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Novack v. Upper Greenwood Lake Property Owners Association, Inc.

C-36-98 (N.J. Super. Ch. Div. 2001) (Unpublished)

HOMEOWNERS ASSOCIATIONS; EASEMENTS—Easement holders within a homeowners association who pay assessments to a quasi-related recreational entity are entitled to have those funds segregated from the entity’s other funds and are entitled to vote on how those particular funds are used.

This case dealt with a series of disputes over the governance of a lake community. Property owners on or near a lake had easement rights to use the lake for bathing, boating, and fishing. An association owned the property over which the property owners held the easement, consisting of the land under the lake and a strip of land around the water’s edge. Unlike many other lake communities, these property owners had no provisions in their deeds giving them a right of membership in the association. Instead, the independently-created association bought the lake from the developer “and then through legal action successfully sought contributions from the easement holders to maintain it.” As a consequence, the easement holders became obligated to pay fees to an association over which they had no control. Many similar lake communities had generated considerable litigation, but there is no legislation governing such relationships and there are few reported decisions governing the resulted disputes. In earlier cases, where property owners argued “taxation without representation,” courts issued orders providing that easement holders had the right to approve each year’s proposed easement budget at an annual public meeting. Here, the easement holders asked the Court “to take what they [asserted were] the next logical steps to make the easement budget process as fair as possible.” They sought to have “actual control of the easement and the budget-creation process turned over to a committee which would be part of a Association but which would be selected by the easement holders.” In the alternative, they asked the Court to order “that an entirely new organization be created solely to maintain the easement and collect fees for that purpose.” In support of those claims, the easement holders accused the existing association of “violating its fiduciary duties to the easement holders in a number of respects, including alleged commingling of easement funds with other Association funds, and appropriation of easement property for the exclusive use of the Association or its members.” Specifically, the easement holders claimed that the association had “improperly required [them] to join the Association (entailing payment of a membership fee in addition to the easement fee) in order to use the Lake’s only improved beach or to use a dock.” Other similar charges were made. In response, the association contended that the easement holders were confusing their easement rights with ownership. The association argued that the fact that the easement holders had the right to use the lake for bathing, boating, and fishing did not mean that the association could not use the lake property, which it owned, for other purposes not inconsistent with the easement rights. It argued that the existence of a clubhouse, the beach, and other amenities did not interfere in any significant way with the right of the easement holders to bathe, boat or fish in the lake. Further, the association contended (and there was no dispute) “that any easement holder [could] become an Association member for an additional fee and thereby [have] the right to use the improved beach and the docks.” Further, there were at least 25 unimproved access points around the lake which could be used for swimming, fishing or boating.

The original developer’s scheme was that the development would become a municipal corporation and that the association would then convey the lake, the area around the lake, the amenities, and the roadways to a municipal corporation and the municipality would take over the association’s responsibility for maintaining the property for the benefit of the residents and lot owners. Also, there was no dispute that from the beginning of the development, there was a “members only” beach operated in the same way that the clubhouse became available only to association members. In short, the situation that existed at the outset of the development, remained unchanged to the present date. Consequently, the Court found that access to the property managed by the association, including the clubhouse and beaches, was intended to be one of the amenities of property ownership and was one of the inducements for prospective buyers to buy lots. However, the Court also found that it was the intent of the association to provide two classes of privileges. The basic privileges included the easement of fish, boat and swim in the lake and the right to join the association. “Association membership carried with it the further privilege of using the beach and the clubhouse.” Thus, according to the Court, lot owners had a choice.

Until about fifteen years earlier, the association carried the entire financial burden of maintaining the lake. Then, the association imposed an easement fee and later obtained a court ruling that the easement holders were required to make financial contributions to the association. The association created a separate easement fund for that purpose and created an easement budget every year. The association had two budgets. The first was a basic budget, which the association deems to be the absolute minimum needed to maintain the easement. The second contains proposed enhancements to the basic budget. If the easement owners disapprove the second budget, the association implements the minimum budget without further voting. The resulting annual assessments were characterized by the Court as “relatively modest.” The easement owners did not object to the reasonableness of any budget item, but objected to the manner by which the budgets were proposed and adopted. The association created an informal voluntary easement committee whose membership was open to all easement owners regardless of association membership. This, however, was a self-selected group and membership did not appear to be genuinely open to all who were interested.

The Court stated that there was “no dispute in this case” that the community was a common interest community. It relied on Restatement (Third) of Property (Servitudes) for the proposition that developments with “social and recreational facilities built on land that is conveyed in fee simple to the owners’ association” constitute common interest communities. Under case law, and in accordance with the Restatement, “[t]he duties of a common interest to its members include the obligation(s) to (a) use ordinary care and prudence in managing the community’s property and finances; (b) to treat members fairly; (c) to act reasonably in the exercise of its powers; and (d) to provide members reasonable access to information about the association, the common property and the financial affairs of the association.” Based upon the facts before the Court, it found that the association was not mishandling the assessment funds. It did, however, find that the system of accepting a single check for easement fees and membership fees and then taking as long as a month to divide those funds into separate accounts, even absent any intent to misuse the funds, constituted improper commingling. Therefore, the Court ordered that the association collect dues by separate checks and directly deposit those checks into separate accounts. Further, the Court approved use of the easement property for the clubhouse and beach “because those uses [were] clearly consistent with the Indenture.” Nonetheless, “since a majority of the easement holders [did] not belong to the Association, [there was] a need to ensure that the Association [gave] sufficient consideration to the interest of all easement holders in making future decisions on setting aside easement property for use by the Association.” Therefore, the Court ruled that no additional easement property could be set aside “for the exclusive use of Association members without the approval of a majority of the non-member easement holders.” Further, “because there might be an interest among the non-member easement holders in having additional improvements to the easement which [would] be open to all easement holders, (e.g., an additional improved beach, additional boat launches, etc.), the Association [was] required to consult with the easement holders concerning those issues.” The easement holders also objected that at one time an easement holder could build a dock for a minimal fee. Then, the association began requiring membership as a condition for using the dock. For about thirteen years, there were no challenges to that change in policy. Now, the non-member easement holders claimed that use of the association’s dock should be considered one of the incidents of their easement. They were willing to pay a separate fee for dock use, but did not want to have to join the association. The Court held for the association because, “[a]s the owner of the parklands and the soil beneath the lake, the Association has the right to control the use of the waters of the lake, subject only to the right of the adjoining owners to use the lake for boating, bathing and fishing.”

Lastly, as to the budget process, the Court required that the association incorporate into its by-laws a detailed description of how the budget will be voted on at its annual meeting. “At a minimum, the process must allow the easement holders to vote separately, yes or no, on any proposed increased expenditure for any line item, and on any expenditures for new items not previously appearing in the budget.” Further, if any choices would result in substantial increases to the assessment, those choices would have to be presented to the easement holders who would be allowed to vote on the available options. As to the association using the easement fund to pay for counsel fees for this particular litigation and various other law suits, the Court held that only those legal fees used to support the easement or to carry out the association’s responsibilities with respect to the easement could be in the budget. Disputes about payment of such fees could then be decided by a court.

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