MTM Prevails in Appeals Court in Case Rejecting Declarant’s Unilateral Attempt to Extend Its Phasing Right Beyond Seven Years

MTM Prevails in Appeals Court in Case Rejecting Declarant’s Unilateral Attempt to Extend Its Phasing Right Beyond Seven Years

In Kettle Brook Lofts, LLC v. Specht, Appeals Court Docket Nos. 20-P-738 & 20-P-739, a case litigated in the Appeals Court by MTM principals Tom Moriarty and Kim Bielan, the Appeals Court rejected the attempt of a condominium’s developer-declarant to unilaterally extend the expiration of its 7-year phasing right. The Appeals Court’s decision affirmed the Land Court’s determination that other unilateral activities undertaken by the declarant to amend the condominium’s governing documents to avoid the consequences of the expiration of the phasing rights were invalid. It also affirmed the application of subordination principles established in the matter of Trustees of Beechwood Village Condominium Trust v. USAlliance Federal Credit Union, 95 Mass. App. Ct. 278 (2019) (Beechwood I), a decision in a case of first impression obtained by MTM in 2019.

Holding that the Declarant’s actions were invalid, the Appeals Court reasoned that any extension to the Declarant’s phasing rights could only be effectuated by obtaining approval from all the affected unit owners.

The Kettle Brook Condominium (“Condominium”) was created in 2008, when the declarant, Kettle Brook Lofts, LLC (“Declarant”), recorded a Master Deed submitting its interests in the land and all buildings thereon to the provisions of G.L. c. 183A, § 1 et seq. (“Act”). The Condominium consisted of 53 units, created upon the recording of the Master Deed and by amendments thereto recorded shortly after the establishment of the Condominium. In the Master Deed, the Declarant reserved the right, but not the obligation, to complete 109 units at the Condominium, by amending the Master Deed to add 5 additional phases over the course of 7 years. The provisions of the Master Deed also provided that the Declarant’s failure to “substantially complete” and phase-in additional phases within seven 7 years constituted a waiver of its rights. Among the actions undertaken by the Declarant, on the eve of when its phasing rights were set to expire, the Declarant recorded amendments to the Master Deed, purporting to grant it an additional 7 years to complete the development of the remaining units. In connection with same, the Declarant purported to rely upon a general amendment provision in the Master Deed.

The unit owner-controlled Kettle Brook Lofts Condominium Trust (“Condominium Trust”) commenced an action against the Declarant and its lenders in the Land Court seeking, among other things, declaratory relief that the Declarant’s reserved phasing rights had expired and that its attempt to extend its ownership rights and powers over the development and governance of the Condominium were invalid. The Declarant commenced an action in the Superior Court against the Condominium Trust and all of the Condominium’s unit owners seeking to enjoin them from interfering with the Declarant’s extended phasing rights. These actions were consolidated in the Land Court, and the Land Court determined that (i) the Declarant’s phasing rights had expired; (ii) its purported attempt to extend those rights by recording unilateral amendments to the Master Deed were invalid and of no effect; and (iii) as all portions of the property had been submitted to condominium status as either unit or common area, the lenders’ execution of partial releases included the units’ attendant percentage interest in the Condominium’s common areas.

On appeal by the Declarant and its lenders, the Appeals Court affirmed, with minor amendment, the Land Court’s holdings in a 28-page decision. While not an exhaustive identification of the issues considered by the Appeals Court in the case, substantial treatment was afforded to the following matters.

The Appeals Court first considered the Declarant’s attempt to unilaterally extend its phasing rights, discussing § 5(b)(1) of the Act, which authorizes alterations to percentage interest to be undertaken without express consent of unit owners if the alterations are set forth in the master deed when the unit is purchased, such that unit owners are on notice of prospective changes in their ownership interest. In this case, the Declarant, by and through the language contained in the Master Deed, provided the unit owners with notice that its phasing rights would expire 7 years from the date the Master Deed was recorded. Each unit owner, in accepting their unit deed, accepted that development of the Condominium may be ongoing for a period of 7 years and that their percentage interest in the common areas of the Condominium could be decreased by the addition of subsequent units during that period. Such language in the Master Deed allowed each unit owner to make “an accurate determination of the alteration” to each unit’s undivided percentage interest.

Holding that the Declarant’s actions were invalid, the Appeals Court reasoned that any extension to the Declarant’s phasing rights could only be effectuated by obtaining approval from all the affected unit owners. The Declarant’s attempt to unilaterally accomplish an extension of its phasing rights in a contrary manner circumvented the requirements and the intent of the Act and violated the provisions of the Master Deed. Moreover, the Appeals Court held that the general amendment provision relied upon by the Declarant is inapplicable because (i) the Act requires the consent of the unit owners to alter their percentage interest in the common areas, and (ii) the provision itself is only viable when the amendment does not affect the benefits of the unit owners, which the amendment sought to do through the authorization to phase-in additional units.

As noted above, with respect to the lenders’ claims, the Appeals Court affirmed the subordination principles established in the matter of Beechwood I. In its decision, the Appeals Court noted that the Declarant had submitted the entire property and the building thereon to condominium status and determined that, in issuing partial releases, the lenders released each unit and their attendant percentage interest in the common areas for their mortgages. Recognizing that the Declarant continued to own five (5) units at the Condominium that had not been released (and that, by and through the Declarant’s ownership of such units, it has an attendant percentage interest in the common areas), the Appeals Court held that the lenders continue to hold a mortgage interest in those units’ percentage interest in the common areas.

A copy of Kettle Brook Lofts, LLC v. Stacy S. Specht, Appeals Court Docket Nos. 20-P-738 & 20-P-739, can be viewed by clicking on this link.

Should you have any questions regarding this article, please do not hesitate to contact Moriarty Troyer & Malloy LLC at 781-817-4900 or via email at info@lawmtm.com.