Lessons from Countryside Community Association

Otten Johnson Alert February 2014

In December, the Colorado Court of Appeals rendered an unpublished decision in Countryside Community Association, Inc. v. Pulte Home Corporation. Developers of communities falling within the Colorado Common Interest Ownership Act (CCIOA) should take note of the court's ruling, as the ruling confuses certain provisions of CCIOA.

According to the complaint, in 2004, Pulte, the developer and the declarant, recorded a declaration for the Countryside Townhome subdivision in El Paso County, Colorado. The declaration did not initially include any property within the community, but contained a legal description of 186 additional lots for later annexation into the community. Annexation would occur when the developer recorded a plat of these properties and conveyed individual properties to third parties. Thus, property under the developer's ownership would remain unencumbered by the declaration. The declarant additionally reserved easements over common areas and used those easements for the developer's own construction, development, and sales activities. The Countryside homeowners association (HOA) alleged that it had maintained the easements and the developer's fee-owned properties. Once the declarant control period ended, the HOA levied assessments on declarant-owned properties. The developer refused to pay those assessments, and litigation ensued.

The HOA brought three claims against the developer: (1) the developer's failure to pay assessments constituted a breach of contract; (2) an "unjust enrichment" claim for benefits received from the HOA due to the declarant's use of the easements and the HOA's maintenance of developer-owned property; and (3) breach of fiduciary duty against the developer because the HOA paid for upkeep of their properties during the period of declarant control. The district court granted summary judgment to the developer on all of the HOA's claims.

The court of appeals found the developer could be held liable for breach of contract. Relying on CCIOA § 201 and specific language in the declaration, the court found that the properties specified for later annexation to the community became part of the community upon recordation of the plat for those additional properties. Furthermore, the court read declaration language obligating "Owners, including Declarant" to pay assessments as requiring the declarant to pay assessments on properties owned by it in the community. Moreover, the court found the developer could be liable for expenses related to its own property, including easements and those platted lands that were unsold to third parties, because CCIOA § 307 obligates a declarant to pay expenses associated with properties within the community subject to development rights, in addition to assessment liability established elsewhere in CCIOA. Because the HOA paid common expenses related to the developer's properties, the court held that the declarant could be liable for general expenses which benefited their property, and the HOA could impose additional assessments against the developer for payment of those expenses.

Additionally, the court found the developer could be liable for breach of fiduciary duty because the developer's employees served on the HOA board and authorized the expenditure of HOA funds for maintenance and upkeep of the developer's lots and buildings. The Court of Appeals affirmed the trial court's denial of the unjust enrichment claim, since unjust enrichment cannot be asserted where a valid contract covers the subject matter of the alleged obligation to pay.

Many of the court's conclusions in the Countryside case are confusing. In many respects, the declaration's language played a dispositive role in the court's decision. The court's finding that recordation of the plat automatically included the 186 platted lots in the community is curious. CCIOA § 201 makes recordation of a plat a condition precedent for the creation of a common interest community, but the court instead read § 201 to require the community to be automatically created upon the plat's recordation. The court's interpretation of § 201 conflicts with the plain meaning of that provision. It appears, however, that the creation of a shell community with no initial lands, or subjecting of property to the declaration only upon conveyance to third parties, motivated the court's finding.

Moreover, there is an uneasy relationship between the three claims that were brought by the HOA. The HOA's breach of contract claim contemplated that the developer violated elements of the declaration. But the court was first required to find that the developer's property was encumbered by the declaration for it to find a breach. Furthermore, the court accepted that the declarant's failure to reimburse the HOA for maintenance activities on the developer's lots constituted both a breach of contract and a breach of fiduciary duty, which implicates the "economic loss rule." The economic loss rule generally states that a claimant may not recover damages in both a contractual claim and a commercial tort claim arising out of the same set of circumstances. Finally, the court's determination that unjust enrichment was inappropriate is strange given that the HOA provided services to properties owned by the developer in the apparent absence of contractual terms addressing the types of services performed by the HOA.

As the Countryside case is unpublished, it is of limited precedential value. However, a petition for a writ of certiorari has been filed with the Colorado Supreme Court. Developers of common interest communities should take note of continuing proceedings in the matter and should consult CCIOA attorneys for advice on drafting community declarations.

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