On certification to the Superior Court, Appellate Division.
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
The issue before the Court is whether a common-interest community can compel a current homeowner to pay arrears attributable to prior owners of the property under recorded covenants in the community's deeds and bylaws.
Highland Lakes Country Club and Community Association (the Association) is a private, single-family, residential community governed by a not-for-profit corporation. All community property owners must join the Association. On June 22, 1972, Gregory and Marilyn Donchevich purchased the Highland Lakes home that is the subject of this appeal. On December 12, 1990, Oxford Financial Companies (Oxford) filed a complaint in foreclosure against the Doncheviches. The Association was joined as a party because it had a docketed judgment for arrears owed by the Doncheviches. A final judgment was entered in Oxford's favor in its foreclosure action and, ultimately, the property was deeded to Oxford on June 1, 1993. On October 1, 1993, Oxford received a letter from the Association demanding payment in the amount of $851.66 for fees, dues, and assessments that had accrued on the property since the date that Oxford took ownership of the property. In addition, the Association demanded payment for the fees, dues, and assessments still owing from the Doncheviches. Oxford never paid any assessments on the property. On March 18, 1994, Franzino purchased the property from Oxford for $64,948.00. Franzino moved into the property, forwarding to the Association payment for his initiation fee as well as his first year's dues. The Association deposited the monies and informed Franzino that it applied his payment to the amounts owed by Oxford and the Doncheviches from their periods of ownership. The Association also advised Franzino that he would not be permitted any membership privileges until all arrears were paid in full. Franzino refused on the basis that the arrears of past owners were not his responsibility. He has refused to pay his own assessments since then.
The Association filed a complaint in Special Civil Part alleging that Franzino owed $6,750.14 for past amounts due, plus interest and the costs of suit. Franzino subsequently sought a declaratory judgment on his responsibility for the arrears of prior owners of his property, and he requested compensatory and punitive damages attributable to the Association's denial of membership privileges until those arrears were paid in full. The trial court held Franzino liable for those arrears that were attributable to his period of ownership of the property, and for the arrears attributable to the Doncheviches and Oxford when they held the property.
In an unpublished decision, the Appellate Division reversed. The Appellate Division held, in part, that the language of the Association's recorded covenants in the community's deeds and bylaws did not provide sufficient notice of an obligation to pay dues, fees, and assessments owed by prior owners and that there would be an enforceable servitude on the property for those arrears. The Court entered summary judgment in favor of Franzino on his counterclaim for a declaratory judgment and remanded Franzino's reinstated damages count.
The Supreme Court granted the Association's petition for certification.
HELD: On acquisition, a purchaser of property governed by the Association's Bylaws is obliged under Section VIII of Article III to pay money that should have been paid in the past, and it stands to reason that the amounts include the arrears accrued by any prior owner.
1. Lacking any statutory origin, homeowners' associations are created in New Jersey by the filing of a declaration of covenants, conditions, and restrictions contained in deeds and association bylaws. The covenants include restrictions and conditions that run with the land and bind all current and future property owners. Recordation of such documents can serve as notice to subsequent judgment creditors and purchasers and can create an equitable lien on the property. Subsequent bona fide purchasers of property encumbered with an equitable lien take "subject to the rights of the equitable lienor," provided there is adequate notice of the lien. (Pp. 13-16)
2. Any lien that may have been created when the Doncheviches went into arrears on Association common assessments was extinguished by operation of the foreclosure judgment and subsequent sheriff's sale. We reject the Association's argument that liens created through operation of its covenants and bylaws language are entitled to survive a foreclosure judgment. Accordingly, we hold that the Association's asserted lien for the Doncheviches' arrears, arising from the covenant language in the Doncheviches' deed and governing Bylaws, was extinguished by operation of the foreclosure judgment and sale. The property was no longer encumbered by that lien. However, although that lien became unenforceable, the underlying debt that gave rise to that lien was not affected. (Pp. 16-20)
3. Article III, Section VIII of the Bylaws, states that "[m]embership privileges in the Club will not be granted on resale or other transfer of ownership of property until all Club dues, assessments and initiation fees in arrears are paid in full." (emphasis added). Although Section VIII does not include specific reference to arrears "accrued by predecessors in title," its import plainly conveys the message that "all arrears" means "all." Common sense tells us that at "resale or other transfer of ownership of property" there are and there can be no "dues, assessments and initiation fees in arrears" other than those already due from prior owners. Thus, Section VIII undoubtedly addresses those "dues, assessments and initiation fees" that are "in arrears" at the time of a "resale or other transfer of ownership of property" and imposes the obligation of their satisfaction on the new owner of the property. Section IX of Article III addresses those instances when a subsequent acquirer of a property subject to the Association's Bylaws delays paying his own required "dues, assessments and initiation fees," serving as a gap-filler to avoid the non-payment of dues, assessments or initiation fees that may arise during any period a new owner delays in satisfying his membership obligations. Read as written, and in context, Sections VIII and IX of Article III of the Association's Bylaws are not ambiguous. Therefore, nothing here should be read to relieve Franzino of the obligation to which he became bound under the master deed and Bylaws when he acquired the property: the obligation to inquire about and to ensure satisfaction of all "dues, assessments and initiation fees in arrears," a conclusion further supported by the plain meaning of the term. Thus, on acquisition, a purchaser of property governed by the Association is obliged under Section VIII to pay money that should have been paid in the past, and it stands to reason that the amounts include the arrears accrued by any prior owner. (Pp. 20-27)
4. We conclude that there was a debt owed to the Association by Franzino's predecessors in title relating to the property that preceded Franzino's acquisition. Franzino acquired the obligation to pay for that debt when he acquired the property without requiring satisfaction of the arrears debt prior to closing title. Accordingly, we uphold the continuing validity of the underlying debts owed to the Association and separately incurred by defendant Franzino and his predecessors in title Gregory and Marylyn Donchevich and Oxford Financial Companies and hold further that any liens in favor of the Association applicable to the property were either extinguished or never perfected. (Pp. 27-29)
The judgment of the Appellate Division is REVERSED and the judgment of the Law Division is reinstated.
JUSTICE WALLACE filed a separate dissenting opinion, and agrees with the Appellate Division decision that the Association's Bylaws are ambiguous.
CHIEF JUSTICE PORITZ and JUSTICES LONG, ZAZZALI, ALBIN, and RIVERA-SOTO join in JUSTICE LaVECCHIA's opinion. JUSTICE WALLACE filed a separate dissenting opinion.
The opinion of the court was delivered by: Justice LaVECCHIA
Argued September 12, 2005
In this matter, a homeowners' association in a common-interest community seeks to compel a current homeowner to pay his unpaid membership fees, dues, and common assessments as well as arrears attributable to prior owners of the property. The homeowners' association contends that recorded covenants in the community's deeds and bylaws provided homeowners with notice that they would be responsible for arrears from prior owners and that their property would be encumbered by an equitable servitude for those arrears.
The homeowner argues to the contrary. He claims the covenant language did not provide him with sufficient notice that he was responsible for arrears from predecessors in title or that his property was conveyed subject to an equitable servitude in respect of arrears accrued by prior owners. Moreover, because there had been a recent mortgage foreclosure to which the Association had been a party, he argues that the foreclosure cleared the title of any lien for arrears that the Association may have had up to that point in time.
The Appellate Division, in an unpublished opinion, acknowledged that execution of a deed containing covenants compelling compliance with bylaw requirements can create an agreement to pay common fees and assessments (including arrears from prior owners), and also can give rise to a valid claim on property enforceable against a subsequent property owner. Here, however, the panel found that the terms of the recorded covenants were ambiguous and did not provide fair notice that property purchased in this community would be conveyed subject to a contractual requirement that the arrears of prior owners were enforceable against subsequent owners or that there would be an enforceable servitude on the property for those arrears.
We granted the Association's petition for certification, Highland Lakes Country Club v. Franzino, 183 N.J. 213 (2004), and now reverse the judgment of the Appellate Division.
Highland Lakes Country Club and Community Association (the Association) is a private, single-family, residential community governed by a not-for-profit corporation. Restrictive membership covenants contained in the community's master deed, in subsequent deeds used in the transfer of title to property, and in the Association's Bylaws require all property owners in the community to join the Association.*fn1 There appears to be no dispute that membership covenants are valid and enforceable and run with the land, binding all owners of property within a community. Paulinskill Lake Ass'n, v. Emmich, 165 N.J. Super. 43, 45 (App. Div. 1978). At issue is the Association's position that, based on deed language requiring adherence to Bylaw requirements, arrears on membership charges that were accrued by predecessors in title may be enforced both as a contractual obligation undertaken by an acquiring property owner and as an equitable servitude on the property. We thus turn to the relevant language in the Bylaws that, coupled with the deed covenants, is asserted to provide notice that a purchaser in this community acquires the property with a concomitant obligation to pay arrears accrued by prior owners and that the property may be subject to an equitable servitude for such arrears.
Article III of the Bylaws includes the following provisions:
SECTION VIII. Membership privileges in the Club will not be granted on resale or other transfer of ownership of property until all Club dues, assessments and initiation fees in arrears are paid in full. (Amended 8/15/93)
SECTION IX. Membership in the Club shall be granted automatically to new owners upon proof of conveyance of title to property in Highland Lakes satisfactory to the Membership Committee. The effective date of the membership of such new owners shall coincide with the effective date of the acquisition of title by such new owners, and such membership shall continue for the entire duration of ownership. Such new owners shall complete a membership data form and file the same with the Club at the time proof of conveyance of title is presented but any failure or delay in presenting such proof of conveyance of title or filing such membership data form shall not be deemed to relieve such new owners from the obligation of paying Club dues, assessments and initiation fees from the time the same shall have become due. (Amended 8/18/85)
SECTION X. All members shall comply with the By-Laws and Rules and Regulations of Highland Lakes Country Club and Community Association. (Amended 8/16/81)
SECTION XI. (Adopted 8/18/85) The Club shall have a lien on the real property in Highland Lakes of a member for all of such member's unpaid dues, assessments and initiation fees, together with the late payment charges thereon and reasonable attorney's fees for the collection thereof, ...