By Robert J. Galvin
In re: Northwood Properties, LLC was a U.S. District Court decision that, if allowed to stand, would have deprived developers of the flexibility they need in order to successfully develop phased condominium projects.
Northwood Properties was the developer of the Northwood at Sudbury Condominium, which was to consist of five phases. Northwood completed just two phases before its phasing rights expired. Northwood filed a voluntary petition under Chapter 11, which is why the case is in federal court.
Northwood filed a proposed plan that was contingent upon Northwood obtaining a revival of phasing rights. The court said, "At stake are development rights potentially worth millions of dollars. The result is a barroom brawl for control of these rights … the phasing rights may be worth up to $3 million, more than enough to satisfy all debts."
Two of the plaintiffs objected to the revival of the phasing rights on grounds that as unit owners, their express consent would be required before Northwood could add new units to the condominium. They argued that their express consent was required because of the provisions of Section 5(b)(1) of Chapter 183A.
Section 5 (a) of Chapter 183A provides that "each unit owner shall be entitled to an undivided interest on the common areas and facilities in the percentage set forth in the master deed. Such percentage shall be in the approximate relation that the fair value of the unit on the date of the master deed bears to the then aggregate fair value of all units."
In 1998, Section 5(b)(1) was added to Chapter 183A. This enactment states, in relevant part, "provided, however, that the acceptance and recording of the unit deed shall constitute consent by the grantee to the addition of subsequent units or land or both to the condominium and consent to the reduction of the undivided interest of the unit owner if the master deed at the time of the recording of the unit deed provided for the addition of units or land and made possible an accurate determination of the alteration of each unit's undivided interest that would result therefrom."
This wording created the difficultly at the heart of this case. When the 1998 amendment was enacted, it puzzled some practitioners. What was the purpose of the language, "made possible an accurate determination," when the only method for apportioning the percentage interest of each unit in the common areas and facilities was provided by Section 5(a) — the fair value of the unit in question compared to the fair value of all the units?
The plaintiffs claimed that the language in Section 5(b)(1), "make an accurate determination," meant that they had veto power over the revival of phasing rights because the master deed didn't precisely state what the percentage appurtenant to their units would be as a result of the extension of the phasing rights.
The Bankruptcy Court held that Section 5(b)(1) did not require such precision.
The District Court, reversing the Bankruptcy Court, decided in favor of the plaintiffs, holding, in essence, that they had veto power over any phasing plan unless the master deed specifically stated what the precise percentages would be in each phase, or at least provided for the calculation of precise percentages.
The problem with the District Court's analysis was threefold:
First, Section 5(a) has always provided — and still provides — the only way in which percentages may be set in Massachusetts. Second, the addition of Section 5(b)(1) did not alter the provisions of Section 5(a). Third, if the District Court decision had not been reversed, it would have called into question titles to hundreds, if not thousands, of units which had been created in phased condominiums.
My colleague, Christopher Marino, and I filed an amicus curiae brief on behalf of the Real Estate Bar Association and The Abstract Club, urging that the 1st Circuit vacate the judgment to the extent that it held that Section 5(b)(1) of Chapter 183A requires a condominium declarant, at the time it records the master deed, to precisely identify how each unit's percentage interest will change when each new phase is added to the condominium.
Under the District Court's interpretation of the statute, the developer would have to precisely predict the market values — and the percentages — of all the units in all phases several years down the road. This simply cannot be done with any degree of accuracy. When a real estate appraiser produces an appraisal report, the appraiser's value conclusion is always expressed as an approximation.
For example, a value conclusion might be "$1.2," not "$1,273,459.28." The appraiser and the lender for whom the appraisal is made understand that no such precision is possible. The language of Section 5(a), "such percentage shall be in the approximate relation that the fair value of the unit on the date of the master deed bears to the then aggregate fair value of all the units," is the very antithesis of the District Court's requirement that the master deed at the outset of the project state precisely what the percentage of each unit will be in all phases when the condominium is completed. As an example of the need for flexibility, a developer of a phased condominium may begin to build one-bedroom apartments in the first few phases, only to discover as marketing proceeds that there is a market for two-bedroom apartments, not-one bedroom units.
Under the District Court decision, this flexibility — which is particularly important with respect to condominium projects that will be built out over a period of years — would be impossible.
Fortunately, the 1st Circuit overruled the District Court's decision, as we had urged in our brief, preserving for our clients the flexibility they need to develop phased condominiums.
Winter 2008
