopt.

The court got it right, according to Adams. “Condos are by definition ‘air space,'” he said. “For example, if a 12-unit condo building were to burn to the ground, the ownership of the condo wouldn’t suddenly evaporate. The owners would still own that air space, and they could rebuild the structure.”

The court also called the trust’s claim that it didn’t own eight separate condo units “wholly inconsistent” with the fact that Edwards had voted in several association elections, casting three ballots for each of the eight lots he denied were “units.”

As to the trust’s argument that it failed to receive proper notice of the association’s liens, in part because the trust’s attorney rejected the certified mail notices of lien, the court called the argument a “red herring.” Finding that Edwards’ attorney received all notices but simply refused to acknowledge receipt of those delivered certified mail, the court stated, “The requirement to send lien notices by certified mail cannot be defeated by the simple expedient of refusing to sign the returned receipt.”

Nor did the court buy Edwards’ argument that notice was improper because it was sent to his attorney as his agent. “It appears to the court…that when it’s convenient to use (Edwards’ attorney) and her address, that’s what they do. And when it’s not convenient, then there is a disclaimer that (Edwards’ attorney) has no authority to act on his behalf.  Mr. Edwards…will be estopped from making that claim.”

The court added several “unpublished” – or non-precedential – sections to the opinion in which it expressed frustration with Edwards and his attorney, Lucila Enriquez. In the middle of trial, Enriquez failed to appear, citing medical reasons but never providing the court with what it considered adequate documentation to explain the medical basis for her absence.

When Enriquez failed to appear, the trial court reluctantly granted a 60-day continuance but informed Edwards that if Enriquez still couldn’t appear in 60 days, he must be prepared to go forward at trial without her. When court reconvened, Enriquez wasn’t present, again citing medical reasons, yet her replacement said he wasn’t ready to proceed at trial.

Finding that Enriquez’s medical excuses were “inadequate and incredible,” the court continued the trial without her and sanctioned her. The appellate court affirmed the trial court’s decision to go forward and its sanctions against Enriquez.

“What I find remarkable,” Adams said, “is that Mr. Edwards and his lawyer allowed the dispute to get to this point. It seems they were working the system as hard as they could, and then they turned around and tried to do it to the court. And the court wouldn’t stand for it,” he said.

The trust, on whose behalf Edwards declined to comment for this article, appealed to the California Supreme Court. However, the court denied review in late 2005. Bear Creek’s motion for recovery of its attorneys’ fees for its appeal is currently pending.

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