On October 12, 2021, the Appeals Court issued its decision in Kettle Brook Lofts, LLC v. Specht, 100 Mass. App. Ct. 359 (2021), affirming, as amended, previous decisions of the Massachusetts Land Court in favor of the Kettle Brook Lofts Condominium Trust (“Condominium Trust”). While the case entailed somewhat tortuous maneuverings undertaken by the declarant of the Kettle Brook Lofts Condominium (“Condominium”), it principally concerned an issue common to most development rights cases: the declarant’s failure to timely exercise its phasing rights and a belated attempt to retain such rights without duly compensating the Condominium’s unit owners for such interest. In Kettle Brook Lofts, the Appeals Court held that the declarant’s reserved phasing rights lapsed and certain “improvements” on the common areas are owned by the unit owners. In addition, the Appeals Court held that, to the extent the declarant had mortgaged its interest in the land prior to submission of the property to the provisions of the Condominium Act, such mortgages encumbered only those units, and their appurtenant interest in the common areas and facilities, for which the mortgagees had not executed partial releases.

The Kettle Brook decision provides additional guidance on a number of transition issues.

The Condominium is located in Worcester, Massachusetts, and is comprised of a single structure with six adjoining wings. In connection with its renovation and conversion of the structure to residential units, the declarant received a number of loans, which were secured by mortgages on the real property. Subsequent to execution of the mortgages, the declarant recorded a Master Deed, creating the Condominium comprised of units and common area and retaining the right to phase-in up to 109 units to the Condominium over a period of seven (7) years. Prior to the expiration of its phasing rights, the declarant had lawfully phased-in a total of fifty-three (53) units, five (5) of which it retained ownership to. For all units sold to third-party purchasers, the mortgagees executed partial releases, releasing to the buyers of the units “all interest acquired” under the lenders’ mortgages with respect to those individual units.

On the eve of the expiration of the declarant’s phasing rights, having phased-in less than half of the initially contemplated units, it unilaterally recorded a number of instruments with the Worcester Registry of Deeds in which it purported to expand its ownership rights and powers over the development and governance of the Condominium. The declarant’s efforts included an attempt to: extend the duration of its phasing rights for an additional seven (7) years, create “Class B” units to be governed under a separate trust, and phase-in not yet completed and/or constructed units, which purported to give the declarant control of a majority of ownership interest in the Condominium’s common areas and facilities.

After the Condominium Trust prevailed in the Land Court, the Condominium’s declarant and the declarant’s mortgagees appealed to the Appeals Court.

In its decision, the Appeals Court first discussed the declarant’s attempt to extend its phasing rights. In reliance on G.L. c. 183A, § 5(b)(1), the Appeals Court reasoned that the declarant’s attempt to amend the Master Deed were precluded by the impact it had on the unit owners’ determination as to the scope of the phasing rights at the time they purchased their units. The Appeals Court also indicated that the declarant’s attempt to rely on the general amendment provision to unilaterally extend its phasing rights for an additional 7-year period was invalid.

Additionally, the Appeals Court rejected the declarant’s argument that it had effectively added the final fifty-six (56) units to the Condominium. Citing the Master Deed’s requirement that units be “substantially complete” prior to being phased-in to the Condominium (note that this standard is more onerous than the requirement set forth in G.L. c. 183A, § 8(f), which provides that units must be sufficiently constructed to allow preparation of a plan “fully and accurately depict[ing] the layout, location, unit number and dimensions of the units as built”), the Court held that the declarant had failed to satisfy this standard. As the declarant’s phasing rights had expired, and pursuant to the language in the Master Deed, the portions of the common areas that had not been transformed into units remained the property of the unit owners in accordance with their percentage interest in the common areas.

As to the arguments advanced by the declarant’s mortgagees concerning the partial releases, the Appeals Court held that the effect of the partial releases was to release each unit and their appurtenant percentage interest in the common areas. Noting a distinction between the facts in Kettle Brook Lofts and the Commonwealth’s leading case on this issue, Trustees of the Beechwood Village Condominium Trust v. USAlliance Federal Credit Union, 95 Mass. App. Ct. 278 (2019), because the declarant continued to own five (5) condominium units, the Court initially held that the lenders’ mortgage interests were not subordinate to the Master Deed as to those units and their attendant percentage interest in the Condominium’s common areas.

Recognizing there were some challenges with the language employed by the Appeals Court, and that their intention was likely not to possess the mortgagees of an ability to foreclose and wipe out the Condominium (which would be in conflict with the mortgagees’ acknowledgment of the Condominium regime pursuant to their previously issued partial releases), the Condominium Trust moved to modify the Appeals Court’s October 12^th decision. In an infrequent move, the Appeals Court granted the Condominium’s motion and modified its decision to clarify that any foreclosure on the units retained by the declarant would not wipe out the Condominium and would merely concern those units and their appurtenant interest in the common areas and facilities.

The Kettle Brook decision provides additional guidance on a number of transition issues. Click here to view the decision, as modified.

If you have any questions about a declarant’s phasing rights or any transition matters, please do not hesitate to contact our office. MBM lawyers, including the author and Tom Moriarty, handled the case that is the subject of this article in both the trial court and Appeals Court and can readily answer any questions you may have concerning the Appeals Court’s decision and the issues discussed therein.