Monday, October 30, 2023

TIES THAT BIND

             Four Seasons is a housing development in Tennessee. FSD Corporation operates the homeowners’ association for Four Seasons. 

            In 1984 FSD executed a Declaration of Covenants, Conditions, and Restrictions for the benefit of all owners of residential properties within the Four Seasons development. The CCRs provide that the restrictions are intended to “run with and bind” all of the Four Seasons properties identified in an exhibit attached to the CCRs. 

            CCR restrictions include: (a) each Lot must be used only as a residence; and (b) no gainful profession, occupation, or trade may be conducted on any Lot. 

            Two other provisions are important: (c) owners may delegate the right to use common areas and facilities to tenants; and (d) the CCRs can be amended by the affirmative vote of all record Lot owners. 

            The CCRs are valid for 30 years. At expiration of the initial term, they are automatically extended for successive 10-year periods, unless a majority of owners elect to terminate them. 

            The CCRs were properly recorded in DeKalb County; the CCRs were not terminated by action of the owners. 

            Pratik Pandharipande purchased his Four Seasons property in 2015, with the intent of leasing it on a short-term basis as income-producing property. And, with the assistance of a property management company, Pratik was successful – he leased his property to third parties for rental terms ranging from two to 28 days. 

            Possibly as a reaction to the activities of Pratik and others, a majority of FSD owners voted to amend the CCRs in 2018. The amendment requires that all leases must be for a minimum of 30 days. FSD recorded the amendment with the DeKalb County Register of Deeds. 

            Unperturbed by these events, Pratik continued to lease his property for terms of fewer than 30 days. In March 2019 FSD send Pratik a letter, notifying him that he was violating the 2018 amendments. 

            Pratik responded by filing a lawsuit in 2019, seeking a declaratory judgment that the 2018 amendments did not prohibit him from using his property as an STR. Then Pratik appealed when he lost at the trial court. 

            The Court of Appeals concluded that the 1984 CCRs were in effect when Pratik purchased his Four Season property. And the 2018 amendment was lawfully approved and properly recorded. Finding no basis for determining that the 2018 amendment was subject to challenge, FSD prevailed. 

            So Pratik further appealed. 

            The Supreme Court first evaluated the CCRs and determined that they pass automatically with the land when ownership or possession changes, whether or not each successor owner consents. That leaves the question of only the effectiveness of the 2018 amendment. 

            Under law, unless CCR modifications are arbitrary and capricious, amendments will be effective when a purchaser buys into a community governed by restrictive covenants that permit future amendments. Holding that the 2018 amendment restricting STR activities is neither arbitrary nor capricious, Pratik and his Four Seasons property are bound by it. 

            The 2018 amendment is effective. Pratik may not lease his Four Seasons property for a term of less than 30 days. See Pandharipande v. FSD Corp.; Supreme Court of Tennessee; Case No. 2019-CV-60; October 17, 2023: https://www.tncourts.gov/sites/default/files/OpinionsPDFVersion/FSD%20-%20Majority%20Opinion.pdf. 

Questions / Issue: 

1.      Likely a rhetorical question, but curious why this case was litigated all the way to the Supreme Court. The only surprise here is that Pratik kept pushing an untenable / untenantable position when the outcome seemed clear. Perhaps this is a matter of first impression in Tennessee. 

2.      Not stated in the Opinion is whether or not Pratik knew or should have known of the existence of the CCRs when he purchased the property. If not, then claims could have been asserted against the seller, title company, and others. 

3.      Also unstated are Pratik’s efforts to oppose the 2018 amendment when it was proposed. Or announce his candidacy to become a director or officer of the POA, to potentially influence the decision behind the 2018 amendment. 

                                                                            Stuart A. Lautin, Esq.*

 

 Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Tuesday, October 3, 2023

MORTGAGE GIFT LETTERS

             Stephanie Shields and Timothy Wilkinson decided to cohabitate in 2017. At that time Tim lived in a home owned by his grandmother, Ida Mae Clark. The three determined it would be best for all of them to live together, so Stephanie engaged a Realtor to both purchase a new home and sell Ida Mae’s property. 

            Since Stephanie’s credit scores were better than Tim’s, Stephanie applied for a VA mortgage. Ida Mae sold her property to provide equity for the new home, to be occupied by Stephanie, Tim, and Ida Mae. 

            Stephanie took Ida Mae to the office of the mortgage lender, where Ida Mae was furnished a form titled “Gift Letter.” The form stated: “I have made a gift of $111,213.14 to Stephanie Shields,” who was incorrectly identified in the letter as Ida Mae’s granddaughter. The form also provided that “No repayment of the gift is expected or implied . . .” 

            When Tim learned of the gift letter, he contacted an attorney. The attorney drafted a Memorandum Agreement for Tim and Stephanie. The Agreement acknowledged that Tim and Stephanie used substantially all of the gift proceeds from Tim’s grandmother to purchase the new property. Further, the Memorandum Agreement stated that if either Stephanie or Tim “failed to pay [their] half of the bills, then [Ida Mae’s gift] amount [would] be made good at the time of payout.” 

            Ida Mae was not a party to the Memorandum Agreement. 

            The property purchase closed in July 2017. The Memorandum Agreement was not signed until February 2018. Presumably at the time of the purchase the mortgage lender received a title policy insuring its first lien position. 

            When the relationship between Stephanie and Tim deteriorated in 2018, Stephanie posted an eviction notice on Ida Mae’s door, requiring that both Tim and Ida Mae vacate within 30 days. So Ida Mae engaged an attorney, who filed a lawsuit against Stephanie in 2019. 

            A trial was convened in 2021. The court determined that Ida Mae and Stephanie had a valid agreement to jointly purchase the property, and entered an Order requiring that Stephanie reimburse Ida Mae for substantially all of the “gift” funds. 

            Stephanie appealed. 

            On appeal, Stephanie argued that Ida Mae disclaimed any interest in the property when she signed the Gift Letter. Ida Mae responded by claiming that Stephanie admitted the money was not a gift when Stephanie signed the Memorandum Agreement. 

            The Appellate Court considered the mortgage broker’s testimony that the Gift Letter was required for Stephanie to qualify for a mortgage loan. Conversely, the Court noted that Stephanie signed the Memorandum Agreement requiring her to repay Ida Mae’s gift amount from the proceeds available at the time of sale. 

            Thus negating the concept of a gift. 

            These competing facts led the Appellate Court to reconsider the relationship between the parties. Evidently monies described in a gift letter may not be a gift, depending on the intent of the parties. Rebuttal testimony is permitted to challenge the presumption that the monies paid were actually a gift with no expectation of repayment, even though the Gift Letter is unambiguous. 

            Further, the High Court did not find it particularly relevant that the Memorandum Agreement was signed eight months after closing, since the Court determined that the true agreement of the parties preceded the purchase of the property. Not stated in the Opinion is the reasoning to allow the Memorandum Agreement to controvert the Gift Letter, as typically extrinsic evidence is not allowed to be considered as evidence unless required to support or contest an ambiguous document. 

            Ida Mae wins again; Stephanie must repay the “gift” funds. See Shields v. Clark; Supreme Court of Alaska; Case No. S-18325; August 18, 2023: https://cases.justia.com/alaska/supreme-court/2023-s-18325.pdf?ts=1692378023. 

Questions / Issue: 

1.      Our judicial system is composed of people with parents, children, grandparents, and grandchildren. From purely a legal perspective and without the overlay of a grandma trying to do something nice for her grandson, this is an absurd result. But given the context of this claim, both the superior court and Supreme Court delivered results that were likely anticipated. 

2.      And yet, what if the State where this was litigated has a theory of equitable liens and constructive trusts? And what if a Judgment is entered that allows grandma to enjoy the position of a first lienholder, priming the mortgage lender and VA, allowing grandma to foreclose and eradicate the secured position of the mortgage lender? Then the lender would seek recourse against the title company that insured its lien position, who, in turn, would look for indemnity from the mortgagors.

3.      In law school we learn that ‘bad facts make bad laws.’ Perhaps that should be supplemented with this appendix: ‘Also, Gift Letters mean nothing. At least not in Alaska. 

                                                                        Stuart A. Lautin, Esq.*

 

Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.