GSL Decision Alert – MA Appeals Court Decision on Beechwood Case
MASSACHUSETTS APPEALS COURT DECISION GIVES ASSOCIATIONS A VICTORY AGAINST DEVELOPER
May 16, 2019 – As everyone knows, or should know by now, owning a condominium unit means that the owner not only has the complete ownership interest in the unit but, along with the other owners, has an undivided interest in the common area. This form of ownership leads to the question: what is the effect on undeveloped common area as the result of an issuance of partial mortgage releases to unit purchaser where the mortgage, recorded prior to the Master Deed, is never completely discharged? What could happen to that undivided interest if the holder of a mortgage recorded prior to the Master Deed foreclosed on an undeveloped portion of the common area? On Wednesday, May 14, 2019, the Massachusetts Appeals Court addressed that question in Trustees of the Beechwood Village Condominium Trust vs USAlliance Federal Credit Union & others.
When a lender lends money to a developer for the development of a condominium, the loan is secured by the grant of a mortgage to the lender which is then recorded prior to the condominium’s Master Deed. It would then follow that the land is subject to that mortgage and, should the developer default on payment of the note secured by the land, the lender could foreclose on its mortgage. Typically, shortly after the recording of the Master Deed or upon the sale of the first unit, the Developer’s mortgage is then subordinated to the condominium. After all, who would buy a unit if a mortgage holder (other than the unit owner’s mortgage holder) could foreclose on the unit because the Developer defaulted on her obligation to make payment even though the owner was paying her own mortgage. Subordination eliminates that problem…it operates to “rearrange” the recording dates so that the unit purchaser’s mortgage is not subject to that prior Developer’s mortgage. If the Developer defaults, the subordination agreement serves to protect the unit owner as the foreclosing lender could take unsold units and/ or any rights reserved to the developer in the Master Deed.
In Beechwood, the developer granted a mortgage on his land as security for a loan. The lender recorded the mortgage and, after constructing three units, the developer recorded the Master Deed, establishing the condominium. All the land was submitted to Chapter 183A, the “Condominium Statute”, and was common area. As each unit was sold, the lender issued a partial release of its mortgage.
However in Beechwood, there was no subordination agreement. As units were sold, partial releases of that prior mortgage were issued. Unfortunately, the condominium was not completed and a portion of the common area as submitted to Chapter 183A remained vacant. USAlliance argued that its issuance of partial releases on those units which had been constructed and sold did not release all the common area and that it could foreclose on that vacant portion of the land. It argued that the partial releases only operated to release the exclusive use common area appurtenant to the unit released. However, the winning argument advanced by Beechwood was that when a partial release of a mortgage on a unit is granted, it releases not only that unit but 100% of that unit’s undivided interest in the common area. In fact, as the Appeals Court stated, “the effect of the subsequent mortgage discharges by the relevant lenders upon the sale of each unit was to release the lenders’ mortgage interest in all of the common area.” (Emphasis added) The Court held that while the interest in the physical land was released, the mortgage holder’s interest in the development and easement rights reserved by the developer in the Master Deed remained. In Beechwood, while the Court found that the development rights remained, there was no way for the Developer to access the land and construct additional units as the easement rights to use the common area to access the undeveloped portion of the common area had expired.
The significance of this case cannot be emphasized strongly enough. Had the Court held otherwise there would be a real possibility that title to many units in condominiums other than Beechwood would have been “clouded” and of even greater concern, that entire associations could be wiped out by a foreclosure on undeveloped land for which no partial releases had been granted.
Just as condominiums represent the best of community living and spirit, this decision too represents the best of community spirit in the legal community. Ellen A. Shapiro, principal of GSL, had handled the case from its inception to the appellate level. Through her many years of friendship with Tom Moriarty, principal of Moriarty, Troyer and Malloy, she knew that he had long advanced the theory of the effect of partial releases in the condominium setting. Rather than simply adopting that theory as her own, she enlisted Tom on behalf of Beechwood. Not only were the best interests of Beechwood served but those of condominium communities throughout the Commonwealth.
The full opinion can be found at Trustees of the Beechwood Village Condominium Trust v. USAlliance Federal Credit Union (AC 18-P-0089)
If you have any questions about Beechwood and how it applies to your condominium, or any other condominium matters, please contact Attorney Ellen A. Shapiro at (781) 251-9800 or via email at firstname.lastname@example.org