MCL 559.167: Michigan Court of Appeals rules that Developer lost right to construct units on common element land

Kevin Hirzel, Brandan Hallaq, Kayleigh Long and Joe Wloszek of Hirzel Law, PLC represented the Cove Creek Condominium Association in this case.

In Cove Creek Condo Ass’n v Vistal Land & Home Dev, LLC, __ Mich App __; __ NW2d __(2019), issued December 19, 2019 (Docket No. 342372), the Michigan Court of Appeals issued a published opinion establishing binding legal precedent and much needed guidance on the interpretation and application of MCL 559.167.  In Cove Creek, supra, the Court of Appeals decided the following important issues:

  1. MCL 559.167, as amended by 2016 PA 233, cannot be used to retroactively re-create “need not be built” condominium units that ceased to exist by operation of law prior to September 21, 2016, when MCL 559.167 was last amended.
  2. MCL 559.167, as amended by 2002 PA 283, the version that existed prior to September 21, 2016, was constitutional and the loss of a developer or successor developer’s right to construct units due to the passage of time did not violate the due process clause or the takings clause of the Michigan or United States Constitutions.

Facts

The Cove Creek Condominium (the “Condominium”) was established by the recording of the Master Deed in the Oakland County Register of Deeds on April 21, 1989. Lifestyle Homes, a co-partnership, was the developer of the Condominium, which was originally to be composed of 31 units.  Units 15 to 31 were designated as “must be built,” were constructed, and were conveyed to conveyed to a non-developer co-owner. Units 1 through 14 were identified as “need not be built” and were never constructed.

On May 11, 1989 Lifestyle Homes recorded the First Amended to the Master Deed indicating that Cove Creek Limited Partnership (“Cove Creek, LP”) became the developer. On May 17, 1989, Lifestyle Homes executed a deed transferring all of its interest in the Condominium to Cove Creek, LP.  Construction of the condominium commenced prior to October 27, 1989, as this was the date that the first constructed unit was conveyed to a non-developer co-owner.

On September 15, 2004, Cove Creek, LP executed a deed attempting to convey units 1-14 to Vistal Cothery, LLC, an entity that did not exist 2004. On November 6, 2006, Vistal Cothery, LLC attempted to deed units 1-14 to Vistal Land & Home Development, LLC (“VLHD, LLC”).  On October 31, 2016, VLHD LLC attempted to deed units 1-14 to the America and Maria Cervi Living Trust (the “Trust”).  On November 3, 2016, the Trust advised the Cove Creek Condominium Association (the “Association”) that it had withdrawn “need not be built” units 1-14 from the Condominium.

The Association relied on, and the trial court applied, MCL 559.167(3), as amended by 2002 PA 283, effective May 9, 2002, which stated:

Notwithstanding section 33, if the developer has not completed development and construction of units or improvements in the condominium project that are identified as “need not be built” during a period ending 10 years after the date of commencement of construction by the developer of the project, the developer, its successors, or assigns have the right to withdraw from the project all undeveloped portions of the project not identified as “must be built” without the prior consent of any co-owners, mortgagees of units in the project, or any other party having an interest in the project. If the master deed contains provisions permitting the expansion, contraction, or rights of convertibility of units or common elements in the condominium project, then the time period is 6 years after the date the developer exercised its rights with respect to either expansion, contraction, or rights of convertibility, whichever right was exercised last. The undeveloped portions of the project withdrawn shall also automatically be granted easements for utility and access purposes through the condominium project for the benefit of the undeveloped portions of the project. If the developer does not withdraw the undeveloped portions of the project from the project before expiration of the time periods, those undeveloped lands shall remain part of the project as general common elements and all rights to construct units upon that land shall cease. In such an event, if it becomes necessary to adjust percentages of value as a result of fewer units existing, a co-owner or the association of co-owners may bring an action to require revisions to the percentages of value under section 95. (emphasis added)

The Trust relied on MCL 559.167(3), (4) and (5), as amended by 2016 PA 233. The 2016 version of the statute, effective September 21, 2016, provides, in relevant part:

(3) Notwithstanding section 33, for 10 years after the recording of the master deed, the developer, its successors, or assigns may withdraw from the project any undeveloped land or convert the undeveloped condominium units located thereon to “must be built” without the prior consent of any co-owners, mortgagees of condominium units in the project, or any other party having an interest in the project. If the master deed confers on the developer expansion, contraction, or convertibility rights with respect to condominium units or common elements in the condominium project, then the time period is 10 years after the recording of the master deed or 6 years after the recording of the amendment to the master deed by which the developer last exercised its expansion, contraction, or convertibility rights, whichever period ends later. Any undeveloped land so withdrawn is automatically granted easements for utility and access purposes through the condominium project for the benefit of the undeveloped land.

(4) If the developer does not withdraw undeveloped land from the project or convert undeveloped condominium units to “must be built” before expiration of the applicable time period under subsection (3), the association of co-owners, by an affirmative 2/3 majority vote of the members in good standing, may declare that the undeveloped land shall remain part of the project but shall revert to general common elements and that all rights to construct condominium units upon that undeveloped land shall cease. When such a declaration is made, the association of co-owners shall provide written notice of the declaration to the developer or any successor developer by first-class mail at its last known address. Within 60 days after receipt of the notice, the developer or any successor developer may withdraw the undeveloped land or convert the undeveloped condominium units to “must be built”. However, if the undeveloped land is not withdrawn or the undeveloped condominium units are not converted within 60 days, the association of co-owners may file the notice of the declaration with the register of deeds. The declaration takes effect upon recording by the register of deeds. The association of co-owners shall also file notice of the declaration with the local supervisor or assessing officer. In such an event, if it becomes necessary to adjust percentages of value as a result of fewer condominium units existing, a co-owner or the association of co-owners may bring an action to require revisions to the percentages of value under section 95.

(5) A reversion under subsection (4), whether occurring before or after the date of the 2016 amendatory act that added this subsection, is not effective unless the election, notice, and recording requirements of subsection (4) have been met. (emphasis added)

In 2016, the Association filed a complaint seeking declaratory relief that MCL 559.167, as amended by 2002 PA 283, applied and that the right to construct the “need not be built” units ceased to exist. On February 10, 2017, the trial court granted summary disposition in favor of the Association. The trial court applied MCL 559.167, as amended by 2002 PA 283, and held that the land on which Units 1 through 14 were to have been constructed remained as general common elements. The trial court further ruled that the Trust did not have the right to withdraw Units 1 through 14, or the land on which Units 1 through 14 were to be located, from the Condominium.

Did MCL 559.167, as amended by 2016 PA 233, apply retroactively?

As an issue of first impression, the Court of Appeals addressed whether the 2016 amendment to MCL 559.167 was retroactive based upon the plain language of the statute.  The Court of Appeals held:

The 2016 amendment to MCL 559.167 does not expressly provide that it is retroactive….Defendants argue that the use of the word “occurring” in Subsection (5) expressly makes the 2016 amendment retroactive. MCL 559.167(5) provides: “A reversion under subsection (4), whether occurring before or after the date of the 2016 amendatory act that added this subsection, is not effective unless the election, notice, and recording requirements of subsection (4) have been met.” MCL 559.167(5), as amended by 2016 PA 233 (emphasis added). This language, however, is not a clear and unequivocal expression of the Legislature’s intent to apply the amendment retroactively. The Legislature’s choice of the word “occurring,” rather than “occurred,” is significant. As the trial court determined, the present participle indicates that the 2016 amendment does not apply to any “reversion” that had already occurred. Before the 2016 amendment, MCL 559.167 did not use the term “reversion” or contain Subsection (4). Therefore, “[a] reversion under subsection (4)” could not have occurred before the effective date of the 2016 amendment. Likewise, the use of the word “occurring” in Subsection (5) signals the progressive aspect and shows that an action was, is, or will be unfinished at the time referred to. People v. Manuel, 319 Mich. App. 291, 301-302, 901 N.W.2d 118 (2017). Thus, the statute signals that a “reversion under subsection (4)” may be in the process of occurring when the statute became effective. In those cases, the requirements of the 2016 amendment must be satisfied. As plaintiff argues, however, nothing suggests that completed transfers under the earlier versions of the statute are to be reversed.

Cove Creek, supra, at 9.

After determining that the plain language of MCL 559.167, as amended by 2016 PA 233, did not permit retroactive application, the Court of Appeals determined that retroactive application of the statue was also impermissible as it would have unconstitutionally interfered with the Association’s vested rights.  Specifically, the Court of Appeals held:

…even if the 2016 amendment is considered remedial, it cannot apply retroactively if it abrogates vested rights. See Davis, 272 Mich. App. at 158, 725 N.W.2d 56. Under the 2002 version of MCL 559.167(3), “[i]f the developer does not withdraw the undeveloped portions of the project from the project before expiration of the time periods, those undeveloped lands shall remain part of the project as general common elements and all rights to construct units upon that land shall cease.” MCL 559.167(3), as amended by 2002 PA 283 (emphasis added). In this case, 10 years after the date of commencement of the project was sometime in 1999, or possibly sometime in 2012 at the latest. When the rights to construct units ceased, plaintiff obtained a vested right in the undeveloped lands (former Units 1 through 14). The trial court found that plaintiff’s rights vested by operation of law, without any action. We agree.

Defendants’ arguments against vesting are that (1) plaintiff did not prepare and record a replat under MCL 559.167(2), and (2) the 2002 version of MCL 559.167 violated defendants’ due-process rights. The version of MCL 559.167(2), as amended by 2002 PA 283, provides: “If a change involves a change in the boundaries of a condominium unit or the addition or elimination of condominium units, a replat of the condominium subdivision plan shall be prepared and recorded assigning a condominium unit number to each condominium unit in the amended project.” As found by the trial court, nothing in this language required a replat to be recorded, or conditioned a “reversion” on the recording. Thus, a “reversion” occurred regardless of whether a replat was prepared or recorded.

Cove Creek, supra, at 10-11.

Did MCL 559.167, as amended by 2002 PA 283, deprive the defendants of due process?

In Cove Creek, supra, the defendants argued that they were deprived of their due-process rights under the 2002 version of MCL 559.167 because they were not provided with notice and a hearing before they were permanently deprived of their property rights in former Units 1 through 14.  The Court of Appeals held that the defendants had not been denied due process as the legislature had the authority to condition the continued retention of a property right based on the performance of affirmative acts.  Specifically, the Court of Appeals held that:

In City of Kentwood v. Estate of Sommerdyke, 458 Mich. 642, 646, 581 N.W.2d 670 (1998), our Supreme Court held that “the state has the authority to condition the retention of certain property rights on the performance of an affirmative act within a reasonable statutory period.” That case involved the highway-by-user statute, MCL 721.20. City of Kentwood, 458 Mich. at 645, 581 N.W.2d 670. As stated by the Court:

Even with respect to vested property rights, a legislature generally has the power to impose new regulatory constraints on the way in which those rights are used, or to condition their continued retention on performance of certain affirmative duties. As long as the constraint or duty imposed is a reasonable restriction designed to further legitimate legislative objectives, the legislature acts within its powers in imposing such new constraints or duties. [L]egislation readjusting rights and burdens is not unlawful solely because it upsets otherwise settled expectations. [Id. at 652-653, 581 N.W.2d 670 (quotation marks and citation omitted).] Therefore, the Court held that “the state may condition the permanent retention of a property right on performance of reasonable conditions that indicate a present intention to retain the property interest.” Id. at 655-656, 581 N.W.2d 670. The Court concluded that “by treating property that has not been reserved for private use for ten years or longer as dedicated to the public for use as a highway, the Michigan statute is a reasonable exercise of police power.” Id. at 656, 581 N.W.2d 670. Regarding whether due process was afforded, the Court stated, “generally, a legislature need only enact and publish a law and afford citizens a reasonable opportunity to familiarize themselves with the terms of a statute to advise its citizens of the lapse of a property right.” Id. at 664, 581 N.W.2d 670.

Similarly, MCL 559.167(3), as amended by 2002 PA 283, conditioned the retention of a property right on the performance of reasonable conditions that indicate a present intention to retain that property interest. Within the 10-year period, defendants were required to either develop Units 1 through 14 or withdraw the undeveloped portions from the project. See MCL 559.167(3), as amended by 2002 PA 283. Defendants had sufficient notice of the law and that their property rights would lapse if they did not take action within the 10-year period. Moreover, the requirements of either completing the project or withdrawing the units from the project are reasonable requirements designed to further the legitimate objectives of preventing incomplete projects and providing finality…. As consequence, any vested rights defendants possessed in the property lapsed by 2012.

Cove Creek, supra, at 11-12.

Did MCL 559.167, as amended by 2002 PA 283, result in an unconstitutional taking of real property?

Defendants also argued that the 2002 version of MCL 559.167, which mandated a permanent transfer of title, caused an unconstitutional taking without just compensation and in violation of the public use requirement. However, the Court of Appeals held a takings claim could not be asserted against the condominium association at it was not a state actor.  Specifically, the Court held:

“The Fifth Amendment provides in part: ‘[N]or shall private property be taken for public use, without just compensation.’ ” City of Kentwood, 458 Mich. at 656, 581 N.W.2d 670. “The Fifth Amendment prohibition applies against the states through the Fourteenth Amendment. Michigan’s Constitution is substantially similar to the Taking Clause of the United States Constitution.” Id. (citations omitted). “One who asserts an uncompensated taking claim must first establish that a vested property right is affected.” Mich. Pub. Serv. Comm., 249 Mich. App. at 436, 642 N.W.2d 691 (quotation marks and citation omitted).

As discussed, defendants had a vested property right in former Units 1 through 14, such that they could properly assert an uncompensated taking claim. Nonetheless, the necessary state action required to find an unconstitutional taking is not present. As stated in City of Kentwood, 458 Mich. at 663, 581 N.W.2d 670, “It is the owner’s failure to make any use of the property—and not the action of the State—that causes the lapse of the property right; there is no ‘taking’ that requires compensation.” (Quotation marks and citation omitted.) Similarly, in this case, it was defendants’ failure to act within the 10-year period that caused the lapse of their property right, not any action of the state. Therefore, there is no “taking” that requires compensation under the United States and Michigan Constitutions.

Cove Creek, supra, at 12-13.

Conclusion

MCL 559.167 was originally enacted to provide an end date for the development of condominiums.  MCL 559.167(3) required that a developer, its successors or assigns either complete any units identified as “need not be built” on the condominium subdivision plan within ten (10) years of the date of commencement of construction or within six (6) years of exercising a right of conversion, expansion or contraction.  If the developer, its successors or assigns did not complete the “need not be built” units with the statutory time periods, the right to construct the units would automatically terminate and the undeveloped land would remain as common elements if it was not withdrawn from the condominium.

In contrast, the 2016 amendments to MCL 559.167, created a new “reversion” process to eliminate “need not be built” units after the expiration of the six (6) year or ten (10) year statutory time periods. Newly created MCL 559.167(4) requires 2/3 of the co-owners that are in good standing to vote to approve a “reversion” of “need not be built” units to common elements by adopting a declaration that will be recorded in the register of deeds after the expiration of the statutory time periods. If 2/3 co-owner approval is obtained, the condominium association must then send the declaration to a developer or successor developer at its last known address.  The developer or successor developer may withdraw the land on which the units were to be located or amend the master deed to make the units “must be built” within the sixty (60) day period.   If the developer or successor developer fails to withdraw the land or amend the master deed within sixty (60) days, the condominium association may record the declaration, which becomes effective upon recording and the developer or successor developer loses the right to construct the “need not be built” units.

Given that  Cove Creek Condo Ass’n v Vistal Land & Home Dev, LLC, __ Mich App __; __ NW2d __(2019), issued December 19, 2019 (Docket No. 342372), is binding precedent, attorneys, co-owners, condominium associations, developers, successor developers and title companies should be aware of the following:

  1. MCL 559.167, as amended by 2002 PA 283, applies to ALL condominiums that existed at the time the statute was enacted, not just condominiums that were created on or after the effective date of 2002 PA 283.
  2. “Need not be built” condominium units are automatically eliminated by operation of law under MCL 559.167, as amended by 2002 PA 283, and a replat or recording of any additional documents is not necessary.
  3. Vested rights in the common elements acquired by the co-owners under MCL 559.167, as amended by 2002 PA 283, cannot be eliminated by 2016 PA 233.
  4. The co-owner voting “reversion” process, and the additional 60 day time period for a developer to withdraw “need not be built” units that was created by 2016 PA 233 only applies to condominiums in which the six (6) or ten (10) year statutory periods had not expired prior to September 21, 2016 or to condominiums created after September 21, 2016.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2019, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel has been named a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine in 2018 and 2019, an award given to less than 5% of the attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 478-1800 or kevin@hirzellaw.com.