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Limited Liability for Successor Developers
Corporate law generally provides that in certain transactions, a corporate successor can receive transferred assets free and clear of all but valid liens and security interests. Other areas of law, like the Michigan Condominium Act (Act), have limited successor liability in a similar manner.
In Michigan, a successor developer is a person who acquires title to the lesser of 10 units or 75% of the units in a non-business condominium project by foreclosure, deed in lieu, purchase, or similar transaction. MCL 559.235(1). If the successor developer sells any units, it must comply with the Act and assume all of its predecessor’s express, written contractual warranty obligations for defects in workmanship and materials. Id. But a successor developer is not required to assume, and is not otherwise liable for, any other contractual obligations of its predecessor in title. MCL 559.235(2)(b).
A successor developer can also avoid assuming certain contracts with appropriate insurance and compliance with escrow requirements. MCL 559.235(3)(b). Compliance with the Act’s provisions related to future sales (MCL 559.184 and 559.184a) may be complicated. Escrow obligations and mechanics must be analyzed carefully.
Except for the scant insight in Alden State Bank v. Borton, (2005 WL 3078213,Mich App, November 15, 2005), Michigan case law is quiet on successor developer liability. Until future courts rule, successor developers can rely on the limited liability provisions in the Act. Future courts will undoubtedly explore this aspect of condominium law as the new decade dawns.
Danger With Cross Defaults
The Court of Appeals held in Eagle Ridge LLC v. Albert Homes LLC, (2009 Mich App, Lexis 2382, November 17, 2009), that a cross default provision found in only one of two simultaneously signed agreements does not create reciprocal cross defaults between both.
Albert Homes (AH) sold property developable for condos and a golf course to Eagle Ridge (ER). The purchase agreement, with no cross default provision, required AH to build the course by a certain date; ER would then sell the property to AH.
ER granted an exclusive option to AH to purchase condo sites through an option agreement after ER developed them. The option provided that a default by AH under the purchase agreement would also be a default under the option.
AH failed to timely complete the course. ER sued alleging a breach of both agreements: the purchase agreement for failing to complete the course, and the option based on its cross default provision. AH counterclaimed that ER’s failure to timely deliver developed sites breached the option, thereby rendering AH’s performance under the purchase agreement impossible.
The court held that ER’s failure to complete the home sites was no defense for AH’s failure to complete the course. The Court reasoned that by including the cross default provision in the option, the parties intended for AH’s rights under the option to be conditional on completion of the course. By not including a similar provision in the purchase agreement, the parties did not intend to condition the completion of the golf course on ER’s completion of the home sites.
Bottom line: practitioners should carefully negotiate cross default provisions.If the parties intend for their various obligations to be cross defaulted and reciprocal, explicit cross default terms must be included in each and every agreement.
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Thursday, February 4, 2010
March 11-13, 2009