Vermont Bar Association
Seminar Materials
The Law, the Lore, and the Myths of
Common Interest Ownership Communities
September 27, 2013
Lake Morey Resort
Fairlee, VT
Faculty:
Jim Knapp, Esq.
Carl Lisman, Esq.
Hal Miller, Esq.
Robin Stern, Esq.
The Law, the Lore, and the Myths of Common Interest
Ownership Communities
Vermont Bar Association
135th Annual Meeting
Lake Morey Resort, Fairlee, Vermont
September 27, 2013
Whether representing the declarant, the declarant’s lender, a buyer, the buyer’s lender,
the association, a property manager, or a creditor of an association, this program will
address common and unusual issues confronting Vermont lawyers. Topics will include:
What law applies; determining whether governing documents are sufficient and other
title issues; governance issues (including meetings requirements); resale certificates;
foreclosure priorities; whether (and how) to deal with Fire Marshal inspections – and
more.
Speakers:
Carl Lisman; Harland Miller, III; Robin Stern; Jim Knapp
Wells Fargo Bank v. Schunck, No. 193-4-10 Wmcv (Wesley, J., Apr. 28, 2011)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
SUPERIOR COURT
WELLS FARGO BANK
Plaintiff
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WINDHAM UNIT, CIVIL DIVISION
Docket No. 193-4-10 Wmcv
v.
Nancy Schunck, Obertal Condominiums,
et al
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Defendant
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ORDER RE DISPUTE AS TO
FORM OF JUDGMENT
Judgment has entered against all defendants in this foreclosure action, as to both
Plaintiff’s complaint and the cross-claim to foreclose its lien for condominium
association fees filed by Defendant Obertal. Having been directed to file a proposed
consolidated decree, Plaintiff and Obertal disagree as to the proper form of judgment.
Regarding the principal basis for disagreement, Obertal’s proposed decree would
recognize its claim to priority as to the proceeds from any eventual sale based on a six
month period of delinquencies accruing immediately prior to its initiation of this action to
enforce the lien, and all unpaid assessments that have continued to accrue while this
action has been pending. Basing its argument of the plain language of 27A V.S.A. §3116(c), Plaintiff disputes that Obertal is due priority as to any amounts beyond the six
month period of delinquencies which accrued prior to the initiation of the cross-claim.
The statute provides:
(c) A lien under this section is also prior to all security interests
described in subdivision (b)(2) of this section to the extent of the common
expense assessments based on the periodic budget adopted by the
association pursuant to subsection 3-115(a) of this title which would have
become due in the absence of acceleration during the six months
immediately preceding institution of an action to enforce the lien.
27A V.S.A. § 3-116(c).
Relying on elemental principles of statutory construction, see, In re:
Ambassador Insurance Co., Inc., 184 Vt. 40, 418, Plaintiff contends that the
meaning is plain of the face of the statute, limiting any claim for priority of
association assessments over a first mortgage to the six month period described in
Sec. 3-116(c). Obertal responds that the language specifically refers to “the six
months immediately preceding institution of an action to enforce the lien”, and
that logic and fairness requires that, in addition to such specifically designated
retroactive priority, all unpaid assessments which continue to accrue while the
action is pending should be paid first from the proceeds of any sale. The Court
agrees.
As Obertal argues, the statutory scheme strikes a careful balance between
the secured positions of the first mortgage holder and the condominium
associations, whose interests are intertwined in the success of condominium
developments. First mortgage financing is essential to the sale, resale and longterm viability of any such project. At the same time, the very units serving as
collateral for a mortgage are subject to waste and deterioration if the
condominium association is unable to sustain its own viability, including
responsibility for the maintenance of the common elements.
In consideration of this balance of interests, the Court adopts Obertal’s
construction of the statute, inferring that the Legislature meant only to limit the
retroactive priority of unpaid liens over a first mortgage in an enforcement action.
As Obertal urges, Plaintiff’s construction leads to such unjust results as to require
that it be rejected as yielding absurd consequences. Ambassador Insurance, 184
Vt. at 419. From the initiation of the enforcement action until an eventual sale by
judicial decree, a period of between one and two years is typical.1 It is usual and
predictable in foreclosures involving condominiums that the association fees will
remain delinquent throughout this period. Rarely will an association be in a
position to easily absorb this large a delinquency, particularly if several units are
in arrears simultaneously. Thus, the Court concludes that granting the enforcing
association only six months of priority skews the balance the statute was designed
to protect. Plaintiff’s construction would risk the financial viability of the owners
associations, imperiling not only the security for its own mortgage but that of all
other mortgage holders secured by units in the complex.
As urged by Obertal, its construction of the statute is further supported by
the holding in Town of Weathersfield v. Merchants Bank, 284 F.3d 362, 369 (2d
Cir.,2002), stating that “a foreclosure judgment vest full legal and equitable title
to the property with the mortgagee” subject only to the equity of redemption.
Indeed, the Court recognizes this legal status as a separate grounds, independent
from its statutory construction, for charging Plaintiff with satisfying the
assessments for the unit to which it is asserting equitable title by the claims raised
in its foreclosure action, and which have accrued unpaid during after the filing of
the complaint.
In a matter unrelated to lien priority for Obertal’s assessments, Plaintiff
objects to Obertal’s proposed order as it conflates amounts under Plaintiff’s first
1
The Court takes judicial notice that many nationally-based institutions holding assignments of mortgage
notes have declared moratoriums as to pending foreclosure actions, a fact well-known to Plaintiff’s
counsel. Furthermore, the recent enactment of the amendment to V.R.C.P.80.1(g) has prompted requests
for delay, even after the issuance of a decree and order of sale, in order that plaintiffs may gather the
information and documents necessary to the required certifications. In an unrelated case, involving different
parties and counsel, the Court recently denied a request by Plaintiff’s counsel for an indefinite stay of the
obligation to conduct the judicially decreed sale until such time as “it becomes clear that such a sale will be
necessary”. In short, in the current climate, the expectation embodied in Rule 80.1 that foreclosure is a
summary remedy allows for far less predictability than in the past regarding the length of time necessary to
the disposal of a foreclosure action.
and second mortgages. Obertal did not respond to this objection, and the Court
acknowledges its validity.
WHEREFORE it is hereby ORDERED: The Court APPROVES the
proposed decree submitted by Obertal as relates to the priority of condominium
association assessments, provided that the proposed decree shall be submitted in
amended form, approved by both parties, to properly state amounts due under
Plaintiff’s first mortgage, and also afford it a redemption period for its second
mortgage.
Dated at Newfane this
day of
, 2011.
_____________________________
John P. Wesley
Superior Court Judge
Vt. Hous. Fin. Auth. v. Coffey, No. S0367-11 CnC (Toor, J., Aug. 11, 2011)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
VERMONT SUPERIOR COURT
CHITTENDEN UNIT
CIVIL DIVISION
VERMONT HOUSING FINANCE
AUTHORITY
Plaintiff
v.
GAIL H. COFFEY; CHAMPLAIN
HOUSING TRUST, INC. f/k/a
BURLINGTON LAND TRUST, INC.;
BUILDING 601 UNIT OWNERS
ASSOCIATION; DALTON DRIVE
NEIGHBORHOOD ASSOCIATION,
INC.; and ANY TENANT RESIDING
AT 601A DALTON DRIVE, ESSEX, VT
Defendants
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Docket No. S0367-11 CnC
RULING ON MOTION FOR PARTIAL SUMMARY JUDGMENT AGAINST
BUILDING 601 AND DALTON DRIVE
Plaintiff/Mortgagee Vermont Housing Finance Agency (VHFA) seeks a decree to
foreclose on its mortgage on condominium unit 601A Dalton Drive in Essex, Vermont
(Unit 601A). VHFA named several defendants as parties possibly holding interests in the
property including the mortgagor, Gail Coffey, as well as Building 601 Unit Owners
Association and Dalton Drive Neighborhood Association, Inc. (the Associations). The
Association(s)1 counterclaimed and cross-claimed against its codefendants, seeking to
1
It is unclear exactly what the difference is between Building 601 Unit Owners Association and Dalton
Drive Neighborhood Association, Inc. The filings have not been consistent. VHFA filed two separate
returns of service on the same individual. The cross-claim lists both associations as cross-claim plaintiffs
in the caption, but the motion only pertains to the Building 601 Association and Attorney Riley only signs
on behalf of the Building 601 Association. Both associations respond to VHFA’s motion for judgment and
subsequent motion for partial summary judgment, but only the Building 601 Association moves for
judgment against Coffey.
obtain a judgment for unpaid condominium assessments and fees, and to foreclose Coffey
and junior lienholders’ interests in Unit 601A.
VHFA moved for partial summary judgment against the Associations, arguing
that the Associations are only entitled to a lien with superpriority equivalent to six
months of periodic assessments pursuant to 27A V.S.A. § 3-116. The court (Tomasi, J.)
scheduled the claim for a hearing. The hearing was held before the undersigned on
August 10.
Discussion
VHFA’s motion for partial summary judgment only raises issues of law and does
not require a factual analysis.
The question presented is whether the portion of a
condominium association’s lien entitled to superpriority over a first mortgage includes
common-expense assessments incurred after the date the condominium association
initiates an action to enforce the lien.2 VHFA argues that (1) the plain language of 27A
V.S.A. § 3-116 necessitates a conclusion that the Associations’ liens are only prior to
VHFA’s mortgage to the extent of six months of periodic assessments, and (2) legal and
equitable title to the property are not merged until confirmation of sale. The Associations
argue that assessments accruing after the filing of the action should also be entitled to
superpriority on the grounds that (1) the court should follow the Windham Superior
Court’s decision in Wells Fargo Bank v. Schunk, No. 193-4-10 Wmcv (Vt. Super. Ct.
April 28, 2011) (Wesley, J.), and (2) policy arguments and equitable considerations
support its position.
2
Although the parties appear to address the issue with reference to the date VHFA filed its foreclosure
complaint, the relevant date is based on the institution of an action to enforce the condominium’s lien, in
this case, the Associations’ filing of the counterclaim and cross-claim. See 27A V.S.A. § 3-116(b)(3).
2
Condominium associations’ liens and their relative priorities are created and
governed by 27A V.S.A. § 3-116. Under that statute, a condominium association “has a
statutory lien on a unit for any assessment levied against that unit or fines imposed
against its unit owner.” 27A V.S.A. § 3-116(a). This lien may include a variety of fees,
charges, and fines. Id.
While an association’s lien generally enjoys priority over other liens, it is not
prior to “a first mortgage or deed of trust on the unit recorded before the date on which
the assessment to be enforced became delinquent.” Id. § 3-116(b), (b)(2). However, the
association’s lien may have superpriority over a first mortgage “to the extent of the
common expense assessments based on the periodic budget adopted by the association
pursuant to subsection 3-115(a) of this title which would have become due in the absence
of acceleration during the six months immediately preceding institution of an action to
enforce the lien.” Id. § 3-116(b).
In essence, the superpriority gives the condominium association the power to
recover some sale proceeds ahead of the mortgagee in the event of foreclosure. If the
property is sold at auction, the condominium gets the first bite at the apple: the equivalent
of six months of common-expense assessments that would have become due immediately
preceding the date that it initiates an action to enforce the lien. Then, if there is any
money left, the mortgagee is paid in full or until the money is exhausted. If there is
anything left after that, the condominium association is entitled to proceeds equal to the
remainder of its claim.
The six-month superpriority is intended to “strike[] an equitable balance between
the need to enforce collection of unpaid assessments and the obvious necessity for
3
protecting the priority of the secured interests of lenders.”
Id. § 3-116—Official
Comment ¶ 2. “As a practical matter, secured lenders will most likely pay the six
months’ assessments demanded by the association rather than having the association
foreclose on the unit.” Id.
The plain language of the statute is clear and controls this issue. The general rule
is that, except as provided in subsection (c) of § 3-116, a first mortgage recorded before
the date on which the assessment to be enforced became delinquent has priority over the
condominium association’s lien.
27A V.S.A. § 3-116(b)(2).
A condominium
association’s lien is only prior to a first mortgage to the extent of common-expense
assessments for the six months immediately preceding the commencement of the
condominium association’s foreclosure action. This ends the discussion. Assessments
may continue to mount after the filing of a foreclosure action. But in situations where the
mortgage has already been recorded, they are simply not entitled to superpriority status
because they become delinquent after the date of recordation.
The court does not agree with the Schunck decision from the Windham court.
That court reasoned that condominium associations must be entitled to collect unpaid
assessments accrued after the filing of a foreclosure action to maintain the balance of
interests created by the Legislature. It relied on the policy consideration that, because the
foreclosure process often takes between one and two years, the condominium would
absorb the loss of substantial assessments “particularly if several units are in arrears
simultaneously.” No. 193-4-10 Wmcv at 2. The court disagrees because the language of
the statute is clear, and it “must enforce the statute as written.” In re M.W., 2007 VT 90,
¶ 9, 182 Vt. 580 (mem.).
4
Furthermore, while the Official Comments adopted do not address the policy
considerations raised by the Windham court, they specifically state that “secured lenders
will most likely pay the six months’ assessments demanded by the association rather than
having the association foreclose on the unit.” 27A V.S.A. § 3-116—Official Comment
¶ 2 (emphasis added). Considering the equitable balance set by the Legislature, it would
be presumptuous to introduce new policy considerations to the mix that could add
significant additional assessments to the secured lenders’ tab.
The Schunck court also presents another basis for its decision: that “a foreclosure
judgment vests full legal and equitable title in the property with the mortgagee” subject
only to the equity of redemption. Schunck, No. 193-4-10 Wmcv at 2 (quoting In re
Canney, 284 F.3d 362, 369 (2d Cir. 2002)). The court held that this constitutes “separate
grounds, independent from its statutory construction, for charging [the mortgagee] with
satisfying the assessments for the unit . . . .” Id.
While the court agrees that a foreclosure judgment strips the mortgagor of some
of her interests, it does not mean that common-expense assessments that become due
after the association initiates an enforcement action are given superpriority. The lien
statute makes no reference to title.3 The superpriority only extends to the assessments
that would have become due during the six months immediately preceding the filing of an
action to enforce the lien, irrespective of the mortgagee’s posture. By definition, the
assessments the Associations are seeking become due after this key date.
3
The
The court notes that a mortgagee already has legal title to the unit, regardless of whether it holds a
foreclosure judgment. See Canney, 284 F.3d at 369. Nevertheless, a mortgagee is not a “unit owner” under
the condominium statute because its interests in the unit are “solely as security for an obligation.” 27A
V.S.A. § 1-103(31).
5
Associations do not argue that VHFA is no longer a first mortgagee otherwise entitled to
priority. Therefore, the newest assessments are not entitled to superpriority.
The Associations’ remaining arguments are unpersuasive. The fact that the court
may appoint a receiver to collect money owed to a unit owner and then intercept sums to
pay for common-expense assessments pursuant to 27A V.S.A. § 3-116(k) is irrelevant to
the issue of priorities and does not modify the plain language of § 3-116(b)(3).
Furthermore, the Legislature has already balanced the equities when enacting the priority
scheme at issue here, and the court sees no compelling reason why it should put its
fingers on the scale in this instance.
Order
VHFA’s motion for partial summary judgment is granted.
Dated at Burlington this 11th day of August, 2011.
______________________________
Helen M. Toor
Superior Court Judge
6
EverHome Mortg. Co. v. Murphy, No. 115-3-10 Bncv (Hayes, J., Dec. 6, 2011)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
SUPERIOR COURT
Bennington Unit
EverHome Mortgage Company,
Plaintiff
v.
Robert G. Murphy, Antoinette D. Murphy,
and Bourn Brook Condominium Assoc.,
Defendants
CIVIL DIVISION
Docket No. 115-3-10 Bncv
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DECISION ON MOTION FOR RELIEF FROM JUDGMENT
On April 6, 2011, Judge Wesley issued a judgment and decree of foreclosure by
judicial sale. On August 11, 2011, Bourn Brook Condominium Association moved for
relief from that judgment order under V.R.C.P. 60(b), arguing that its “super-priority” to
the proceeds from any judicial sale should include all unpaid association fees from the
filing of the foreclosure action until judicial sale. Robert and Antoinette Murphy owed
the Bourn Brook Condominium Association (Association) $9,540.00 in condominium
assessments as of September 30, 2011, dating back to 2005, and the Association seeks
“super-priority” treatment of $2,950 of those fees. The plaintiff objects to this request,
and argues that under 27A V.S.A. § 3-116(c,), the Association is entitled only to unpaid
association fees for “the six months immediately preceding institution of an action to
enforce the lien.”
The statutory language governing the priority of liens is not ambiguous. It
provides condominium associations a lien for unpaid assessments, and gives such liens
super-priority over pre-recorded first mortgages “during the six months immediately
preceding institution of an action to enforce the lien.” 27A V.S.A. § 3-116(b)(3). For all
other time periods, the general presumption in 27A V.S.A. § 3-116(b)(2) controls, i.e.,
whoever is first in time is first in right. First in time, first in right is not only the general
presumption in § 3-116(b)(2), but it is also the general presumption in all of secured
transaction law. The legislature carved out an exception to that presumption when it
created the six-month super-priority period. Such exceptions to common law
presumptions should be construed narrowly by courts. State v. Deyo, 2006 VT 120 ¶ 16,
181 Vt. 89 (“It is well settled that statutes in derogation of the common law are to be
construed narrowly.”) (citing 3 Sutherland Stat. Const. § 61.01 (5th ed.1992)).
In support of their positions, the parties have cited to two recent and competing
interpretations of Section 3-116(c) in Superior Court, Civil Division cases. Wells Fargo
Bank v. Schunck et al., No. 193-4-10 Wmcv, slip op. (Vt. Super. Ct. Apr. 28, 2011)
(Wesley, J.); Vermont Housing Finance Authority v. Coffey et al., No. S0367-11 CnC, slip
op. (Vt. Super. Ct. Aug. 11, 2011) (Toor, J.).
The Schunk opinion notes that “the statutory scheme strikes a careful balance
between the secured positions of the first mortgage holder and the condominium
associations,” and that a literal interpretation of the statute “leads to such unjust results
as to require that it be rejected as yielding absurd consequences.” 193-4-10 Wmcv at 2.
In Schunk, the court also focuses on the reality that the foreclosure process in Vermont
– and indeed in the country – has tended to take much longer in recent years than it
ever has in the past. This fact means that condominium associations are often left in
2
the same position as other secondary creditors with respect to fees that accrue during
the pendency of actions. Therefore, the court in that case held that “all unpaid
assessments which continue to accrue while the action is pending should be paid first
from the proceeds of any sale.” Id. at 1.
In the Coffey decision, the court concluded that “[t]he plain language of the
statute is clear and controls this issue.” No. S0367-11 CnC, at 4. It held that “it would
be presumptuous to introduce new policy considerations to the mix that could add
significant additional assessments to the secured lenders’ tab.” Id. at 5.
This court concludes that the Coffey decision is the better reasoned and more
persuasive argument. The language of the statute is clear, and must be enforced. It is
therefore ordered that Bourn Brook is entitled to a super-priority lien over EverHome
only for the assessments that accrued between October 25, 2009 and March 25, 2010
when the complaint was filed.
The plaintiff is invited to submit an amended final judgment order that conforms
to this opinion within two weeks of this decision.
Dated at Bennington, this 6th day of December, 2011.
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Katherine A. Hayes
Superior Judge
3
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Chase Home Fin., LLC v. Maclean, No. 424-6-10 Rdcv (Teachout, J., Jan. 31, 2012)
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
STATE OF VERMONT
SUPERIOR COURT
Rutland Unit
CIVIL DIVISION
Docket No. 424-6-10 Rdcv
CHASE HOME FINANCE, LLC
Plaintiff
v.
STEVEN P. MACLEAN, et al.,
Defendants
DECISION
Motion for Reconsideration
regarding
Priority of Association Lien
The issue before the Court is the extent of the priority of the condominium association
lien over the plaintiff’s first mortgage. This is a mortgage foreclosure case in which Plaintiff
Chase Home Finance seeks foreclosure on its first mortgage. The property is a condominium
unit, and the Condominium Association responded to the suit with a cross-claim for foreclosure
on its unpaid condominium association fees.
Both foreclosing parties are entitled to judgment, but a dispute arose in the course of
preparation of the form of judgment. Chase acknowledges the Association’s priority for its lien
for the period of 6 months prior to the filing of the Association’s cross-claim, but not as to the
amounts that accrued during the pendency of the case. The Association claims priority of its lien
commencing 6 months prior to the filing, and continuing throughout the case.
This Court ruled in favor of the Association on July 27, 2011, adopting the reasoning in a
trial court opinion on the issue in Wells Fargo Bank v. Nancy Schunk, et al, No. 193-4-10 Wmcv
(Vt. Super Ct. April 28, 2011) (Wesley, J). A motion for reconsideration was filed and this
Court heard oral argument on the issue on November 30, 2011. Chase was represented by
Attorney Joshua Lobe, and the Association was represented by Attorney William Meub.
Two other written trial court decisions have since been made on the issue, both in favor
of the first mortgage holder’s position. Vermont Housing Finance Authority v. Gail H. Coffey, et
al., S0367-11 CnC (Vt. Super Ct. Aug. 11, 2011) (Toor, J.), and EverHome Mortgage Company
v. Robert G. Murphy, et al., No. 115-3-10 Bncv (Vt. Super. Ct. Dec. 6, 2011) (Hayes, J.).
Upon reconsideration and further reflection, this Court declines to change its ruling,
partly for the reasons set forth in Judge Wesley’s ruling in Schunk, and also for the reasons set
forth below.
The analysis calls for statutory construction of 27A V.S.A. Sec. 3-116 and harmonization
of that section on Lien for Assessment from the Uniform Common Interests Ownership Act with
the statutory scheme for mortgage foreclosures set forth in Title 12. Section 3-116 is part of a
uniform law drafted by a national organization and designed for use in a large number of states,
which have a variety of different foreclosure statutes. As the Uniform Comment states with
respect to the lien priority issue, “the law of each State should be reviewed and amended when
necessary.” No legislative history has been brought to the Court’s attention indicating that the
Vermont Legislature, in adopting the uniform act, gave particular attention to section 3-116
(b)(3) on the priority of an association’s lien within the context of Vermont foreclosure
procedures.
This context has implications for the manner in which the statute is interpreted, as it is
unlikely that the Vermont Legislature has made a specific policy determination on the specific
issue at hand, although it did make a policy choice to adopt the general framework for handling
association liens when it adopted the uniform law. What is likely is that there was no specific
focus on the part of the Vermont Legislature on the particular issue presented in this case, with
the result that the courts are left with the task of interpreting the statute in a manner that makes
sense of the language and furthers the statutory purpose. In conducting such an interpretation, it
is important to consider not just the specific language of one subsection of the uniform law, but
the operation of the law as a whole, with particular attention to the interaction with Vermont
foreclosure law.
While the plain language of a portion of subsection (3) of subparagraph (b) of Section 3116 is clear as to the 6-month period prior to the filing of the association’s cross-claim, the
situation with respect to the period after the filing, specifically between filing and sale, is not
addressed. The statute is actually silent as to this period. The analyses in the Coffey and Murphy
decisions rely on the principle that the 6-month priority was an exception to the general rule of
first in time is first in right, and that exceptions should be narrowly construed. The Schunk
analysis proceeds from the starting point that the statutory provision represents a balance of
interests between the first mortgage holder’s interests and that of the condominium association,
and proceeds to analyze those interests in context. It does not see the 6-month period as a
limited exception, but sees the entire provision as a balancing of interests.
This approach is grounded in the explanation of Uniform Law Comment 2: “A
significant departure from existing practice, the six months’ priority for the assessment lien
strikes an equitable balance between the need to enforce collection of unpaid assessments and the
obvious necessity for protecting the priority of the security interests of the lenders.” The
Comment proceeds to address the practical options for lenders when the situation arises, such as
to establish escrow requirements or to pay the fees themselves, both of which would maintain the
payment of condominium assessments to avoid weakening of the infrastructure of the common
interest community. These options suggest the continuation of the association’s priority.
The statute and Comment 2 make clear that the condominium lien does not get the same
full priority as real estate taxes or other governmental assessments do, but it does get a special
priority at a level between the government and the first mortgage holder in order to strike an
2
equitable balance between its need to maintain the infrastructure of a common interest
community—which is akin to the purpose of real estate taxes and governmental assessments—
and the interest of the first mortgage holders, who are in a position to protect themselves with
respect to such charges. Moreover, the first lender is on notice of the priority of the association
lien by virtue of the Declaration and 27A V.S.A. Sec 3-116 (d): “Recording the declaration
constitutes record notice and perfection of the lien. No further recording of any claim or lien for
assessment under this section is required.” By virtue of section 3-116 (b)(3), they are also on
notice of the six-month reachback provision.
I will not repeat here the reasoning set forth in the Schunk decision, which this Court
continues to adopt as sound, but will make one comment on it. In footnote 1, the Court took
judicial notice of the current climate in foreclosure practice and its effect on the lack of
predictability in the length of time necessary for disposal of a foreclosure case. The fact that a
number of factors have converged to make some foreclosure cases proceed more slowly than
they might otherwise should have no impact on the legal interpretation of the statute, and indeed
the analysis in Schunk is sound even without that observation.
If a residential foreclosure case proceeds as fast as it possibly can under Title 12, it takes
a minimum of approximately 9 months, with one year being a realistic norm. Under the Schunk
analysis, the uniform law drafters created a priority for condominium associations so that they
could meet their ongoing expenses, and made that priority retroactive for six months, in order to
avoid an interruption in the association’s ability to meet its ongoing expenses. The lenders are in
a position to protect themselves as noted in the Comment, whereas the common interest
communities, despite having a lien for assessments that is superior to the first lender’s mortgage,
have no means of protection from losing needed assessments altogether if a property becomes
less valuable than the amount due on the first mortgage, even if the foreclosure case only lasts 9
months, unless the priority of the association lien continues throughout the pendency of the case.
Actually, associations do have an alternate means of protecting themselves, and this
should be considered in construing the statute. That is, there is nothing to prevent an association
from bringing a new foreclosure action every six months, throughout the life of the lender’s
foreclosure case, in order to obtain priority for its lien for every six month period. This is
permissible under the statute, and would maintain the continuing priority of the association’s
lien. However, this makes no economic sense, as it increases expenses and attorneys’ fees for all
parties concerned—the association, the owner, the first lender, and other parties to the case--and
is contrary to the goal of judicial economy. It makes more sense to construe the statute as
providing for an association lien for assessments to have a priority over a first mortgage for the
period from 6 months prior to the association’s filing of its first foreclosure action throughout the
pendency of the action. This explains why the statute is silent as to that period: the priority of
the association lien is created by the statutory scheme, and the 6 month provision expands its
reach retroactively to 6 months prior to filing. It is an expansion of the priority, and not an
exception to it.
It should also be noted that Sec 3-116 has application and effect in other circumstances
beyond a mortgage foreclosure action brought by the first lender. For example, when the first
lender has not filed a foreclosure action but the owner has stopped paying condominium fees and
3
the association is the first to file a foreclosure action, the statute requires the association to notify
the first lender: “The association’s lien may be foreclosed pursuant to section 4531a of Title 12
in which case the association shall notify all the lienholders of the affected unit of its action.”
27A V.S.A. Sec 3-116 (i). This demonstrates the effect of the overall scheme: the association is
required to give notice to the first lender so that the first lender can respond to protect itself from
the fact that the association’s lien has priority status over its first lender security interest, and will
continue to do so. This makes the Comment make sense: if the priority status of the association
lien is going to continue to be superior to that of the first lender, the first lender needs notice so
that it can take action to protect its interest as described in the Comment.
For the reasons set forth above, after full reconsideration, the Court declines to change its
ruling of July 27, 2011.
Dated at Rutland, Vermont this31st day of January, 2012.
_________________________
Hon. Mary Miles Teachout
Superior Judge
4
The Vermont Statutes Online
file:///C:/Users/lwelcome/AppData/Local/Microsoft/Windows/Temporary%20Internet%20Files/Content
.Outlook/1KAO8ZD8/Title%2027A%20Section%203-116.htm
Title 27A: Uniform Common Interest Ownership Act (1994)
Chapter 3: MANAGEMENT OF THE COMMON INTEREST COMMUNITY
27A V.S.A. § 3-116. Lien for sums due association; enforcement
§ 3-116. Lien for sums due association; enforcement
(a) The association has a statutory lien on a unit for any assessment attributable to
that unit or fines imposed against its unit owner. Unless the declaration otherwise
provides, reasonable attorney's fees and costs, other fees, charges, late charges, fines,
and interest charged pursuant to subdivisions 3-102(a)(10), (11), and (12) of this title,
and any other sums due to the association under the declaration, this title, or as a result
of an administrative, arbitration, mediation, or judicial decision, are enforceable in the
same manner as unpaid assessments under this section. If an assessment is payable in
installments, the full amount of the assessment is a lien from the time the first
installment becomes due.
(b) A lien under this section is prior to all other liens and encumbrances on a unit
except:
(1) liens and encumbrances recorded before the recordation of the declaration;
and
(2) except as otherwise provided in subsection (c) of this section, a first
mortgage or deed of trust on the unit recorded before the date on which the
assessment to be enforced became delinquent; and
(3) liens for real estate taxes and other governmental assessments or charges
against the unit.
(c) A lien under this section is also prior to all security interests described in
subdivision (b)(2) of this section to the extent of the common expense assessments
based on the periodic budget adopted by the association pursuant to subsection 3-
115(a) of this title which would have become due in the absence of acceleration
during the six months immediately preceding institution of an action to enforce the
lien. Subsections (b) and (c) of this section do not affect the priority of mechanics' or
materialmen's liens, or the priority of liens for other assessments made by the
association. A lien under this section is not subject to the provisions of 27 V.S.A.
chapter 3.
(d) Unless the declaration otherwise provides, if two or more associations have
liens for assessments created at any time on the same property, those liens have equal
priority.
(e) Recording the declaration constitutes record notice and perfection of the lien.
No further recording of any claim or lien for assessment under this section is required.
(f) A lien for unpaid assessments is extinguished unless proceedings to enforce the
lien are instituted within three years after the full amount of the assessment becomes
due.
(g) This section does not prohibit an action against unit owners to recover sums for
which subsection (a) of this section creates a lien or an association from taking a deed
in lieu of foreclosure.
(h) A judgment or decree in any action brought under this section shall include an
award of costs and reasonable attorney fees to the prevailing party.
(i) The association, upon request made in a record, shall furnish to a unit owner a
statement of the amount of unpaid assessments against that unit. If the unit owner's
interest is real estate, the statement shall be recordable. The statement shall be
provided within 10 business days after receipt of the request and is binding on the
association, the executive board, and every unit owner.
(j) The association's lien may be foreclosed pursuant to 12 V.S.A. § 4531a and
subsection (o) of this section. The association shall give the notice required by statute,
or if there is no such requirement, reasonable notice of its action to all lienholders of
the unit whose interest would be affected.
(k) A unit owner is not exempt from liability for payment of common expenses by
a waiver of the use or enjoyment of any of the common elements or by abandonment
of the unit.
( l ) In an action by an association to collect assessments or to foreclose a lien on a
unit under this section, the court may appoint a receiver to collect all sums alleged to
be due and owing to a unit owner before commencement or during pendency of the
action. The court may order the receiver to pay any sums held by the receiver to the
association during pendency of the action to the extent of the association's common
expense assessments based on a periodic budget adopted by the association pursuant
to section 3-115 of this title.
(m) An association may not commence an action to foreclose a lien on a unit under
this section unless:
(1) the unit owner, at the time the action is commenced, owes a sum equal to at
least three months of common expense assessments based on the periodic budget last
adopted by the association pursuant to subsection 3-115(a) of this title and the unit
owner has failed to accept or comply with a payment plan offered by the association;
and
(2) the executive board votes to commence a foreclosure action specifically
against that unit.
(n) Unless the parties otherwise agree, the association shall apply any sums paid by
unit owners that are delinquent in paying assessments in the following order:
(1) unpaid assessments;
(2) late charges;
(3) reasonable attorney's fees and costs and other reasonable collection charges;
and
(4) all other unpaid fees, charges, fines, penalties, interest, and late charges.
(o) Notwithstanding subsection (a) of this section, unless sums due the association
include an unpaid assessment, a foreclosure action may not be commenced against the
unit unless the association has a judgment against the unit owner for the sums due the
association and has perfected a judgment lien against the unit.
(p) Every aspect of a foreclosure, sale, or other disposition under this section,
including the method, advertising, time, date, place, and terms, must be commercially
reasonable. (Added 1997, No. 104 (Adj. Sess.), § 3, eff. Jan. 1, 1999; amended 2001,
No. 46, § 13; 2009, No. 155 (Adj. Sess.), § 35, eff. Jan. 1, 2012.)
The Vermont Statutes Online
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.Outlook/1KAO8ZD8/Title%2027A%20Section%204-109%20(2).htm
Title 27A: Uniform Common Interest Ownership Act (1994)
Chapter 4: PROTECTION OF PURCHASERS
27A V.S.A. § 4-109. Resales of units
§ 4-109. Resales of units
(a) Except in the case of a sale where delivery of a public offering statement is
required or is exempt under subsection 4-101(b) of this title, a unit owner shall furnish
to a purchaser before the conveyance or transfer of the right of possession of a unit,
whichever is earlier, a copy of the declaration, without any plats and plans, the
bylaws, the rules or regulations of the association and a certificate which discloses the
following:
(1) The effect on the proposed disposition of any right of first refusal or other
restraint on the free alienability of the unit held by the association.
(2) The amount of the periodic common expense assessment and any unpaid
common expense or special assessment currently due and payable from or by the
seller.
(3) Any other fees payable by the owner of the unit being sold.
(4) The amount of any reserves for capital expenditures and of any portions of
those reserves designated by the association for any specified projects.
(5) The most recent regularly prepared balance sheet and income and expense
statement, if any, of the association.
(6) The current operating budget of the association.
(7) Any unsatisfied judgments against the association and the status of any
pending suits in which the association is a defendant.
(8) The amount of any insurance coverage provided for the benefit of unit
owners.
(9) Any alterations or improvements to the unit, or to the limited common
elements assigned to it which violate any provision of the declaration within the
knowledge of the executive board.
(10) Any violations of the health or building codes with respect to the unit, the
limited common elements assigned to it, or any other portion of the common interest
community within the knowledge of the executive board or managing entity.
(11) The remaining term of any leasehold estate affecting the common interest
community and the provisions governing any extension or renewal of it.
(12) Any restrictions in the declaration affecting the amount that may be
received by a unit owner upon sale, condemnation, casualty loss to the unit or the
common interest community, or termination of the common interest community.
(b) The association, within 10 days after a request by a unit owner, shall furnish to
the unit owner a certificate containing the information necessary to enable the unit
owner to comply with this section. A unit owner providing a certificate pursuant to
subsection (a) of this section is not liable to the purchaser for any erroneous
information provided by the association and included in the certificate.
(c) A purchaser is not liable for any unpaid assessment or fee greater than the
amount set forth in the certificate prepared by the association. A unit owner is not
liable to a purchaser for the failure or delay of the association to provide the certificate
in a timely manner, but the purchase contract is voidable by the purchaser until the
certificate has been provided and for five days thereafter. (Added 1997, No. 104 (Adj.
Sess.), § 3, eff. Jan. 1, 1999.)
VBA UCIOA Seminar
I.
When does VCIOA apply?
a. Pre- Existing Communities (Created prior to January 1, 1999) are generally exempt
unless they opt in
i. Certain sections of VCIOA may apply to these (See 27A Section 1-204)
1. 1-103; 1-105, 1-106; 1-107;
2. 2-103; 2-104; 2-121
3. 3-102(a)(1) through (6) and (11) through (16); 3-111, 3-116, 3-118
4. 4-109; 4-117
b. Exceptions for small projects (1-203)
i. Planned community with no more than 24 units; or
ii. Small (under $300) common expense liability
c. Non-residential and mixed-use (1-207)
d. Small Condominiums (1-209)
i. Fewer than 10 units
ii. Exemption was supposed to sunset January 1, 2012, but see repeal of sunset
(2011 Act 52, Section 26)
II.
Title Issues
a. Defective Declaration and Plans. (2-109)
i. % don’t add up to 100%
ii. Phantom units
b. Confusion between “Planned Community” and “Condominium”
i. “Planned Community” = common area owned by HOA
ii. “Condominium” = common area owned as % interest by unit owner
c. Phased Condominiums
i. All structural components and mechanical systems of all building containing or
compromising any units must be substantially completed before a declaration
or amendment may be recorded.
ii. Recorded Certificate of completion executed by an independent professional
engineer, surveyor or architect “as appropriate and if authorized by the
respective practice acts of each profession in 26 VSA Chapters 3, 20, 45).
III.
Curing Defects
a. Revised plans
b. Amendment to Declaration vs. Re-Stated Declaration
i. Authority of Declarant to unilaterally execute. (reserved POAs)
ii. Required vote of unit owners
iii. Consent by mortgage holders.
c. Impact on Public Offering Statement
d. Impact on Permits
IV.
Homeowners Association
a. Corporation vs. unincoporated association
b. Section 3-111 – Tort Liability
i. “A unit owner is not liable, solely by reason of being a unit owner, for any injury
or damage…..”
c. Caveat: Daniels v. Hartford Elks Club.
I. Formation of Common Interest Communities before VCIOA
Common Interest Communities. There was no legal framework for creating a planned
community before VCIOA other than the principles of common law. The basis for forming a
planned community was a common set of covenants imposed on all of the units/lots in the
project and the formation of some form of entity to own the common lands. Imposing the
common set of covenants might have been accomplished by (i) recording a declaration of
covenants, restrictions, and liens before the sale of the first lot, then making each sale of a lot
subject to the terms of the declaration; or (ii) by inserting the covenants into the deeds to the lots.
Either method worked under common law because the terms and conditions of the declaration
satisfied all of the requirements to create covenants that ran with the title to the land. In addition,
those declarations often included a provision by which the unit owners were obligated to
contribute a prorata portion of the costs of maintaining the common property. Although there
was no statutory basis for imposing such an obligation, the Vermont Courts ultimately adopted
the “common benefit, common expense” rule which held that anyone who enjoyed the benefit of
a particular common improvement was obligated to contribute to the costs of maintaining and
repairing the property which conferred the benefit. Attorneys often took the position that the
covenants themselves created a contract to which all of the owners were a party, and were then
contractually bound to comply with the covenants. Management of the larger planned
communities was entrusted to a non-profit corporation organized by the developer. Owners of
the units in the project became members of the non-profit and over time acquired voting rights.
The statutes regulating the formation and operation of corporations applied to the organized nonprofits and provided the framework for managing the homeowners/unit owners associations.
1
Condominiums. Until 1968 there were no condominiums in Vermont. Condominiums
are a creation of statute and only by strictly complying with the statute does a condominium
exist. The Vermont Condominium Act 1 followed one of the early model statutes. After its
adoption, the statute was not updated to keep the statute current with the developments in
condominium law occurring throughout the country. As a result, condominium projects were
generally limited to residential and small commercial projects which fit within the constraints of
the statute. Most of the issues that arose in the formation of the planned communities, such as
the liens for assessments, governance issues and relative rights of the owners among themselves
were addressed directly in the condominium statute.
After 1968 and before 1999, condominium projects had to be configured to fit the
requirements of the statute. In general, a developer could only create a condominium in a
building or series of buildings that included an enclosed space to form one or more units. In
much of the rest of the country, there were parking lots, docks, campgrounds and all kinds of
projects operated under the condominium form of ownership. The other significant issue with
the Vermont form of Condominium Statute was the absence of any provisions for expanding a
condominium project. The exact scope of the expansion issue is addressed below.
The formation of a pre-VCIOA condominium was governed by the requirements of the
statute. Without strict compliance with the statutory provisions, there was no condominium. If
the condominium was not properly formed, the persons who thought they owned units in a
condominium merely owned all of the property that was included in the condominium jointly.
There were three requirements to the formation of a condominium under the pre-VCIOA
1
27 V.S.A. §1301 et esq.
2
statute.
1.
A Declaration - The Declaration is a written instrument, executed by the
developer and recorded in the land records. 27 V.S.A. §1311 dictated the
contents of the Declaration. There are twelve subsections with descriptions of the
specific information that must appear in the document. In general, the
Declaration must include, (i) a description of the land to be made subject to the
condominium; (ii) a description of the buildings and improvements included in
the condominium; (iii) a description of the units, including unit numbers, area,
number of rooms; (iv) a description of the common elements (which would
include buildings, improvements, land, property rights attached to the property,
etc.); (v) a description of limited common elements (property set aside for the use
of one or more units, but less than all of the units); (vi) a value of the unit and the
percentage of interest in the common elements appurtenant to the unit; (vii) uses
and restrictions on use of the buildings; (viii) the name of the agent for process;
(ix) a method for determining when a unit would be rebuilt after casualty loss or
condemnation; (x) the process for amending the Declaration; (xi) references to the
recorded plans; and (xii) anything else that the Declarant wanted to include.
2.
Bylaws for the Association. The statute automatically created a unit owners
association to manage the condominium. Many developers actually incorporated
the association so it would not be deemed to be an unincorporated association.
Note that the statute does not require the association be incorporated. Like the
Declaration, the statute (27 V.S.A. §1319) described the minimum contents of the
bylaws to include methods of electing a board of directors, appointing or electing
3
officers, procedures for determining what maintenance would be required,
procedures for computing and collecting assessments, the process for amending
the bylaws, method for adopting rules and regulations, restrictions on use of units
and the common lands not included in the Declaration and other provisions
related to the operation of the association.
3.
Plans. The plans are the area where most pre-VCIOA condominiums have
problems. The statute (27 V.S.A. §1313) detailed two types of required plans
and mandated certain certifications that must be included with the plans. A
condominium does not exist unless there is a site plan showing the location of the
units and the identification of the units on the land included in the condominium.
In addition, the formation of the condominium required the filing of floor plans
showing the layout, location, dimensions, and identifying information for the
units. The plans did NOT meet the requirements of the statute unless the plans
included a VERIFIED statement of an architect or engineer or surveyor affirming
that the recorded plans were (i) an accurate copy of the plans as filed with and
approved by the municipal authorities or other governmental authority having
jurisdiction over the approval of construction of the improvements; and (ii) either
a certification on the plans or a separate certification (which must be in the form
or an attachment to an amendment to the declaration) by the engineer, architect
or surveyor that the plans, as recorded, accurately depict the layout, location,
dimensions, and identifying numbers of the units AS BUILT. The “as built”
requirement is particularly important as some Declarations and plans were
recorded before the construction of the buildings was complete and therefore
4
could not certify as the actual construction of the buildings and improvements.
Knowing the basic statutory elements for the formation of a pre-VCIOA condominium is
important because the law does not recognize a good faith attempt to form the condominium
correctly. Either the condominium is properly formed and is therefore a legal condominium or it
fails and there is no condominium.
The pre-VCIOA statute did not directly address expansion of a condominium or the
phasing of a multi-unit condominium. In fact, at least one provision of the condominium law
implied that phasing or expansion was not allowed by prohibiting the alteration of the common
interest assigned to a unit without the unit owners specific consent. Realistically it was
impossible to obtain the consent of every unit owner to allow a condominium project to be
expanded or a new phase started.
Phasing and expansion of a condominium are important
because most developers did not have the financial resources to build a project all at one time. In
addition, most developers did not want to build to many units of any one kind or price range until
the developer was sure the units could be sold. Developers found several ways to create the
opportunity to phase or expand a project. Sometimes the developer would record an early site
plan showing a number of different lots, each of which would be developed in time with a
specific number of units. Each of the little projects would be its own condominium and all of the
little condominiums would be incorporated under a single large master association. That process
worked as long as the developer was diligent about getting all of the necessary subdivision
permits for the separate lots. Many were not and problems of that nature are still being resolved
years after the condominiums were formed. The second method to provide for phasing and
expansion was to create a complex table in the initial declaration that would identify the proper
percentage of interest for each unit based on how many and which phases were built. The
5
concept in that mechanism was to identify for each purchaser what percentage of interest would
attach to that purchaser’s unit at any point in the life of the project. The developer could then
assert that there was no change to the percentage of interest because all possible combinations of
percentages of interest had been identified and disclosed. A third method which seems to be the
least ideal under the statute was to reserve to the declarant/developer the right to amend the
declaration to include new units and have the reservation phrased as a power of attorney by the
purchaser to the developer.
6
Inspections Of Public Buildings, A Contract Issue, A Title
Issue Or Just An Issue
Is a condominium unit a public building?
The easy answer to that question is “yes”.
20 V.S.A. § 2730. Definitions
(a) As used in this subchapter, "public building" means:
(1). . .
(C) a cooperative or condominium;
(b) The term "public building" does not include:
(1) an owner-occupied single family residence, unless used for a purpose
described in subsection (a) of this section;
All public buildings must comply with the provisions of 20 V.S.A. Chap. 173.
So, if this condominium unit is a public building, does the statute
require an inspection at the time of sale?
The answer to that question appears to be “no” under the provisions of the state statutes
but everyone whose local fire marshal/fire department has assumed responsibility for
the “fire safety inspection” should confirm that there is no time of sale inspection
required under the local ordinances.
OK, if there is no applicable statute or ordinance, do the
provisions of the typical purchase and sale contract require that
the Seller provide the results of an inspection or certificate of
occupancy?
There has been no case decided at the Supreme Court level (I don’t know about trial
court decisions), that has included the requirement of a fire safety inspection under the
terms of the typical residential contract. If the buyer shows the contract to an attorney
before it is signed, it is always best to insert a provision requiring an inspection and
report if there is any question about whether the property complies. It is possible that
the buyer may arrange for an inspection if there is a general inspection contingency that
addresses the physical condition of the property. Many housing inspectors will not
certify that a property complies, but the inspector may be sensitive to the issues that also
appear in fire safety inspections.
But is a failure to comply with the life safety/fire safety code an
encumbrance?
It is not unreasonable to assert that a property that does not comply with the life safety
code and fire prevention code is encumbered by an encumbrance which does affect
marketable title, and that the proper remedy is to assert that the title is defective.
The issue is how do you determine whether the property complies (no encumbrance) or
does not comply (encumbered) and the answer seems obvious. Either the Seller can
provide an inspection report that says – it passed, and the property is not encumbered
or the Buyer can arrange an inspection. However, the later course is difficult unless the
contract provides for a broad due diligence process – or perhaps (don’t know about this)
the “housing inspection” contingency might be adequate unless the inspection is defined
narrowly.
If the failure to comply with life safety and fire safety constitutes an encumbrance
covered under the title contingency which allows the purchaser to assert that a defect
exists that the Seller must attempt to clear ( by getting the inspection and proving the
property complies) is not an unreasonable argument.
An encumbrance exists when the consequences of the violation diminish the value of the
property as a result of the threat of enforcement for violations through fines, injunction
or the like. (See generally the Hunter and Bianchi decisions cited below). All of those
risks exist in the event of a failure to comply with life safety or fire safety codes. It is
possible that a court could adopt a “Bianchi”-like standard to justify a conclusion that an
encumbrance exists when a property subject to the code does not comply.
From the Statement of Facts in Bianchi v. Lorenz, 166 Vt. 555, 701 A.2d 1037 (Vt. 1997)
[166 Vt. 557] In June 1987 defendants obtained a building permit. The
application provided that "[a]ll construction [was] to be completed in accordance
with the Zoning Laws of the Town of Jericho and State of Vermont." Jericho's
zoning regulations require an owner of a newly constructed home to apply for a
certificate of occupancy. Jericho, Vt., Zoning Regulations § 1204(2) (1981). The
certificate will be issued only after the home is inspected and found to be in
compliance with the building and septic permits. The zoning regulations make it
unlawful to use or occupy a building until issuance of a certificate of occupancy.
Id. § 1203(2). Under 24 V.S.A. §§ 4444 and 4445, the town has the authority to
enforce its zoning laws through fines and injunctions.
This is from the first part of the decision.
Defendants argue that a violation of a zoning ordinance does not constitute an
encumbrance for purposes of the covenant against encumbrances in a warranty
deed. We disagree and hold that an encumbrance is present at least when the
seller can determine from municipal records that the property violates local
zoning regulations at the time of conveyance, and the violation substantially
impairs the purchaser's use and enjoyment of the property.
This is the key language in my opinion from Bianchi
Two differences between this case and Hunter Broadcasting require some
analysis. First, our decision in that case relied, in part, on the section of the
subdivision rules that prohibited resale of a subdivided lot without the permit
needed for the original subdivision. There is no identical provision in this
regulatory scheme. We did not mean to suggest in Hunter Broadcasting that
a regulatory violation is an encumbrance only if it creates an impairment of
title. Indeed, by
Page 1040
definition an encumbrance creates a " 'diminution of the value of the estate
of the tenant [that is] consistent[ ] with the passing of the fee.' " Olcott v.
Southworth,115 Vt. 421, 424, 63 A.2d 189, 191 (1949) (emphasis added)
(quoting Bouvier Law Dictionary, "Incumbrance" (Rawle's 3d rev.)). The point
of HunterBroadcasting was that the subdivision rule created a substantial
diminution in value.
Although the Jericho zoning ordinance does not prohibit reconveyance of the
property, it does severely diminish the value of this residential property. The
ordinance makes it unlawful to "use or occupy ... any building or other structure,
or part thereof, for which a zoning permit is required until a certificate of
occupancy has been issued by the Zoning Administrator." Jericho, Vt., Zoning
Regulations § 1203(2) (1981). The zoning administrator has the power to enforce
this provision by an action to "restrain, correct or abate such ... use, or to prevent
... any ... use constituting a violation." 24 V.S.A. § 4445. The property involved in
this case is a small residential lot with a four-bedroom home on it. It is difficult
to conceive of a greater [166 Vt. 560] diminution in value of a residential
property than that accompanying the loss of the right to use or occupy the home.
Defendants argue that the violation is latent because it cannot be found in
the land records. As we held in Hunter Broadcasting, a violation is not latent
merely because the purchaser must examine the records of a separate
agency. [2] Likewise here, the violation
Page 1041
of the [166 Vt. 561] zoning regulations is not latent merely because
defendant must examine municipal records in addition to land records.
It is unclear whether the Supreme Court’s ruling in Trinder v. Connecticut Attorneys
Title Ins. Co., 22 A.3d 493, 2011 VT 46 (Vt. 2011) based on this quote:
¶ 17. We are not persuaded. Homeowners' ability to sell their home
at a reasonable price is separate from the question of whether
homeowners hold marketable title to their property. As one scholar
explained, "defects which merely diminish the value of the property,
as opposed to defects which adversely affect a clear title to the
property, will not render title unmarketable within the meaning and
coverage of a policy insuring against unmarketable title." 11 L. Russ
& T. Segalla, Couch on Insurance 3d § 159:7, at 159-17 (2005).
-
intends to overrule that portion of Bianchi that suggests that the impact of a
significant use/regulatory issue that would seem to diminish the value of the
property still constitutes an encumbrance. The Court continued in Trinder to say:
While the location of the septic system on the museum property may have
had an impact on the value of homeowners' property, that is a separate
question from the issue of title. Id. (" Plaintiffs thus have confused title with
the physical condition or value of the property they purchased." ). " [O]ne
can hold perfect title to land that is valueless and one can have ‘
marketable title’ to land while the land itself is unmarketable." 11 Russ &
Segalla, supra, § 159:7, at 159-17. The possibility that in the future the
museum might revoke permission and require removal of the septic
system did not implicate homeowners' title.
The confusion in this particular case stems from the Court’s ruling that the economic
impact of the problems with the septic system did not render the title unmarketable, but
the Court did not indicate whether that result changes the test in Bianchi for
determining whether there is an encumbrance on the title as a result of a problem that
diminishes the value of the property. In a traditional analysis, a title may be marketable
but encumbered if the encumbrance is removed prior to closing. That may be one way
to reconcile the decisions in the two cases.
What is the buyer’s attorney obligation if there is not a provision that
allows for inspections?
There is a difference between the buyer’s right to have an inspection and the
attorney’s/title examiner’s obligation. Estate of Edward Fleming v. David Nicholson, et
al., 168 Vt. 495 (1998) clearly indicates that the title examiner is obligated to disclose to
the client information about matters that would diminish the value of the property. The
standard in Fleming is – the attorney searching the title must “inform and explain to the
client the implications of any clouds on the title that would influence a reasonable
purchaser not to purchase the property.” It will likely come out in the case that tests this
theory that costs to rehab a property to comply, fines, penalties, injunctions, defense
costs and the like would diminish the value of a non-complying property or cause an
informed purchaser not to purchaser, or at least make some adjustment for the potential
risks.