Missouri Western District Court of Appeals just affirmed a trial court’s judgment in a way that will resound with homeowners’ association (HOA) boards across the state, many of which are struggling to raise sufficient revenues to take care of streets and amenities, even though many of the developer-owned lands that benefit from the streets are apparently exempt from assessments.
Lenders that have foreclosed on developers may find that this opinion undermines the lenders’ ability to claim to enjoy the developer’s exemption from assessments on lender-owned land. Parties purchasing land from lenders, hoping to have the status of the former developer, may find themselves heavily in debt to the HOA, perhaps blaming the lenders who sold them the land.
In Woodglen Estates Association v. Dulaney, Dulaney obtained 17 parcels of land from the FDIC. This land had once been owned the original developer Braeman, then passed through the hands of a few different parties, before ending up with the FDIC, which had taken the parcels of land from a failed bank.
The Woodglen Estates Association hired an auditor to review its finances. The auditor discovered that land owned by Dulaney had not been assessed for several years. The association then sued Dulaney, and Dulaney asserted two defenses:
- As successor to the original developer, Dulaney should be exempt from assessments on land it owned.
- Much of the land that Dulaney owned in Woodglen was in “parcels,” not having been subdivided into “units,” so that it should not be assessed.
The appellate court looked at the line of Missouri case law that holds that the special rights and privileges of a developer, typically reserved in the declaration of covenants for the subdivision, do not automatically pass with ownership of the developer’s real estate. These rights, called “developer rights,” “declarant rights” or “development rights,” may be assigned, but a party claiming to hold these rights has to be able to prove to have acquired them by assignment. Dulaney had no proof of assignment of declarant rights.
To make matters worse for Dulaney, the Woodglen declaration did not contain an exemption for the developer’s real estate–which is a common feature of declarations–and the appellate court noted that developers do not receive an automatic exemption. Under current Missouri law, other than in condominiums, a developer may lawfully reserve an exemption from assessment for its own real estate. The original developer simply failed to create the exemption when filing the declaration and made the mistake of including land in the declaration that was not ready to be developed.
Dulaney argued that its “parcels” were not subject to assessment, since only “units” and “unit owners’ could be assessed. The appellate court noted that some of the declaration’s provisions were ambiguous when addressing the respective rights of owners of units and parcels, but the assessment provisions were clear: ”each owner shall be obligated to pay to the Board such sum as shall have been established….,” without distinguishing between owners of units and parcels. The legal description attached to the declaration had included Dulaney’s parcel, placing this land under the provision of the declaration.
For lenders, the lesson is that any loan documents for a development loan should include a security interest in the declarant rights, and any documents showing the recovery of the developer’s real estate should include a specific assignment of the declarant rights. When the lender sells the former developer’s property, the conveyances to the purchaser should include the assignment of declarant rights. These issues are covered in more detail in this essay.