SBM Real Property Law Section eNewsletter

March 2010

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Developer Master Deed Amendments Invalidated

By Stephen M. Guerra, Makower Abbate and Associates, PLLC

In City of South Lyon v. DeMaria Bldg. Co., (Mich. App., No. 287703, January 28, 2010), the developer recorded a Master Deed with no reservation of rights to unilaterally contract land from the condominium. The Master Deed provided, however, that certain sections of the Master Deed could not be amended without specific city consent, including a section designating the open space areas as shown on the condominium subdivision plan.

The developer unilaterally recorded two amendments to the Master Deed after commencing the project. The first reserved to the developer the right to unilaterally withdraw portions of the units or common elements from the condominium. The second "contracted" the size of the condominium and included a new plan and legal description showing 4.5 acres of open space had been removed from the condominium. These amendments did not directly modify the sections requiring city consent.

The Court held that the amendments were void because they had the "effect of amending [these sections] by implication" without required city approval. The court did not analyze whether the amendments were valid under the Condominium Act, which required in this case, co-owner approval (MCL 559.190(2)). Practitioners routinely scrutinize condominium documents for compliance with the plain terms of the Condominium Act. The DeMaria opinion suggests that practitioners also must now consider whether proposed amendments may have the "implied" effect of modifying certain rights and obligations of the co-owners and other affected parties, whose approval may be needed.

1031 Exchanges and Short Sales

By Margo Rosenthal, Investment Property Exchange Services

The seller of an investment property in a short sale may be able to benefit from a 1031 exchange. In a short sale the lender is agreeing to release the property from the lien of the mortgage. Since the Mortgage Forgiveness Debt Relief Act of 2007 only applies to a principal residence, any debt forgiveness with regard to an investment property will be taxable.

Let's assume an investor purchased property in 2005 for $2.4 million with 100% financing. Four years later the property is now valued at $2 million. Investor sells the property as a short sale and the lender agrees to accept $2 million.

The debt forgiveness of nearly $400,000 could result in a significant tax liability for this "phantom income." With a 1031 exchange, the investor can acquire a replacement property as long as its value is equal or greater than $2.4 million. A transaction like this could benefit investors, lenders, and real estate agents. An investor could acquire the new property in an area which has stabilized with more appreciation potential.

Attorneys advising clients on the benefits of doing a 1031 exchange out of a short sale will need to determine if the mortgage was recourse or non-recourse, as this will affect not only what the capital gain may be but also the issue of cancellation of debt. Cancellation of debt on a recourse loan is taxed as ordinary income, even though the tax payer receives no cash, and can't be deferred.


Michigan Court of Appeals Establishes Binding Precedent Prohibiting Separate Taxation of Condominium Common Elements

By Heidi Hohendorf, Associate, Charron & Hanisch, PLC

On January 12, 2010, the Michigan Court of Appeals issued an opinion, set for publication, which holds that the plain language of Michigan's Condominium Act (MCA) prohibits taxation of common elements in a condominium project separately from the condominium units. Paris Meadows, LLC v. City of Kentwood, - - - N.W.2d - - - (Mich. App., No. 286978, January 12, 2010). This decision comes on the heels of Richmond Street, LLC v. City of Walker (Mich. App., No. 286454, July 14, 2009), a nearly identical case in which a Court of Appeals panel unanimously concluded that a taxing body has no authority to tax any part of a condominium project separately from the units therein, regardless of whether the developer retained the right to expand, convert, or contract land within the condominium project. The Paris Meadows Court agreed with the rationale of Richmond Street and adopted it as its own, concluding that "the Tax Tribunal erred in concluding that Paris Meadows' reservation of rights to develop the disputed property rendered the property not a common element, and thus separately taxable."

The publication of Paris Meadows is important because it provides binding legal authority on this issue and establishes a bright-line rule of law regarding taxation standards under the MCA. In addition, it will prevent inconsistent interpretation and application of the MCA, by both courts and municipalities. This case symbolizes a significant development in condominium law.

Seller Disclosures: Silent Fraud as Buyer's Remedy

By Joseph H. Wener, Couzens Lansky Fealk Ellis Roeder & Lazar, PC

The Michigan Seller Disclosure Act (SDA), MCL 565.951 et seq., establishes a statutory duty but no independent cause of action for residential seller disclosures. Further, the SDA expressly neither limits nor abridges any other applicable seller disclosure obligations. Prior to closing, a buyer may terminate an existing agreement for SDA non-compliance. Later claims for failure to disclose are typically framed as innocent or fraudulent misrepresentation/silent fraud or breach of contract. All are recognized exceptions to common law caveat emptor.

In Elliott v. Therrien (Mich. App., No. 288235, January 26, 2010), seller became aware of significant mold contamination. Seller had the mold evaluated by professionals and conducted some clean-up. Seller failed to disclose the nature and extent of the mold contamination and the professional evaluation in any of several Seller Disclosure Statements and verbal statements. Seller continued to conceal its knowledge when the buyer raised issues prior to closing. The trial court jury awarded significant damages to buyer on the basis of silent fraud.

Affirming, the Court of Appeals ruled that silent fraud applies where information is concealed with intent to create a false impression upon which a buyer detrimentally relies. Silent fraud requires both the existence of a legal or equitable duty, and clear and convincing proof of a seller's representation that is false, misleading, or intentionally deceptive. The Court held that both SDA and common law disclosure obligations give rise to a legal duty. In Elliott, seller's suppression of the evaluation, incomplete disclosure statements, and verbal misrepresentations all were intended to conceal the contamination problem, supporting a finding of silent fraud.