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Emerging Issues in Planned Community and Condominium Disputes

Client Alert

Author: Kelly L. Martin

10/17/2019
Emerging Issues in Planned Community and Condominium Disputes

From disagreements over short-term rentals to an infamous Tigger mailbox that elevated a neighborhood dispute all the way to the Commonwealth Court,1 Pennsylvania has seen a growing trend in litigation involving unit owners’ associations established under the Pennsylvania Uniform Planned Community Act 2 (the PC Act) and the Pennsylvania Uniform Condominium Act3 (the Condo Act). Claims under the PC Act and the Condo Act, however, can involve much more than neighborly squabbles.

When a developer subjects real estate to the PC Act or the Condo Act, a scheme of ownership is created whereby property owners will own a portion of the real estate, referred to as “units,” and will enjoy a proportional ownership or other beneficial interest in the common areas of the development, called “common elements.” Under both acts, the development’s creator, known as a “declarant,” then forms a nonprofit corporation — a unit owners’ association — to administer the development’s affairs. The PC Act and the Condo Act empower these associations to govern not only residential neighborhoods, but also commercial and mixed-use developments.

Both the PC Act and the Condo Act allow the declarant to have a period of control over the association. Approximately 10 years after the development is established, however, the declarant must turn the reins of the association over to the unit owners. As more and more declarants reach this point in their development timeline, even while still building out portions of the developments they no longer control, declarants can find that the separation, like any divorce, can be messy.

An Association’s Arsenal of Claims

Following the period of declarant control, an association’s potential claims against a declarant include the following:

  • Claims for Unpaid Assessments: The PC Act and the Condo Act task an association with collecting common expense assessments from unit owners for the expenses associated with operating the development and maintaining common areas. Once the association assesses the first round of expenses, assessments become due on all units in the development, including declarant-owned units that have been created but not yet sold.4 If a declarant has failed to pay assessments on these units, an association may seek a judgment for those unpaid sums. For units created between approximately 2008 and 2010, when the recession meant some units were created but sat unsold for several years as the housing market slumped, those unpaid assessments could add up to a hefty judgment.
  • Claims for Association Mismanagement: Even during the period of declarant control, declarant-appointed members of the association’s executive board stand in a fiduciary relationship to the association.5 If the association believes that the declarant-appointed members failed to act in the best interest of the association or failed to act with reasonable “inquiry, skill and diligence,” then the association could bring a claim alleging a violation of that fiduciary duty. Specifically, an association may allege that the declarant, when controlling the association, collected too few assessments or failed to properly budget for the development’s anticipated expenses.
  • Construction Claims: Finally, associations may allege construction claims ranging from violations of statutory and contractual warranties to negligence. Nothing under the PC Act or the Condo Act requires a declarant to build the improvements within a development itself, and declarants often contract with affiliated or unaffiliated builders to complete the construction. The PC Act and the Condo Act, however, require a declarant to warrant against structural defects in the units and common elements of a development for two years.6 The courts have yet to probe the definition of “structural defects” under the PC Act and the Condo Act, but the uncertainty of the term’s scope has not deterred associations from claiming structural defects in all aspects of a development, from foundations to mailboxes.

Further, even though a declarant may assign some of its statutory obligations to an unaffiliated builder by observing the very specific requirements of assignment set forth in the PC Act and the Condo Act, the original declarant remains jointly and severally liable with an affiliated builder for the above structural warranty.7 Even when a declarant has properly assigned its obligations to an unaffiliated builder, the declarant may nonetheless find itself named as a defendant in an association’s suit — and it could take months and countless dollars before the court is able to parse out the true relationship of the parties.

Potential Damages

Assuming an association can prove its claims of declarant misfeasance to the court’s satisfaction, a declarant faces a judgment for damages commensurate with the proven misconduct. Damages could include the following:

  • Compensatory Damages: In an effort to make an injured association whole, the court may award compensatory damages, such as an award for unpaid common expense assessments or amounts the association must expend to correct structural defects or other construction deficiencies.
  • Punitive, Statutory and Treble Damages: The PC Act and the Condo Act both allow a court to award punitive and statutory damages for certain limited violations, such as willful violations and failure to provide certain required disclosures about the development.8 Further, an association may claim that a declarant’s wrongdoing with respect to any residential units runs afoul of the Pennsylvania Unfair Trade Practices and Consumer Protection Law,9 in which case the court is permitted to award treble damages.10
  • Attorneys’ Fees: As initially enacted in Pennsylvania, the PC Act and the Condo Act did not expressly allow a plaintiff to be awarded attorneys’ fees. The legislature, however, amended the PC Act and the Condo Act in 2018 and made clear that “if appropriate, the prevailing party may be entitled to an award of costs and reasonable attorney fees.”11

The Future of PC Act and Condo Act Litigation

The Commonwealth’s legislature, taking note of the growing number of PC Act and Condo Act cases on the dockets of Pennsylvania courts, amended the PC Act and the Condo Act to require the bylaws of all new planned communities and condominiums to contain alternative dispute resolution procedures.[1] Although the amendments apply equally to residential, commercial and mixed-use developments, the amended statute only requires alternative dispute resolution procedures for conflicts between or among unit owners and between the association and unit owners. Claims by an association against a declarant, therefore, may continue to play out in the courts, with all of the expense and uncertainty that comes with juridical interpretation of these relatively untested statutes.

Avoiding Disputes

Declarants must observe all formalities required under the PC Act and the Condo Act with respect to payment of assessments, operation of the association, and relationships with, and assigning special declarant rights to, any builders. Further, declarants should carefully review the statutory warranties under the PC Act and the Condo Act and the contractual warranties to be provided to unit owners under any agreements of sale. Familiarity with the PC Act and the Condo Act and careful drafting of declarations and other development-related documents are paramount for declarants to avoid, or at the very least mitigate, the costs of litigation when it comes time for the declarant and the association to part ways.

Endnotes

1 Weber v. Bd. of Dirs. of the Laurel Oaks Ass’n, 179 A.3d 1206 (Pa. Commw. Ct. 2017), appeal denied, 187 A.3d 209 (Pa. 2018).

2 68 Pa. C.S.A. § 5101 et seq.

3 68 Pa. C.S.A. § 3103 et seq.

4 See 68 Pa. C.S.A. § 3314; 68 Pa. C.S.A. § 5314.

5 68 Pa. C.S.A. § 3303; 68 Pa. C.S.A. § 5303.

6 68 Pa. C.S.A. § 3411; 68 PA. C.S.A. § 5411.

7 68 Pa. C.S.A. § 3304; 68 Pa. C.S.A § 5304.

8 68 Pa. C.S.A. §§ 3406(c) and 3412; 68 Pa. C.S.A. §§ 5406(c) and 5412.

9 73 P.S. §§ 201-1 to 201-9.2.

10 73 P.S. § 201-9.2.

11 68 Pa. C.S.A. § 3412; 68 Pa. C.S.A. § 5412.

12 See 68 Pa. C.S.A. § 3321; 68 PA. C.S.A. § 5321.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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