Opinion ID: 2319221
Heading Depth: 1
Heading Rank: 3

Heading: The Declaration and Dispute over Common Area Maintenance Funding

Text: As described above, the Purchase Agreement required ATC to record a declaration providing for (1) a $1,200 annual CAM fee for residential unit holders and (2) annual assessments against the other parcel owners in the development. ATC drafted the provision for Common Area Maintenance in Section 10.2.4 of the Declaration, which read as follows: Payment of Common Area Maintenance Costs. While this Towne Centre Declaration is in effect, some or all Parcel Owners, Tier 2 Councils, Tier 2 Owners and/or other Persons shall periodically pay to [ATC] respective shares of the Common Area Maintenance Costs (each of which payments required to be made by any Person is referred to herein as a CAM charge) pursuant to one or more Recorded Supplemental Agreements between [ATC] and one or more of those Persons. [ATC] shall be responsible for payment of the rest of the Common Area Maintenance Costs, which [ATC] shall allocate among the parts of the Retail Component (except for the Target Parcel 11 Unit).[ [7] ] The Declaration thus addressed the CAM funding responsibilities of other parcels with a placeholder provision, which promised future agreements with parcel owners in lieu of establishing, in the Declaration, a detailed funding mechanism in the Declaration. [8] On May 11, 2006, ATC first provided Hovnanian with a draft of the Declaration, and a proposed Supplemental Agreement between Hovnanian and ATC. The draft Declaration indicated that CAM funding details would be handled in Supplemental Agreements with the parcel owners, and the draft Supplemental Agreement for Hovnanian included such a provision. Counsel for Hovnanian responded on July 20, 2006, with a memo including questions and comments. Relevant here, Hovnanian posed four questions: 1) If Target stops paying its annual fees, what are the remedies? Who is authorized to pursue them? What are obligations of developer to pursue them? 2) Is developer also obligated to pay fees based upon square footage it owns or controls? If developer stops paying for any reason, what are the remedies and who is authorized to pursue them? 3) Why does 10.2.4 provide that some Parcel Owners etc shall pay share of CAM and not all? Who will not be obligated to pay?    5) Section 10 of Supplemental Agreement provides for recordation of Memorandum and not the Supplemental Agreement. Why? Aren't purchasers of residential units entitled to see the entire Supplemental Agreement since they are paying these monthly, annual fees beginning at $1200 per year and with 3% increases annually? Hovnanian also provided comments regarding the draft Supplemental Agreement, stating: [Hovnanian] wants the fees to be payable by unit owners and not by [Hovnanian,] and that it must be clear that each unit owner must pay the annual fees directly to [ATC]. Hovnanian thus flagged the CAM fees provision of the Declaration for further discussion. On July 25, 2006, counsel for ATC responded to Hovnanian's questions, as follows: 1) This project has been structured as though it were a traditional mixed-use center, with parcel sales to the residential developers. The residential developers are limited to a fixed CAM charge and the Developer is obligated to maintain the Common Facilities Parcel, which are all the streets and common parking areas. The Developer can pass those charges on to its retail tenants, or pay for them out of its pocket, but it is still obligated to maintain [the Common Facilities Parcel] in accordance with the documents. If Target doesn't pay its fees, the Developer can pursue Target or come up with the extra cash itself. The Developer has the same choice if the residential parcels don't pay their fees. 2) See # 1 but, in addition, if the Developer doesn't maintain the Common Facilities Parcel in accordance with the Declaration, any of the parcel owners can bring an action against it. 3) See # 1. 5) We have no problem recording this. Debbie had indicated that K-Hov might want to divide this charge up differently (with larger units paying larger portions) and we thought that fee would be included in your condominium documents for your parcels but recording the Supplemental Agreement is fine. With regard to the Supplemental Agreement, ATC merely noted that those issues had been Discussed. ATC sent updated drafts of the Declaration to Hovnanian on August 1, 2006, and August 15, 2006. Each of these revisions contained substantially similar provisions regarding the use of Supplemental Agreements. Hovnanian provided ATC comments on the second draft on August 17, 2006. These comments, addressing a number of issues in the Declaration, did not expressly address 10.2.4 or the specifics of CAM funding. ATC circulated new drafts, with identical CAM sections, on August 28, 2006 and September 14, 2006. On September 18, 2006, Hovnanian provided detailed comments to the September 14 draft Declaration, including comments on the CAM funding provision. [9] Hovnanian stated, in relevant part: 3. Definition of Common Area Maintenance Costs. The definition seems to exclude real property taxes and fees to the Operator. These costs should be included in the CAM. If not, then we need to have a clear understanding of this to explain to our client. If this is variable depending on Parcel Owner, then perhaps this should be addressed by Supplemental Agreements if you deem it appropriate, but then the Declaration should so state. We need to understand this issue better. ATC's counsel responded the same day, stating Fees to [ATC] are included in CAM and we can add that. Taxes are not and Section 9.5 says at the end that some parcel owners are required by Supplemental agreements to pay them. On October 12, 2006, ATC's counsel stated: In order to stay on our construction schedule at this project, we must file the [Declaration] by the end of this month.... We have received comments from some of you since the last version of the Declaration was circulated and [we] will be incorporating those to the extent we can. If anyone has comments that have not yet been submitted, please get those to us. On October 30, 2006, ATC recorded its Towne Centre Declaration (the Declaration), and circulated the recorded version to Hovnanian on November 6, 2006. On November 15, 2006, ATC and Hovnanian amended the Purchase Agreement. This amendment removed Hovnanian's obligation to purchase a portion of the property where one of the buildings was to be constructed, reduced the purchase price from $33,184,000 to $22,927,000, and allowed Hovnanian to extend the closing date from November 1, 2007 to February 1, 2008 by paying ATC an extension fee of $100,000. In late 2006, ATC continued its negotiations with the Target Corporation, which was purchasing a large retail parcel in the project. On December 12, 2006, as those negotiations approached a close, counsel for ATC emailed Hovnanian, indicating that the revised Declaration would be recorded on December 20, 2006. On December 15, 2006, counsel for Hovnanian responded with the following email: Once again, I am amazed at the ability of you and Greg [ ] to balance all of the varying interests in this project. I am submitting the following comments to the above draft.... There are not a lot of comments.    It appears that the payment of CAM for each Parcel, including Parcel 15, is going to be dealt with in the Supplemental Agreement. The remainder of the e-mail addressed Section 10.2.2(b), which is not at issue in this case. [10] ATC delayed the recording of the Amended Declaration until January. It circulated drafts on January 4, January 11, and January 16, 2007. After this last circulation, ATC and Hovnanian went back and forth regarding certain provisions in the Amended Declaration. On January 17, 2007, Hovnanian's counsel wrote: ... On behalf of [Hovnanian] I am providing the following comments regarding the January 4, 2007 version of the Declaration. These comments and questions are not new. We have raised them in the past and we thought that it was agreed that they would be made, but as you will see, we are not certain that the language that now exists addresses the concerns sufficiently.    10.2.4. Payment of the Common Area Maintenance Costs. As I read Section 10.2.4 it provides, in relevant part, that Tier 2 Owners and/or other Persons shall periodically pay to [ATC] respective shares of the Common Area Maintenance Costs.... This language, together with the portion of Section 14d of the original Purchase and Development Agreement that has not been changed by the most recent amendment, has led me to interpret this above language to mean that [ATC] will begin assessing the annual CAM directly from each purchaser of a Tier 2 residential unit when that person settles from the builder[ ] of that Tier 2 residential condominium and will continue to do so per month until the full CAM has been collected (or the prorated amount for that first year). It is not my understanding that [Hovnanian], the Parcel Owner, or the Tier 2 Council of Unit Owners once the Tier 2 residential condominium is created will be doing the collection of the CAM from its future unit owners and remitting the same in lump sums to [ATC]. We need to confirm that [ATC] will pursue the individual Tier 2 unit owners for the annual fee of $1,200[.] The next day, ATC's counsel replied and stated: ... I believe both of these issues can be dealt with in our Supplemental Agreement with Hovnanian, if need be.... On the [CAM issue], we do have a different understanding and we can talk about that. It has always been our intention to bill the Association for the total CAM due and that the Association would collect from its members. It would be a total nightmare for the Towne Centre Council to be billing and chasing each individual condominium owner.... We can talk about that more. I'm sure we can both get comfortable with it. We have been in the process of closing with Target since last Thursday and we are concluding today, with the recordation immediately after. In another email on January 18, ATC reiterated that, because of practical limitations, it wanted to address Hovnanian's concerns in a Supplemental Agreement: ... That document was signed off by Target, Prudential and Bank of America last Thursday (the day set for the actual closing) and funding happened today based upon it. The title company has the entire package for recording and may be recording it this afternoon. We can't make any change at this point. I'm not sure a language change is even necessary on that but, if it is, we can address it in the Supplemental Agreement for your parcel. On January 19, 2007, Hovnanian's counsel responded: Not a problem. I'm fine with addressing this and our other concerns later (if it is appropriate for the Supplemental Agreement then I am fine with addressing them in that document), but please keep in mind that we have always made it clear that we have never given our final sign off on the recorded document, that we do have outstanding unresolved issues, and that we have only been giving our approval on the changes Target made to this latest draft, which happened very quickly, in an effort to meet your deadlines with Target. Our previous e-mails confirm this understanding but I wanted to confirm this in response to your last email. Therefore, I hope that you did not expect that any of the changes we may have needed in an amended Declaration made it to the one you are recording now, because they are not included at this point and remain outstanding. ATC's counsel responded, also on January 19, 2007: ... We honestly feel that the issues you raised that needed to be addressed in the Amended Declaration have been and that is why we have copied you and Earle on all the redrafts. Both of the other residential developers are OK with the recorded document. Greg was careful to include revisions we agreed upon at our last meeting. If any issues need to be dealt with, we need to do so in the Supplemental Agreement if possible. Now that Target has closed on their parcel, they will need to approve of any changes to the Declaration, which will be a difficult if not impossible process. The next day, January 20, 2007, Hovnanian's counsel replied: We were repeatedly told by you and Greg that we would address any of [Hovnanian's] open issues in an amended Declaration, and I have told the same to my client. If I did not have that comfort level from you, then I would have protested against recordation prior to my client signing off. I cannot rely on the comfort level of the other residential developers in order to get my client comfortable so I cannot focus on their satisfaction with the document. I'm absolutely fine with addressing our concerns in a Supplemental Agreement if it is possible and if it accurately resolves the concerns. If not, then we will have to amend the Declaration and work through it with Target.... I do not anticipate new problems, but some of our longstanding issues have not been addressed and we absolutely have to have my client's approval of this document. On January 22, 2007, without further comment from Hovnanian, ATC recorded an Amended and Restated Declaration (the Amended Declaration). Over the next year, the project proceeded towards closing, with both parties making preparations. During this time, Hovnanian and ATC frequently communicated, though not specifically with regard to the Declaration's CAM provisions. The CAM provisions, apparently, were discussed at an April meeting, after which ATC sent an email discussing collateral CAM fee issues. [11] On April 6, Hovnanian responded, saying only that it need[ed] to set up a follow-up meeting on other condo doc issues[.] After this communication, however, the record demonstrates that Hovnanian did not again mention the specifics of 10.2.4 or its use of Supplemental Agreements, in 2007. As they approached the original closing date, November 1, 2007, Hovnanian paid $100,000 to extend that date to February 1, 2008. Yet, even with the delayed closing date, Hovnanian soon realized the extent to which the recent housing collapse had reached the markets. [12] Hovnanian began privately preparing an offer package to sell its interest in the project to another party. These attempts would prove unsuccessful. Additionally, Hovnanian sought an additional extension and/or a discount from ATC throughout January of 2008. [13] The negotiations began to fall apart in late January, as the parties could not agree on an acceptable extension deal. Throughout these negotiations, Hovnanian referenced market difficulties as the major hangup. For example, the regional president at Hovnanian stated, in an email dated January 3, 2008, that the original purchase price could work over time with the cooperation of the market but it doesn't now and unless things drastically and quickly improved, there is almost no discount that would work over the next 6 months. Similarly, in an email on January 30, 2008, the regional president wrote: Isn't something better than nothing plus we are still your best chance to get to closing as soon as possible? If the market and financing were available, we would be there. Do you think there is someone else who is willing to step up in this market and pay our Purchase Price less $4M (portion of our $7M deposit net to you after taxes). After its last efforts to obtain an extension had failed, Hovnanian then turned to the Purchase Agreement and attempted to ascertain whether all of the conditions precedent to closing were met.