Laurel Road HOA, Inc. v. W.E. Freas and N. Freas
191 A.3d 938 (2018)
Rule of Law:
A developer/declarant of a small planned community that falls under the limited applicability of the Uniform Planned Community Act (UPCA) still owes common law fiduciary duties to the homeowners association and its members until control is relinquished, requiring good faith and proper management, and can be held liable for breaches of these duties.
Facts:
- Laurel Road Homeowners Association, Inc. is a not-for-profit corporation serving as the mandatory unit owners' association for a nine-unit planned community known as Ridings at Newlin.
- William E. Freas and Nancy Freas (Declarants) were the developers and declarants of the Ridings at Newlin community.
- The Declarants began executing deeds and transferring title of individual lots or units to third-party purchasers on November 11, 2006, with all units sold by July 9, 2010.
- The Declarants did not relinquish control of the Association to the unit owners until January 2014, long after all units were sold.
- During their period of control, the Declarants did not allow unit owners to participate in governance, did not keep financial records, did not prepare annual financial statements, and did not create a reserve fund for the Association.
- The Declarants filed, created, and/or drafted a Declaration, three sets of Bylaws, and plats and plans that contained multiple deficiencies.
- The Declarants transferred common title and ownership to a common area prior to its completion or the involvement of unit owners, and failed to maintain and complete the common area private roadway.
- The community's Declaration, Article IV, Section 3, stated that an 'Initial Assessment' of $4,000.00 for each lot would be levied by the Association 'Upon the sale of Lots... at the time of settlement'.
Procedural Posture:
- On March 9, 2015, Laurel Road Homeowners Association, Inc. (Association) filed a three-count complaint against William E. Freas and Nancy Freas (Declarants) in the Court of Common Pleas of Chester County (trial court), alleging malfeasance and/or misfeasance.
- Following a bench trial, the trial court found in favor of the Association on Count I (common law breach of fiduciary duty) and awarded damages, but found in favor of the Declarants on Count II (statutory warranty against structural defects) and Count III (assessments), concluding the pertinent Uniform Planned Community Act (UPCA) provisions did not apply to Ridings at Newlin.
- The trial court also dismissed Count I insofar as it alleged UPCA violations and rejected applying Section 6.20 of the Restatement (Third) of Property.
- Both the Association and the Declarants filed motions for post-trial relief, which the trial court denied by orders dated February 21, 2017.
- The Association (as appellant, docketed at No. 960 C.D. 2017) and the Declarants (as appellants, docketed at No. 961 C.D. 2017) filed cross-appeals, which were subsequently transferred from the Superior Court to the Commonwealth Court of Pennsylvania.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
1. Is a planned community with 12 or fewer units subject only to limited sections of the Uniform Planned Community Act (UPCA) under Section 5102(a)(1), irrespective of the nature or extent of its common elements? 2. In a planned community where the full provisions of the UPCA do not apply, do developer-declarants owe common law fiduciary duties to the homeowners association and its members before relinquishing control? 3. Are declarants obligated to pay initial common assessments on unsold lots they still own when the declaration stipulates assessments are levied 'upon the sale of Lots... at the time of settlement' for each lot?
Opinions:
Majority - Judge McCullough
1. Yes, a planned community with no more than 12 units is subject only to the limited enumerated sections of the UPCA under Section 5102(a)(1), regardless of the nature or extent of its common elements. The court affirmed the trial court's conclusion that Ridings at Newlin, with nine units, fell under this exception. The court reasoned that the plain language and grammatical structure of Section 5102(a)(1) unambiguously define a planned community with 12 or fewer units, and the phrases regarding 'common elements' within this subsection refer only to sections allowing for unit subdivision or community expansion, not to the nature or extent of existing common elements. Such considerations are relevant only to subsection (a)(2), which the Association conceded was inapplicable. The court declined to consider Uniform Law Comments or legislative history, finding no ambiguity in the statute's clear language. 2. Yes, developer-declarants of a planned community, even where the full provisions of the UPCA are inapplicable, owe common law fiduciary duties to the homeowners association and its members until control is relinquished. The court affirmed the trial court's finding that the Declarants and the Association were in a confidential relationship giving rise to fiduciary duties. The court followed precedents like _Lyman v. Boonin_ and _Pinecrest Lake Community Trust_, which establish that common law principles can 'fill the gap' in statutory voids. Citing persuasive authority from other jurisdictions (e.g., _Raven’s Cove Townhomes_, _Cohen v. S&S Construction Co._, _Goddard v. Fairways Development_, _Richard Gill Co._), the court determined that developers act as fiduciaries to associations and unit owners before control transfer, due to the trust placed in them to establish and manage the community. The Declarants' sole control over the Association until 2014 and their various failures in management and operation constituted a breach of these fiduciary duties. 3. No, declarants are not obligated to pay initial common assessments on unsold lots they still own under a declaration that states assessments are levied 'upon the sale of Lots... at the time of settlement' for each lot. The court affirmed the trial court's conclusion that the Declarants had no duty to pay such assessments. The court interpreted the Declaration's language to mean that assessments were to be levied only in conjunction with the sale of each property to a third party, not upon the Declarants for properties they retained. Other sections of the Declaration defined 'owners' as those holding title and becoming members of the Association, which the Declarants were not for unsold lots once their interest was conveyed at settlement. The court also reiterated that UPCA Section 5314, pertaining to assessment collection, was inapplicable due to the Section 5102(a)(1) exception.
Analysis:
This case clarifies critical aspects of planned community law in Pennsylvania, particularly for smaller communities not fully governed by the UPCA. It firmly establishes that common law fiduciary duties apply to developer-declarants, even in the absence of explicit statutory coverage, thereby providing a legal recourse for homeowners associations against developer misconduct during the control period. This ruling reinforces the judiciary's role in filling statutory gaps with established common law principles, ensuring that developers are held to a standard of good faith and proper management regardless of a community's size or specific statutory applicability. Future cases will likely cite this decision to support common law claims against developers who fail to properly manage or transition control of small planned communities, emphasizing the importance of developer conduct from inception to turnover.
