Developers Must Explicitly Reserve Construction Right in Phased Condominium Project

Conn Kavanaugh
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As any seasoned developer knows, condominium development projects involve a delicate interplay between the developer, unit owners, the condo association, and the lenders that fund construction and acquisition costs. Last month, the Appeals Court addressed two issues that affect the balance of these relationships.

First, where the lender granted partial discharges to unit owners upon the sale of each individual condo unit, the court held that the lender released its mortgage interest in the condo’s common areas and could not foreclose on those common areas when the developer defaulted on its mortgage.

Second, the court concluded that the developer failed to reserve the right to pursue additional phases of construction where the master deed’s construction easement expired after seven years and the remaining easements only provided a general right of access.

The Facts

In Trustees of Beechwood Village Condo. Trust v. USAlliance Fed. Credit Union, 95 Mass. App. Ct. 278 (2019), the developer purchased a 37-acre parcel on Beech Street in Rockland with plans to develop the property as a 79-unit condominium. The developer granted a first mortgage to USAlliance and a second mortgage to the seller.

A year after granting the mortgages, the developer submitted the property to the Condominium Act, G.L. c. 183A, by recording the master deed. The master deed defined the common area to include the entire parcel and improvements thereon, less the units themselves. Among other terms, the master deed also granted the developer easements to construct additional units over the a seven-year period and to access the common areas of the property.

The developer completed 54 units over multiple phases between 2007 and 2011. As each additional unit was completed, the developer added the unit to the master deed and both USAlliance and the original seller executed partial releases in favor of the new unit owner.

Sometime after 2011, the developer – apparently beleaguered by a difficult housing market – defaulted on its mortgage, and USAlliance sought to foreclose on the condo’s common areas.

The Holding

Overturning a Land Court decision, the Appeals Court nixed USAlliance’s plans. It concluded that the unit owners each owned an indivisible interest in the common area, and that USAlliance released its mortgage interest in the common area when it executed partial discharges upon the sale of each unit. The Appeals Court further held that where the developer expressly reserved the right to construct additional units for only seven years, a provision in the master deed granting the developer a broad right of access was insufficient to revive the developer’s construction rights.

Takeaways

The Beechwood decision is a cautionary tale in the importance of careful draftsmanship for developers, lenders, and other real estate professionals.

For developers, Beechwood is a reminder to state what you mean in the condo’s master deed. See Flynn v. Parker, 80 Mass. App. Ct. 283, 289 (2011) (“[T]he master deed itself provides the rules of the game.”). Be express about the rights you are reserving, particularly if you intend to complete work in phases over time. While the local housing market remains strong, long-term market fluctuations can spoil even the best laid plans. Anything less than a strong and unequivocal reservation of rights may result in the forfeiture of valuable rights, especially where courts are quick to interpret language against the developer and in favor of unit owners.

Likewise, lenders would be wise to rethink their standard discharge language. Instead of releasing unit owners from all mortgage obligations, lenders may consider limiting the scope to the units only, leaving the common areas subject to the mortgage. Alternatively, lenders could simply refuse to provide any release at all upon the sale of individual units.

Whatever sphere of the real estate industry you occupy, the message is clear: drafting matters. Professionals should carefully choose their words so as to allocate risk according to reasonable expectations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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