Ketle Brook Lofts, LLC v. Specht

KETLE BROOK LOFTS, LLC, & others [^1]

v.

STACY S. SPECHT & others [^2] (and a consolidated case [^3]).

Nos. 20-P-738, 20-P-739

Appeals Court of Massachusetts, Suffolk

October 12, 2021

Heard April 13, 2021.

Civil action commenced in the Superior Court Department on August 3, 2015. Civil action commenced in the Land Court Department on August 6, 2015.

After transfer of the Superior Court action to the Land Court Department, the cases were heard by Karyn F. Scheier, J., on motions for summary judgment; a renewed motion for summary judgment was heard by Diane R. Rubin, J., and entry of judgment was ordered by her.

Henry A. Goodman for Kettle Brook Lofts, LLC, & others. Patrick C. Tinsley for Haymarket Capital, LLC, & another. Thomas O. Moriarty for Stacy S. Specht & others.

Present: Meade, Wolohojian, & Massing, JJ.

MASSING, J.

In this appeal we consider the scope of a developer's reserved right to construct a condominium in phases over a limited period of time and whether, consistent with the terms of the Massachusetts condominium statute, G. L. c. 183A (statute) and the master deed, the developer may unilaterally extend its time to complete the phased development. In the circumstances of this case, we hold that the developer's attempts to do so were invalid under both the statute and the master deed and affirm the judgment in this regard. We also consider whether the developer's lenders, by executing partial releases of their mortgage interests to individual unit owners, effectively released their entire interest in the common areas of the condominium. Distinguishing Trustees of the Beechwood Village Condominium Trust v USAlliance Fed. Credit Union, 95 Mass.App.Ct. 278 (2019) (Beechwood), because the developer here had not sold one hundred percent of the completed units, we modify the judgment to declare that the lenders' mortgage interests are not subordinate to the master deed as to the units retained by the developer and those units' undivided percentage interest in the condominium's common areas.

Background.

1. The master deed.

The undisputed facts in the parties' summary judgment motions established the following. From 2004 to 2008, Kettle Brook Lofts, LLC (developer), acquired several tracts of land located at 1511 and 1541 Main Street in Worcester (property). The property included a single structure with six adjoining wings. As pertinent here, Haymarket Capital, LLC (Haymarket), and Commerce Bank and Trust Company (Commerce Bank) made loans to the developer, secured by mortgages and security agreements, to develop the property and structure as a condominium. (For simplicity, we refer to Haymarket and Commerce Bank collectively as "the lenders," and to their various security arrangements as "mortgages.")

Following the execution of the mortgages, the developer, as the "declarant," recorded a master deed on July 22, 2008, creating the Kettle Brook Lofts Condominium (condominium). By the terms of the master deed, all the developer's interests in all the land and improvements at the property were submitted to the provisions of G. L. c. 183A. As described in more detail below, the master deed permitted the developer to complete construction of up to 109 units in phases over a period of seven years. At the time the master deed was recorded, "Wing C," with thirty-three units, had been completed as "Phase I." Exhibit C to the master deed (Exhibit C) listed the thirty-three units in Wing C along with their size, description, and assigned percentage of undivided beneficial interest in the common areas, based on each unit's fair market value in relation to the aggregate value of all then-existing units. The thirty-three units' percentage ownership of the common areas totaled one hundred percent. The contemplated future units were to be located in "the additional wings shown on the Plans as Wing A, Wing B, Wing C, Wing D, Wing E, and Wing G," which, the master deed noted, "presently constitute common areas and . . . may be completed as additional phases."

Several sections of the master deed set forth the developer's rights and obligations with respect to the phased development of the condominium. In section IV, entitled "Phasing," the developer as declarant "reserve[d] the right, but not the obligation, to complete the construction of the Condominium, or any part thereof, by amending this Master Deed, which right is also specifically reserved, in order to add up to five (5) additional phases." If fully completed, the condominium would include a total of 109 units, consistent with a special permit previously obtained from the Worcester planning board. "[T]o complete construction work on the Condominium," the developer reserved "the easement, license right and privilege to store equipment and materials and to pass and re- pass by vehicle and on foot in, upon, over and to any and all of the common areas and facilities" of the condominium "for a period ending 7 years" after the recording of the master deed.

Section VIII, "Declarant's Reservation of Development Rights," similarly reserved the right, but did not require, the developer "to construct and add to the Condominium the total permitted 109 Units." This provision established a seven-year period for the developer to substantially complete the additional phases, and also provided that the developer's failure to complete any additional phases within that time would constitute a waiver of its development rights:

"In the event that additional phases are to be included in the Condominium, the Units to be added shall be substantially completed, and the amendment to the Master Deed submitting those Units to the condominium shall be recorded on or before 7 years from the date of the recording of this Master Deed. In the event that any such phase has not been completed and any such amendment has not been recorded during the period specified in the preceding sentence, the Declarant shall be deemed to have waived the right to complete said phase[, ] to record such an amendment to submit additional Units to the Condominium, or to execute documents pursuant to [section] XI(c) hereof."

In section XI(c), referenced in the above-quoted excerpt from section VIII, the developer again reserved its phasing rights and further reserved the right, "when such improvements are substantially completed," to amend the master deed, without the consent of the existing unit owners or their mortgagees, to reflect the addition of new units and to reapportion all new and existing units' percentage of beneficial interest in the common areas. The same paragraph provided that unit owners, by recording their deeds or mortgages, would "acknowledge the anticipated future phases of the Condominium resulting in a potential total of 109 Units," and consent to the corresponding diminution in their percentage ownership of the common areas that the addition of new units would necessarily cause.

At the same time the master deed was recorded, and consistent with its terms, the developer filed a declaration of trust establishing the Kettle Brook Lofts Condominium Trust (trust), through which the unit owners would manage and regulate the condominium. The developer was the original trustee of the trust.

2. Early phases of development.

The developer quickly added eighteen units in "Wing B" as Phase II and two units in "Wing G" as Phase III, amending the master deed accordingly. The addition of the Wing B units was reflected in the first amendment to the master deed, recorded just one week after the recording of the master deed itself. The addition of the units in Wing G was reflected in the third amendment, recorded about six weeks later. Each of the amendments included an updated version of Exhibit C, listing all completed units and their corresponding percentage interest in the common areas based on their relative fair market value. Thus, Exhibit C to the third amendment listed fifty-three units, with combined percentage interests in the common areas totaling 100 percent.^[4]

Over time, the developer sold forty-eight of the units. For all units sold, the lenders executed partial releases, releasing to the buyers of the units "all interest acquired" under the lenders' mortgages with respect to those individual units. The developer retained title to the five unsold units. In 2014, Stacy Specht and Sudhakar Teegavarapu were duly appointed as trustees of the trust.

3. The developer's attempts to reassert its rights.

As noted, the master deed required the developer to complete the phased development of the condominium in seven years. However, no new units were added after the first two months of the condominium's existence. On July 21, 2015, the day before the developer's phasing rights were to expire, the developer unilaterally recorded a series of instruments that purported to vastly expand its ownership rights and powers over the development and governance of the condominium. In the fifth amendment to the master deed, the developer purported to amend the phasing provisions of the master deed to give itself an additional seven years to complete the "Phase IV" development of the last fifty-six of the permitted 109 units. The developer invoked the general amendment provision of the master deed, section XI(a), as its authority to make amendments without the consent of the other unit owners or trustees.^[5]

The units to be created in Phase IV -- which, the developer acknowledged in the fifth amendment, would "require additional work before certificates of occupancy will be issued by the City of Worcester" -- were designated "Class B" units to be governed under a separate trust, the "Kettle Brook Lofts Class B Condominium Trust" (trust B), recorded concurrently. The developer gave itself the "sole, unfettered...