Court rules that Michigan HOA cannot collect assessments after restrictive covenant expires
In Deghetto v Beaumont’s Seven Harbors White and Duck Lack Association, issued June 22, 2017 (Docket No. 330972) (Unpublished Opinion), the Michigan Court of Appeals recently ruled that a homeowners’ association could not continue to collect assessments after the restrictive covenant expired.
In Deghetto, the plaintiffs were the owners of multiple lots in six separate subdivisions in Highland Township, Michigan that contained over 650 lots. The land now known as Seven Harbors Subdivision belonged to various members of the Beaumont family until Harry S. and Florence M. Beaumont (the “Beaumonts”) began subdividing the land in the 1930s. The first two subdivisions created from the land are known as Supervisor’s Plat No. 1 (“SP1”) and Supervisor’s Plat of Seven Harbors (“SPOSH”). When defendant was incorporated in November 1947, it included only these two subdivisions. The Articles of Incorporation were amended in 1959 to add three additional subdivisions, Supervisor’s Plat No. 5 (“SP5”), Supervisor’s Plat No. 6 (“SP6”), and Proprietor’s Plat of Seven Harbors Reserve (“PPOSHR”). The sixth and final subdivision is Supervisor’s Plat 7 (hereafter “SP7”) was added sometime before 1962.
The recorded restrictive covenants that governed SP1 and SPOSH indicated that each purchaser of a lot would automatically become a member of the Seven Harbor White and Duck Lack Association (the “Association”) and the purchasers agreed for themselves, their “heirs, executors and assigns” to pay an annual maintenance fee, not to exceed $5 per year. There was a provision authorizing the association to place a lien on the property if the dues were not paid. However, the deed restrictions explicitly stated that they would expire on January 1, 1960. Effective on January 1, 1960, the owners in SP1 and SPOSH adopted new restrictions (the “1959 Restrictions”). However, the 1959 Restrictions did not indicate that the covenants ran with the land and they did not indicate that any maintenance fees could be charged. The 1959 Restrictions expired on January 1, 1986, unless they were extended by the owners.
The Beaumonts sold the lots in the next three subdivisions, SP5, SP6, and PPOSHR, in the late 1950s and early 1960s. The deeds for the subdivision lots in SP5, SP6 and PPOSHR contained language by which the original purchasers of these lots agreed that they were members of the Association and agreed to pay to the Association a yearly fee to be capped at $15 per year. The deeds did not state that the grantees made this agreement for their heirs, successors or assigns or that the covenants would run with the land. As a result, the owners of these lots adopted restrictions that were almost identical to the 1959 restrictions set forth above in 1956 the (the “1956 Restrictions”), which did not run with the land, did not make any mention of a maintenance fee and expired on January 1, 1986. No restrictions were ever adopted for the SP7 subdivision.
Both the 1956 Deed Restrictions and the 1959 Deed Restrictions provided that they could not be extended without the written consent of 75% of the membership. The restrictions were not extended in 1986, but the Association continued to charge lot owners a fee between $185 and $225 per lot. The Plaintiffs filed a claim for declaratory relief that they were not obligated to pay assessments under the plain language of the deed restrictions.
The Association argued that the 1956 and 1959 Deed Restrictions were extended past their stated expiration date of January 1, 1986, because the 1959 Amendment to the Articles of Incorporation for the Association were approved by 75% of the membership. The 1959 Amendment to the Articles of Incorporation added the three newer subdivisions (SP5, SP6, and PPOSHR) to the original two (SPOSH and SP1) that were included in the 1947 Articles of Incorporation. The 1959 Amendment also provided for a maintenance fee. While the Articles of Incorporation were approved by 75% of the members, they contained no language that purported to extend the deed restrictions. The Court of Appeals held that covenants must be enforced as written and that the covenant could not be extended unless there was an express agreement to do so pursuant to the manner provide in the covenant.
Additionally, the Court held that a covenant can be personal to the original parties to the agreement, or it can run with the land. If a covenant runs with the land, any subsequent purchaser will also be bound if that purchaser has actual or constructive notice of the covenant, as when the covenant appears in the chain of title. The Court also found that the failure to indicate that the covenants ran with the land was also futile to the Association’s claim to assessments with respect to certain subdivisions.
Finally, the Association argued that the doctrine of laches should apply to bar plaintiffs’ claims that they were not required to pay assessments as the plaintiffs’ had paid assessments in the past. The equitable doctrine of laches bars a claim when the passage of time combined with a change in condition would make it inequitable to enforce the claim against the defendant. The Court of Appeals held that the Association had previously obtained an opinion indicating that it was a voluntary association. It was not until the Association claimed to be a mandatory association, that the plaintiffs withheld dues. Accordingly, the court of appeals held that there was no unreasonable delay in filing the lawsuit. Accordingly, the Court held that the Association could not impose mandatory assessments.
Does the Homeowners’ Association have potential equitable remedies?
The important lesson to be learned from this case is that courts will often enforce restrictive covenants as written even if the practical consequences may be harsh. Accordingly, the homeowners’ association would have been best served by obtaining 75% approval to extend the restrictive covenants and to allow for the Association’s board of directors to set an appropriate assessment. From the perspective of the homeowners’ association, it certainly seems unfair that some of the owners paid assessments, while other owners were not required to pay assessments. However, other courts have relied on theories of implied contract and unjust enrichment to require lot owners to pay for common expenses, even if the declaration does not expressly allow for a homeowners’ association to collect assessments. In a similar situation, a Massachusetts Court determined that an implied-in-fact contract existed between a homeowners’ association and a lot owner when the restrictions expired and were no longer enforceable as a matter of contract. Specifically, the Court held that the lot owners,
…acknowledged this duty by paying the bi-annual assessments for six consecutive years, and by availing themselves of the services provided by the Association, including road repair and snow removal. Since the Plaintiffs purchased residential property within the area of a community association, and with knowledge of the Association and the benefits it provided, and because they paid the bi-annual assessments, it follows that they manifested acceptance of the obligation to pay for the services provided by the Association.
See Sullivan v Gibbs, No. 07 MISC 357629 CWT, 2010 WL 2623674, at *5 (Mass Land Ct June 30, 2010), judgment entered No. 07 MISC 357629 CWT, 2010 WL 2643373 (Mass Land Ct June 30, 2010), aff’d as mod sub nom. Sullivan v O’Connor, 81 Mass App Ct 200; 961 NE2d 143 (2012).
The Massachusetts Court also found that the doctrine of equitable servitudes required the lot owners to pay assessments. Specifically, after finding that the restrictions expired, the Court held as follows:
However, the Plaintiffs’ obligation to the trust is not a restriction or a covenant. Rather, the Court finds and rules that the duty to pay the bi-annual assessment is an equitable servitude. It is the rule in the Commonwealth that a previous grantee’s promise to make annual payments connected with land may impose on the granted premises an equitable servitude enforceable against the subsequent owner taking title with actual or constructive notice of the obligation, even where the equitable servitude calls for the payment of money. It is an indisputable fact that Plaintiffs’ took title to the Property with full knowledge of the existence of the Association; moreover, they certainly had constructive—if not actual—notice of their obligations to the Association. Therefore, there exists an equitable servitude that requires Plaintiffs to pay the assessments as the previous owners did.
Furthermore, the Plaintiffs actually paid the bi-annual assessments until 1983. Meanwhile, the remaining members of the Association also continued to act as if the restrictions were still valid. Although it was not until 1991 that the community recorded the Declaration of Restrictive Obligations, the Westwood Hills community acted as if no expiration had ever occurred. Arguably, the deed restrictions were technically expired, and the Plaintiffs never signed the 1991 Declaration. Nevertheless, they purchased residential property subject to the Association with knowledge of the Association, and paid the bi-annual assessments (even after the deed restrictions had arguably expired), thereby manifesting acceptance of an equitable servitude. In short, the restrictions and covenants contained in Plaintiffs’ deed have expired, but their obligations to pay their dues to the Association have not.
Id. While Michigan recognizes the doctrines of implied contract, unjust enrichment and equitable servitudes, it does not appear that the homeowners’ association asserted a counterclaim to collect any assessments or common expenses from the individual lot owners based on equitable grounds in Deghetto v Beaumont’s Seven Harbors White and Duck Lack Association, issued June 22, 2017 (Docket No. 330972) (Unpublished Opinion). It would have been interesting to see if the Michigan Court of Appeals would have reached a different conclusion if the Association had raised the arguments of implied contract, unjust enrichment and equitable servitudes instead of just relying on the expired covenant. Accordingly, homeowners’ associations should be aware that these arguments may still exist in situations where deed restrictions have expired and a homeowners’ association needs funds to pay for common expenses that benefit all of the lot owners. However, whether these equitable doctrines will apply largely depends on the facts of each case.
Kevin Hirzel is a Partner and Chair of the Community Association and Real Estate Practice Group at CMDA. He concentrates his practice on commercial litigation, community association law, condominium law, construction law and real estate law. Mr. Hirzel has been a Super Lawyer’s Rising Star in Real Estate Law from 2013-2017, an award given to only 2.5% of the attorneys in Michigan each year. He was named an Up & Coming Lawyer by Michigan Lawyer’s Weekly in 2015, an award given to only 30 attorneys in Michigan each year. Mr. Hirzel represents builders, community associations, condominium associations, cooperatives, co-owners, developers, homeowner’s associations, investors, property owners and property managers throughout Michigan. He is available to represent clients out of CMDA’s Michigan offices in Clinton Township, Livonia, Grand Rapids or Traverse City. He may be reached at (734) 261-2400 or firstname.lastname@example.org.