Pre-existing duty rule

Started by RayC4 • 17 replies • 2177 views

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RayC4 (Virginia)
Posts: 173

Posted:

For any legal eagles (or wannabees) out there! A developer allocates a tract of land as subdivision common space and records it with the Plat. This common space provision was required under a County Land Regulation. (No common space meant no subdivision approval.)

This County Land Reg is stipulated in the Declaration of Covenants under "Recitals". The developer then enters into a Lease agreement for the HOA to Lease this common space from the developer. My question: Is the Lease legal and proper?

I say "no." The Courts view the Declaration as a 'contract.' Under common contract law, there cannot be valid consideration for something someone (or some entity) was obligated to do anyway. Therefore, the developer would be barred from creating the common space as his obligation, then turning around and charging the homeowner members for it (via HOA assessments). This is called the "pre-existing duty" rule. But I am not an attorney and I could be wrong....

Thoughts?

LarryB13 (Arizona)
Posts: 4,099

Posted:

Ray,

Right now there are developers banging their heads against the wall screaming, "Why didn't I think of that?"

I would agree with you that it was not legal and I see two problems:

One, assuming that the developer owned the land in question and was also in control of the association when the lease was signed there was an obvious conflict of interest and breach of fiduciary duty. As head of the association he was bound by law to act in the best interest of the HOA; instead, he used his position for his personal gain at the expense of the association. The test for breach of fiduciary duty is whether others in a similar situation would have done the same thing. No reasonable person would have entered into a lease for real estate already dedicated for a public purpose.

Two, the land is not his to lease as he has already dedicated it to the county. It is public property, more or less. He gave up his control over the land as a condition to be allowed to develop the tract.

This is a situation that definitely will require the services of a lawyer. If I were in your place I would immediately discontinue paying this lease and demand the return of all lease payments made plus interest. You might also want to contact the county and let them know that the developer has been collecting lease payments for public property. Personally, I think the developer committed a criminal act with a criminal intent by obligating the association to pay him for use of public property.

I am curious what the developer would do if you just stopped paying. Would he be stupid enough to sue? "Your honor, these people refuse to pay me for property I dedicated to the public as a condition of building their homes."

Not sure about this, but individual homeowners may have a claim against both the developer and subsequent boards over this misuse of funds.

How long has the HOA paid under this lease and how much money is involved? Is the developer still in control of the association?

NpS (Pennsylvania)
Posts: 4,216

Posted:

A few questions:

How is the tract of land titled?

How significant are the leasing costs?

Does the developer maintain or preserve the land in any way?

Sikubali jukumu. Read all posts at your own risk.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By NpS on 09/05/2014 7:54 PM
A few questions:

How is the tract of land titled?

How significant are the leasing costs?

Does the developer maintain or preserve the land in any way?

Also:

Are RE taxes paid on the land? Who pays them?

Sikubali jukumu. Read all posts at your own risk.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By LarryB13 on 09/05/2014 5:20 PM

Right now there are developers banging their heads against the wall screaming, "Why didn't I think of that?"

Hahahahaha...... tell me about it. The following should address NpS's questions as well:

I would agree with you that it was not legal and I see two problems:

One, assuming that the developer owned the land in question and was also in control of the association when the lease was signed there was an obvious conflict of interest and breach of fiduciary duty.

Both true. Developer/Declarant owned (and still has title to) the land. The Lease was concocted several days after the County officials (including the County Attorney) signed off on the Declaration. Of course, no homeowners yet -- these were just lots at the start. The Lease is signed twice by the developer -- once as Lessor, and once as Lessee (as HOA Director). Cute huh?

No reasonable person would have entered into a lease for real estate already dedicated for a public purpose.

I'm sure the phrase 'public purpose' would rankle the developer. His position is that he "owns and controls" the common space. I do not believe the County considers this land tract as 'public property.' (But maybe they are wrong....)

Two, the land is not his to lease as he has already dedicated it to the county. It is public property, more or less. He gave up his control over the land as a condition to be allowed to develop the tract.

He disagrees with all of this. He in fact uses the land for growing a crop (hay) which use is allowed in the Land Reg. I should add that shared w/s utilities are located on this same common space. However, their implementation and maintenance are the sole responsibility of the developer (while under declarant control). The County's position seems to be that the land must be allocated to the plat and cannot be developed. Beyond that, they are not interested in what 'he' does with it as long as the Land Reg is not compromised.

How long has the HOA paid under this lease and how much money is involved? Is the developer still in control of the association?

It has been several years now and the Lease amount is now $140 per month per homeowner. The developer is responsible for the taxes on the land (though he passes that thru to the members as well). The homeowners realized (too late) that this Lease amounts to the declarant's personal 401K.

Thank you for your thoughtful response. I noticed tho that you did not address the specific issue of 'pre-existing duty' as an argument here.

NpS (Pennsylvania)
Posts: 4,216

Posted:

The developer made two agreements/contracts - one with the government and one with the HOA members. In the agreement with the government, he agreed not to develop the land - Apparently, he has complied with that agreement. In the agreement with the HOA members, he agreed that the land could be used as common space for the community. In both agreements, the developer gave something and got something in return. In other words, even though you may think there was no consideration, the law would say there was. It doesn't take much.

As to the developer being the signer in both capacities, your arguments are diminished by the fact that all of this information was publicly available. It's too late to bring it up now.

Sure it's unusual that he didn't turn over the property to the HOA, but that in itself doesn't make the contracts invalid.

Where I think you may have a strong argument is on the fees he is charging. It should be easy to find out how much he is paying in taxes, etc. If the amount he is collecting is exorbitant in relation to his costs, that's something to pursue - And if he has been raising the fees over the years, those increases could be challenged as unreasonable in some circumstances.

But I have some other questions. What would happen if you stopped paying his fees? What rights would he have against your houses? I doubt that he could put a lien on your property because the property in question is owned by him, not you. It may be that his right to enforce is a lot weaker than anyone thought.

Sikubali jukumu. Read all posts at your own risk.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By NpS on 09/06/2014 11:51 AM
"the developer gave something and got something in return."

True, the developer "gave" something. My argument is: he had to give it ANYWAY pursuant to the ordinance. Does that not make a difference....?

"It's too late to bring it up now."

I am also concerned about statute of limitations, acquiescence, etc. But homeowners write 'new' checks every month, so possibly mitigating that issue.

"Sure it's unusual that he didn't turn over the property to the HOA,"

What should have happened is that the County, once permitting the utilities on the common area, should have required an easement for the homeowners. They did not.

"If the amount he is collecting is exorbitant in relation to his costs, that's something to pursue"

Actually, we are pursuing that aspect (on grounds that it is unconscionable.)

"I doubt that he could put a lien on your property because the property in question is owned by him, not you."

Another interesting thought. But he has the Lease 'wired into' the Covenants to such an extent that non-payment would be a clear violation and subject to all remedies including the Lien process. The homeowners are understandably gun-shy on that score.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RayC4 on 09/06/2014 1:36 PM

Posted By NpS on 09/06/2014 11:51 AM
"the developer gave something and got something in return."

True, the developer "gave" something. My argument is: he had to give it ANYWAY pursuant to the ordinance. Does that not make a difference....?

*** Doesn't matter that he had to do it anyway. He did reduce the utility of his land and that is enough to qualify as consideration.

"It's too late to bring it up now."

I am also concerned about statute of limitations, acquiescence, etc. But homeowners write 'new' checks every month, so possibly mitigating that issue.

*** He will claim laches on anything having to do with the original contract formation and would probably win.

*** The escalation of cost is something you can challenge. It all depends on what the agreement says or doesn't say about increases and grounds for increases. It is a contract of adhesion (terms are set exclusively by one party who controls) - which in combination with unreasonable increases strengthens your position.

"Sure it's unusual that he didn't turn over the property to the HOA,"

What should have happened is that the County, once permitting the utilities on the common area, should have required an easement for the homeowners. They did not.

*** You have no claim against the county. No reason to go there. Also, you do have an easement even though it isn't recorded. Discussed equitable easements in another thread.

"If the amount he is collecting is exorbitant in relation to his costs, that's something to pursue"

Actually, we are pursuing that aspect (on grounds that it is unconscionable.)

*** See comment above re adhesive contracts.

"I doubt that he could put a lien on your property because the property in question is owned by him, not you."

Another interesting thought. But he has the Lease 'wired into' the Covenants to such an extent that non-payment would be a clear violation and subject to all remedies including the Lien process. The homeowners are understandably gun-shy on that score.

*** It is understandable that the homeowners would be gun-shy. But nothing is stopping you from putting the developer on notice that if he attempts to restrict your rights in your land (via lien or otherwise), you will counter-sue on multiple grounds. Putting a lien on property is a big deal because it potentially impacts your ability to use, finance, sell, etc. Let him know that his only remedy for imposing a lien is on your rights in his property. Beyond that, you should definitely consult an attorney.

Sikubali jukumu. Read all posts at your own risk.

RayC4 (Virginia)
Posts: 173

Posted:

Thanks much, NpS. I will keep you (and others) posted via this forum. As you no doubt suspect, the Lease issue is only one of multiple problems we have with this fellow. (e.g. the state health Dept has the whole place on 'lock-down' due to irregularities with the utilities.)

We retired down here from Pennsylvania. Shoulda stayed up there....!!!

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RayC4 on 09/06/2014 3:25 PM
Thanks much, NpS. I will keep you (and others) posted via this forum. As you no doubt suspect, the Lease issue is only one of multiple problems we have with this fellow. (e.g. the state health Dept has the whole place on 'lock-down' due to irregularities with the utilities.)

Even better. Your potential claims against him are even greater. Unlike the typical developer, he now has future income at risk. Maybe keeping the property wasn't so smart.

If I was in your shoes, I might stop paying him until the utilities irregularities are resolved.

Definitely time to consult an attorney.

BTW, you didn't miss anything in PA this past winter. Brutal.

Sikubali jukumu. Read all posts at your own risk.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Ray,

This is a very complicated situation involving a lot of money. I wish I could give you a better answer but whether what the developer is doing is legal or not will depend on a lot of variables, starting with the county ordinances that set aside the property, the plat, and the CC&R's. You need to have a lawyer go over all of this material and give you (and other homeowners) an opinion.

The part that has me confused most is that the county would require the developer to set aside a portion of his tract without requiring that it be dedicated for some sort of use.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By LarryB13 on 09/06/2014 7:24 PM
The part that has me confused most is that the county would require the developer to set aside a portion of his tract without requiring that it be dedicated for some sort of use.

The controlling agency may have only required that a certain portion of the land remain undeveloped. Their regulatory concern may have been about storm water management or something similar.

Sikubali jukumu. Read all posts at your own risk.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

While I think the HOA having to lease the land is not proper, it could be the owner is meeting any land use requirements especially if it says agricultural (growing and harvesting hay)use.

I have a feeling this developer knew exactly what he was doing and he at best/worst, tricked the association.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By NpS on 09/07/2014 6:19 AM

The controlling agency may have only required that a certain portion of the land remain undeveloped. Their regulatory concern may have been about storm water management or something similar.

I lifted pertinent paragraphs from the ordinance to hopefully address your questions here:

"A clustered development is the arrangement of structures on adjoining lots in
groupings allowing closer spacing than would be generally permitted under
ordinance requirements for lot area, width or setbacks with the decrease in lot
area, width or setbacks compensated by maintenance of equivalent common open space."

"a minimum of 75% of the property exclusive of roads, water and wetlands shall be preserved as open space and protected through restrictive covenants or conservation easements. In each district, the required open space shall be used for recreational, agricultural or forestal purposes."

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RayC4 on 09/07/2014 4:58 PM

"A clustered development is the arrangement of structures on adjoining lots in
groupings allowing closer spacing than would be generally permitted under
ordinance requirements for lot area, width or setbacks with the decrease in lot
area, width or setbacks compensated by maintenance of equivalent common open space."

*** So in exchange for allowing smaller lot sizes, the statute requires equivalent "common open space." There's your easement in writing - maybe not the way you would like to see it, but the restriction on the titleholder's right to exclude is quite clear. The tract has been designated for "common" usage to support the reduced size lots, and the developer has lost the right to exclude HOA members from using the property.

*** Certainly the restricted use is worth some compensation. The question is how much?

"a minimum of 75% of the property exclusive of roads, water and wetlands shall be preserved as open space and protected through restrictive covenants or conservation easements. In each district, the required open space shall be used for recreational, agricultural or forestal purposes."

*** There's that word easement. Conservation easements run with the land. So there's not much the developer can do to change things. I think you may be in a strong position to renegotiate his fees down to realistic levels. Again, go talk to a lawyer.

Sikubali jukumu. Read all posts at your own risk.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By RayC4 on 09/07/2014 4:58 PM
"a minimum of 75% of the property exclusive of roads, water and wetlands shall be preserved as open space and protected through restrictive covenants or conservation easements. In each district, the required open space shall be used for recreational, agricultural or forestal purposes."

Your developer may be within the letter of the law but certainly not within its spirit.

For example, "protected through restrictive covenants or conservation easements." I think he has taken the position that since he recorded restrictive covenants then easements are not necessary. He reads this as "either/or but not both." He recorded covenants that require you to pay him for complying with the law and, in his mind, that is all the ordinance requires. If he recorded covenants that require nothing more than you painting your home hot pink he would be in compliance with this ordinance.

Likewise, he reads the part about "recreational, agricultural or forestal purposes" to be separate from the preceding sentence and sees it as solely his choice of which of those three uses the land will be put to. He cannot make money if the property is used for recreation or forest but he can make money if he uses the land to grow a cash crop. Therefore, he chooses agricultural and you can go elsewhere for recreation or a walk in the woods.

My interpretation is that the open space is for the benefit of the homeowners - not the developer - and that the "agricultural" use is intended to allow homeowners to use some portion of the open space to grow gardens but not for the operation of a commercial farm.

This is a badly-written ordinance that leaves too much to conjecture. What you posted requires leaving some spaces open but does not address who ultimately is to own, control, or maintain the required open spaces.

CyrstalB (Maryland)
Posts: 457

Posted:

In a previous HOA there is a "loophole" in the county code that provided for the developers to resell the conserved land/common area to another developer so that they to could use the same land to get around a three acre + county code in order to subdivide under three acres. Our developer sold that common area while still under his control.

We do not pay taxes any longer, but we were left with an HOA.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By LarryB13 on 09/07/2014 10:54 PM

Posted By RayC4 on 09/07/2014 4:58 PM
Likewise, he reads the part about "recreational, agricultural or forestal purposes" to be separate from the preceding sentence and sees it as solely his choice of which of those three uses the land will be put to. He cannot make money if the property is used for recreation or forest but he can make money if he uses the land to grow a cash crop. Therefore, he chooses agricultural and you can go elsewhere for recreation or a walk in the woods.

My interpretation is that the open space is for the benefit of the homeowners - not the developer - and that the "agricultural" use is intended to allow homeowners to use some portion of the open space to grow gardens but not for the operation of a commercial farm.

Larry, just to clarify something I left out previously, there does exist a 'walking trail' by design which runs through much of this open space tract. This exists physically and is supported by plenty of subdivision documentation (i.e. a rogue homeowner did not decide to cut the trail). Clearly this is a 'recreational use' of the open space and clearly it is for the benefit of the homeowners and no one else.

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