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Poblette v. Towne of Historic Smithville Community Association, Inc.

355 N.J. Super. 55, 809 A.2d 178 (App. Div. 2002)

COMMUNITY ASSOCIATIONS; TRANSITION— If transition from a developer to a community or property owners’ association does not formally take place because of the developer’s bankruptcy, it will be deemed to have taken place at the time of the bankruptcy if it was clearly intended that the affected common elements were to be conveyed to the association.

The developer of a planned unit development created a nonprofit corporation (Association) to maintain the development in accordance with the provisions of a “Declaration.” The Declaration described “[a]n easement for the present and future installation and maintenance of electric service, master and/or cable TV service, telephone service, water (storm water and a sanitary sewer), gas and drainage facilities and the necessary appurtenances to the same” drawn in favor of the developer, the Association, and others. Each Association member’s right to enjoyment and use of the community facilities was subject to that easement. The Association had responsibility for the maintenance, governance, and administration of common facilities as well as the responsibility for maintenance of certain facilities not owned by the Association but known as limited common facilities.

The development experienced a storm and some homeowners in the development “suffered substantial damage to their homes from flooding allegedly caused by the overflow of a detention basin on the Development that was to form part of the storm water drainage system. Significantly, the developer had gone bankrupt well before the flood had occurred.” The homeowners sued the Association and others on the theory that the Association and the others were “under a duty to maintain and repair the detention basin ... as the holder of an easement granting exclusive control of said detention basin to [the Association].” The lower court, on a motion for summary judgment, held that: (a) transition of the development took place with respect to the storm water system between the bankrupt developer and the Association; (b) the Association had responsibility for the basin; (c) the Association, “as the easement holder, was ‘the owner’ and ‘operator’ of the storm water basin”; and (d) the Association “had a duty by way of the easement created by the [Declaration] to inspect, as an element of its maintenance obligations, the storm water basin which [was] the subject of [the] litigation.” The failure of the Association to inspect the storm water basin and discover and correct the lack of an outflow mechanism and/or the lack of adequate depth of the structure as the proximate cause of the flooding” was preserved for determination at trial. At trial, a jury found the Association and its management company liable for damages. On appeal, the Association argued that: “(1) no easement in favor of the Association existed under the relevant provisions of [the Declaration] because the detention basin [was] neither a ‘Community Facility’ nor a ‘Limited Community Facility’ as those terms were defined, and (2) even if the basin did meet either definition, no easement was created because there never was a ‘transition’ of the duty to maintain the detention basis from the developer to the Association.”

The Appellate Division rejected those arguments. The Court found that it didn’t matter that the detention basis, by definition, did not fall exactly into either the category of Community Facilities or Limited Community Facilities because the Court concluded “that whether or not the basin falls within these definitions is not dispositive in determining whether the Association held an easement to the basin in view of the broad language contained” in the Declaration. It then looked to easement language reserving an easement for the “water [storm water and sanitary sewer], ..., which easement shall run in favor of the ... [Association]... .” The import of that language was that the easement was not “circumscribed to cover only community and limited community facilities, but to all property within the development.” As to the Association’s argument that the easement to maintain the storm basin “never attached to the Association because there had not been a formal ‘transition’ of this responsibility from the developer to the Association,” the Court pointed out that although the Declaration did not expressly discuss the concept of transition, its analysis would end there. The Court also recognized that New Jersey courts had never “addressed the precise issue of when a transition has occurred in which the developer cedes to a homeowner’s association, or similarly empowered organization, the rights and duties under an easement to maintain common facilities for the benefit of the property owners in a planned development.” Thus, the Court looked to the intent of the developer “as to the existence, timing and scope” of such an easement. In doing so, it examined the overall Declaration “and the circumstances surrounding its adoption.” Here, the Court found that the intent of the developer was “intertwined with the statutory provisions governing his conduct in developing and offering for sale a community development.” Under that statutory scheme, a developer must create an association with the obligation to manage the common elements of the facility. The legislative history explains that associations are required to be formed “to safeguard the interests of the individual owners or occupants.” Further, a New Jersey statute provides that “[t]he association shall exercise its powers and discharge its functions in a manner that protects and furthers the health, safety, and general welfare of the residents of the community.” The Court pointed out that when trying to determine the developer’s intent, it must recognize that, “at least in part, [such an attempt must have been] to draft a declaration in compliance with the requirement of the Act and the purpose underlying its provisions.” Against that “backdrop,” the Court needed to determine what would happen if a developer went bankrupt before a “formal transition.” With the circumstances presented in this case, the Court found that the transition of duties had actually occurred. This was because “the detention basin in question was constructed to serve the common interests of the individual property owners of the development. Hence, the detention basin was intended to be a limited community facility as defined in the Declaration.” More importantly, the Court found “it inconceivable that it was the intent of the Legislature or of the developer upon drafting the easement provision described above, that in the event of the developer’s bankruptcy, the easement in favor of the Association should not be given effect. To hold otherwise would allow the Association to disclaim any responsibility as to the very duties it was almost exclusively formed to assume simply because there was not a formal declaration that these duties had been transferred to it by the developer.” Therefore, the Court concluded that a de facto transfer to the Association “of those rights and obligations under the easement provisions contained in the Declaration occurred.”

The Court also pointed out the well established general rule that “absent a contrary agreement, the holder of an easement has a duty to maintain and repair the property/facility on a servient tenement subject to the easement.” Further, New Jersey case law has specifically held “that a duty to inspect property subject to an easement exists as to the easement holder.” In furtherance of that duty to inspect, the Court looked to County Development Standards which stated “that detention and retention basis ‘drainage systems’ must be inspected on a routine basis to ensure that they are functioning properly.” Had the Association conducted such inspections, it would have seen that the drainage basin lacked sufficient outlets.

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