January 11, 2017

Often we are asked to address questions of whether declarant’s rights in a development can be or have been assigned.  The Tennessee Court of Appeals recently addressed this question in Civis Bank v. The Willows at Twin Cove Marina Condominium and Home Owners Association, Inc. (No.E2016-00140-COA-R3-CV).  Before addressing the case, it is important to address what declarant’s rights (sometimes known as developer’s rights) are and why they are important.

The declarant is the original developer for a development.  The declarant records the original CCRs or Master Deed, depending on whether the development is a planned development or condominium development.  In that document, the declarant is likely to reserve certain rights.  These rights usually fall into four (4) categories:  (i) control of the Association, (ii) exemption from the payment of assessments, (iii) exemption from and/or control over any architectural review process, and (iv) the unilateral right to amend the document.  These rights give the declarant a great deal of control over the economic investment it is making in the development.  In certain instances, the declarant may want to assign such rights.  In other instances, other entities may want to assume such rights.  For example, the original declarant may sell the development to another developer.  In such instance the new developer likely will want to step into the shoes of the original declarant.  In other instances, the original declarant may default on its development loan, and the bank may wish to assume the declarant’s rights.  The question becomes can this be done and, if so, was it done properly?

In Civis Bank the original declarant had a development loan.  The declarant failed to make payments under the development loan and went through foreclosure.  The remaining development (as some portions had been sold to residents) was purchased at the foreclosure by the holder of the loan.  Subsequently, that lender sold its interest in the development to Civis Bank.  Civis Bank claimed that it was the successor declarant.  The Association claimed that it was not.  The Association levied assessments against Civis Bank’s property in the development, and Civis Bank unilaterally recorded an amendment severing its property from the development.  Ultimately, there was litigation.  As an aside, this is a fairly common fact pattern.

The court in Civis Bank looked to a Tennessee Supreme Court decision in Hughes v. New Life Dev. Corp. 387 S.W. 3d 453 (Tenn. 2012) for guidance, noting that it stands for two propositions:  (i) declarant’s rights can be assigned by general language (although specific and precise language is preferred and more effective) and (ii) declarant’s rights do not run with the land.  Effectively, what this means that is an existing declarant can assign its rights to another party, but such requires more than the mere conveyance of land.  Stated another way, one does not simply step into the shoes of the declarant by being conveyed the property of the declarant.  There must be more to assign the declarant’s rights.  In Civis Bank the Court held that the Bank was not properly assigned the declarant’s rights because the specific provisions of the document at issue precluded such from happening.

For us, however, this is an interesting holding.  The Court is noting that developer’s rights are personal to the developer.  They are effectively a personal property right, which is not pass with title to the appurtenant real property.  Given the number of troubled developments post-2008, the impact of this decision will be felt by Tennessee homeowners associations.

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