Court Rules Condo Developer Improperly Charged Fees for Recreational Facilities

            Kevin Hirzel, Kayleigh Long and Joe Wloszek of Hirzel Law, PLC represented the Charles E. Phyle Restated Revocable Trust

           In Charles E Phyle Restated Revocable Trust v Scheppe Investments, et. al., unpublished opinion of the Court of Appeals, issued April 22, 2021 (Docket No. 353045), the Michigan Court of Appeals ruled that the successor developer of a RV condominium improperly charged the co-owners for fees related to recreational facilities that the developer owned on an adjoining property. The decision is important as it is the first case that interpreted the requirements set forth in MCL 559.234 of the Michigan Condominium Act, and accompanying administrative rule, Mich Admin R 559.111, that must be complied with in order to charge fees to use recreational facilities that are located outside of a condominium. Accordingly, the decision stands for the proposition that the co-owners are entitled to inspect the books and records of the recreational facilities and an equitable vote in the operations of recreational facilities that are owned by third parties.  If the third-party owner fails to comply with the requirements in the Michigan Condominium Act and administrative rules, they are not entitled to charge a fee for use of the recreational facilities.

The Facts of the Case: Did the Developer of a RV Condominium Improperly Charge Fees?

Scheppe Investments, Inc. (“Scheppe”) is the successor developer of the Traverse Bay RV Park Condominium. Scheppe owns property adjacent to the condominium that contained various recreational facilities. The plaintiff, the Charles E Phyle Restated Revocable Trust (the “Trust”) is a co-owner in the condominium and was charged an annual usage fee in connection with the recreational facilities on the adjoining property. As a result of a prior lawsuit in 2012, Scheppe entered into an agreement with a group of 21 co-owners in the condominium, purporting to set a flat fee for usage of the recreational facilities instead of a charging a proportional share of the actual cost of the maintenance and repair of the recreational facilities as indicated in the condominium bylaws.  The 2012 agreement also purported to prohibit the co-owners from inspecting the books and records related to the recreational facilities.  In 2017, Scheppe entered into a clarification agreement with the Traverse Bay RV Park Condominium Association in an attempt to reaffirm the 2012 agreement.

The Trust filed a lawsuit on the basis that the successor developer had improperly attempted to expand the condominium under MCL 559.132, that the fees for the recreational facilities were being charged in violation of the Michigan Condominium Act and administrative rules and seeking inspection of the books and records of the recreational facilities. In an earlier ruling, the trial court held that the condominium could not be expanded under MCL 559.132, and an application for leave to appeal that ruling by Scheppe was rejected by the court of appeals in 2018. The trial court later granted summary disposition in favor of the Trust on the remaining claims and ruled that Scheppe violated Mich Admin R 559.111 and awarded the Trust a reimbursement of the usage fees that it had paid. The trial court awarded $23,801.02 in discovery sanctions against Scheppe and Scheppe appealed the trial court’s final order.

Court Rules Condo Developer Improperly Charged Fees for Recreational Facilities

            The court of appeals commenced its analysis by reviewing the plain language of the Michigan Condominium Act and the accompanying administrative rules.  Specifically, MCL 559.234 states that, “Recreational facilities and other amenities, whether on condominium property or on adjacent property with respect to which the condominium has an obligation of support, shall comply with requirements prescribed by the administrator, to assure equitable treatment of all users.” Mich Admin Code, R 559.111(b) further provides that:

Pursuant to [MCL 559.234], a recreational facility which is to be enjoyed by condominium co-owners and third parties shall, at a minimum, comply with the following provisions:

            …

(b) When recreational facilities are owned by a third party and condominium co-owners are obligated to help financially support the recreational facilities, all of the following conditions shall be met:

(i) Disclosure shall be made to prospective purchasers of their financial obligations and responsibilities as co-owners to support the recreational facilities. Such disclosure shall include information regarding all fees charged and compensation paid.

(ii) The condominium co-owners shall have an equitable vote, as set forth in the disclosure statement, as to the operation and management of the recreational facilities.

(iii) An arbitration clause to settle disputes upon consent of the parties shall be included in the condominium legal documents.

(iv) The necessary easements shall be established.

(v) The books and records of the recreational facilities shall be kept separate from other operations and shall be made available for inspection by the co-owners.

            First, based on the above statutory language, Scheppe argued that MCL 559.234 only applied if the condominium association was required to pay the usage fees and since Scheppe directly billed the individual co-owners, that it was exempt from complying with the Michigan Condominium Act.  In rejecting this argument, the court of appeals stated as follows:

But there is no reasonable basis for construing the statute in this manner. It is clear from its own language that the statute is concerned with the “equitable treatment of all users.” MCL 559.234. Also, it is not disputed that the condominium co-owners were all obligated to pay for the recreational facilities, ostensibly on the basis of the condominium bylaws. Clearly, the “condominium” had an “obligation of support” in this circumstance, and rules regarding the equitable treatment of all users of the facilities were required.

Second, Scheppe argued that it was exempt from complying with MCL 559.234 and Mich Admin R 559.111 because it was not a “third party owner” of the recreational facilities. Scheppe argued that it was not a third party as it also qualified as co-owner through by its ownership of rental units in the condominium.  In rejecting this argument, the court of appeals stated that, “the recreational facilities at issue are not owned by the co-owners collectively; instead, they are owned solely by Scheppe. Scheppe is indeed a ‘third party’ in its role as the owner of the facilities.”  The court further found that Mich Admin R 559.111 applied because there was current use and contemplated future use of the recreational facilities by non-co-owners.  Specifically, the court of appeals stated:

…. persons from a “tiny house” project were using the facilities, and Scheppe did not disagree with that factual assertion, but instead argued that the tiny-house inhabitants should not be considered “third parties” because their homes were intended to be included in the condominium development but, because of a lawsuit, the homes had to be included in a separate development. In fact, Scheppe admits on appeal that in the middle of 2017, third parties began using the facilities. And plaintiff’s argument that the phrase “is to be enjoyed” contemplates future use is compelling. In other words, even if the facilities were not currently being offered to third parties, if such offers were contemplated, the rule would apply. Significantly, the condominium bylaws state, in part:

Recreational areas and facilities, including, but not limited to, open space areas, bath and laundry facilities, a swimming pool and hot tub, a tennis court, a shuffleboard court, and a horseshoe pit have been planned for areas which are currently owned by the Developer and adjacent to the project. Although the Developer is under no obligation to install any such amenities, such areas and facilities may be constructed by the Developer at its sole cost and expense. If installed, the Developer reserves the right to implement a shared use (membership) arrangement for the Co-Owners of this Project and those of any adjacent or proximate lots or projects; however, each Co-Owner will have the right, by virtue of ownership of a lot in the project, to utilize any such installed recreational facilities. The Developer, on behalf of itself and its successors or assigns, hereby reserves the right to charge a reasonable usage or other fee to cover the cost of maintenance and repair of any such amenities. The Developer has also reserved the right through its reserved expansion rights, to add any such areas and/or facilities to the project as general common elements reserving the use of such amenities for the benefit of rental RV lots adjacent to the project. Any such amenities would be for limited pedestrian use (including hiking and biking) by the Co-Owners (and lot renters) and their guests and invitees only, subject to all reserved rights created herein. The use of the recreational areas shall be subject to the rules and regulations, including permitted hours of use (as posted), as may adopted and implemented by the Developer, or its successors or assigns, from time to time (or, if the features are added to the project, the Board of Directors) which shall be applied on a uniform basis to all users of the amenities.

Accordingly, given that the condominium bylaws contemplated use of the recreational facilities by third parties, the court of appeals ruled that Scheppe’s argument was without merit.

            Third, Scheppe argued that only the condominium association was required to comply with Mich Admin R 559.111 and that a developer or successor developer has no obligation to comply with Mich Admin R 559.111.  The court of appeals rejected this argument by analyzing a developer’s disclosure obligations under the Michigan Condominium Act as follows:

…Scheppe’s argument makes little sense in a situation such as the present one, where the co-owners were obligated to pay for the recreational facilities independent of their membership in the condominium association. In addition, the rule, as noted, refers to disclosures. Mich Admin Code, R 559.901, states:

(1) Pursuant to section 84a of the act, the developer shall prepare a disclosure statement at the time of recordation of the master deed. A disclosure statement shall not be used unless it meets the requirements set forth in the act and these rules. A disclosure statement shall be amended before further use if there is a material change in the information contained therein.

(2) Pursuant to sections 84 and 84a of the act, the developer shall furnish a copy of a current, effective disclosure statement to a prospective condominium purchaser not less than 9 business days before a binding purchase agreement.

MCL 559.184a states, in part:

(1) The developer shall provide copies of all of the following documents to a prospective purchaser of a condominium unit, other than a business condominium unit:

            …

(d) A disclosure statement relating to the project containing all of the following:

            …

(x) Other material information about the condominium project and the developer that the administrator requires by rule.

            …

(5) With regard to any documents required under this section, a developer shall not make an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

(6) The developer promptly shall amend a document required under this section to reflect any material change or to correct any omission in the document.

(7) In addition to other liabilities and penalties, a developer who violates this section is subject to [MCL 559.215].

MCL 559.215 states:

(1) A person or association of co-owners adversely affected by a violation of or failure to comply with this act, rules promulgated under this act, or any provision of an agreement or a master deed may bring an action for relief in a court of competent jurisdiction. The court may award costs to the prevailing party.

(2) A developer who offers or sells a condominium unit in violation of section 21 or 84a is liable to the person purchasing the condominium unit for damages.

Accordingly, as a result of the developer’s disclosure obligations, including those related to recreational facilities, the court of appeals affirmed the trial court’s ruling that Scheppe was required to comply with Mich Admin Code, R 559.111.

            Fourth, Scheppe argued that its violation of Mich Admin Code R 559.111 could not void the condominium bylaws, which constituted a contract between the developer and the Trust.  Scheppe argued that since it did not breach the condominium bylaws, it should still be allowed to collect fees related the recreational facilities.  In rejecting this argument, the court of appeals held as follows:

….as stated in Conlin v Upton, 313 Mich App 243, 255; 881 NW2d 511 (2015), “[w]hen validly promulgated, an entity’s bylaws or similar governing instrument will constitute a binding contractual agreement between the entity and its members.” Given the rule violations, the fee provision was not “validly promulgated.” In addition, the court justified its award of damages by referring to the administrative-rule violations. The court concluded that Scheppe had violated the provisions of Mich Admin Code, R 559.111(b). Given the court’s finding that the rule violations themselves justified the award of damages, Scheppe’s discussion about why, allegedly, the fee provision in the bylaws was not violated is irrelevant.

The court of appeals further noted that the condominium bylaws expressly required compliance with the Michigan Condominium Act and held that remedy provided by the trial court was appropriate under MCL 559.215.  Specifically, the Court stated that,

Scheppe’s contention that plaintiff could seek relief only against the association under MCL 559.215(1) is clearly without merit. And even if the statute is interpreted as not providing the avenue of relief sought by plaintiff, then the reasoning of Johnson for disallowing a voiding of the contract would not apply because there would be no “express private remedy” for plaintiff’s having had to pay the improperly assessed usage fees to Scheppe.

            Finally, the court of appeals largely upheld the award of $23,801.02 in discovery sanctions against Scheppe in the trial court, but remanded this issue to the trial court for a minor recalculation of the total attorney’s fees and costs awarded.

Michigan Court’s Decision Confirms Third Parties Must Comply with the Michigan Condominium Act

            The decision in Charles E Phyle Restated Revocable Trust v Scheppe Investments, et. al., unpublished opinion of the Court of Appeals, issued April 22, 2021 (Docket No. 353045) is important for Michigan condominium associations and co-owners as it confirms that third parties, including developers or successor developers, must comply with the requirements of the Michigan Condominium Act if they charge a fee for recreational facilities that are located outside of the condominium.  Accordingly, the most important protections that condominium associations and co-owners are afforded are as follows:

    1. Disclosure of the financial obligations by the developer or successor developer for the co-owners responsibility to support recreational facilities.
    1. An equitable vote in the operation and management of the recreational facilities that are owned by third parties.
    1. Rights to inspect the books and records of the recreational facilities that must be kept separate from other operations of the third-party owner.

Unfortunately, many condominium associations and co-owners are unaware of the above rights.  As such, if condominium co-owners are required to financially support recreational facilities that are owned by a third party, they should ensure that the third party is operating the recreational facilities in compliance with the Michigan Condominium Act and administrative rules.

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 is also a member of the Community Associations Institute’s (“CAI”) National Board of Trustees. Mr. Hirzel has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2020, 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 from 2018-2020, 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.

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