Eminent Domain and the Community Association
During the past forty years, there has been a great demand in California for transportation improvements, such as freeways, highways and streets. This often results in eminent domain actions to acquire property necessary for the transportation improvements. At the same time, the housing mix of California has changed because there has been a dramatic increase in the number of community associations. At the present time, there are 35,000 community associations in California serving 8 million residents, or 25% of the State’s 34 million residents. (Los Angeles Daily Journal, December 6, 2002, p. 9.)
The combined impact of the public agency’s use of eminent domain to improve and expand freeways, highways and streets with the dramatic expansion of community associations has resulted in the public agency’s use of eminent domain to acquire property from community associations. This article explores some of the unique practical, legal and appraisal issues that must be considered when eminent domain is initiated against the community association. These issues include the identity of the client, an analysis of the governing documents, organizational issues, pretrial discovery, settlement and trial.
The Case Study
he hypothetical case study consists of a community association adjacent to a freeway with the guest parking area, the swimming pool and the clubhouse closest to the freeway and 100 residential units further from the freeway. The State decides to expand the freeway at this location and seeks to acquire from the community association the guest parking area, the swimming pool, the clubhouse and two of the 100 housing units.
The first issue to determine is the identity of the client. The client may be some or all of the unit owners who may hold title in a variety of ways. It is important to be sure that the proper persons are identified as the owners of the units. The client may be the community association which may be a corporation, a partnership or some other entity. The client may be a combination of unit owners and the community association. There may be a conflict of interest with the same attorney representing the unit owners and the community association. If there is such a conflict of interest, a written waiver of the conflict may be considered.
The Governing Documents
The governing documents must be examined in order to determine the proper parties to the eminent domain action. The governing documents usually consist of the declaration of covenants, conditions and restrictions, the bylaws, and the articles of incorporation of the community association. The governing documents also include the deeds held by the unit owners of the community association. A current preliminary title report for the property to be acquired, as well as the remainder property should be examined. The governing documents may reflect that the property to be acquired is owned by the community association or the unit owners or it may be owned by a separate entity or a combination of the community association and the unit owners. The governing documents will identify whether the unit owners have an interest in the common areas. This interest may be a fee, an easement, or a permit. The nature of the ownership interest may have significant consequences in the eminent domain action.
How do you get started when you have as your clients 100 unit owners, which may consist of more than 200 persons? You form a litigation committee with 5 or fewer persons. The litigation committee will be the sole communicator with the attorney. If this is not done, the attorney may receive phone calls from dozens of unit owners. The unit owners who are not making the phone calls will not be willing to pay for these phone calls. I recommend that the attorney send out periodic status report letters to all the unit owners, but with the statement that all questions should be directed to the litigation committee.
The starting process should include a clear understanding as to who is to pay the attorneys’ fees, the expert witness fees and costs. If payment is to come from a group of unit owners, there should be a mechanism in place for fees and costs to be paid on a monthly basis with a reserve fund created for anticipated future fees and costs. The retainer agreement should address the questions that are presented in paragraph 8 under “Settlement.”
Aside from the issue of getting started, there is the issue of transition. What happens when the owner of his or her housing unit sells the housing unit during the course of the litigation? This is an issue which must be resolved between the original unit owner (seller) and the subsequent unit owner (buyer) through the escrow instructions. The escrow instructions should specifically state how the proceeds of settlement will be distributed as between seller and buyer and how the expenses that had been paid by the seller are allocated or reimbursed. The attorney can assist this process by drafting a “standard” clause for this purpose for all sales during the process of the litigation.
This type of acquisition is complicated and requires a highly skilled appraiser. I recommend an appraiser with a MAI designation (Member of the Appraisal Institute) with experience in appraising community associations. How do you account for the two acquired housing units? On the one hand, there will be no future association dues paid by these two housing units. On the other hand, there will be no association services required to be provided to these two housing units. How do you appraise the acquired common areas, such as the parking area, the swimming pool and the clubhouse? Do you consider the current replacement cost or the depreciated value of these improvements? How does the loss of these improvements affect the value of the housing units? The State may argue that the housing units are unaffected by the loss of the swimming pool, the guest parking area and clubhouse. The issue is how much loss in value is there and how does an appraiser make this determination? How does an appraiser find a comparable sale, unless another community association similarly situated has lost its swimming pool, guest parking area and clubhouse to eminent domain? If there are none, how is the valuation to be done? This is part of the challenging task of the appraiser.
The most common type of discovery in eminent domain consists of an exchange of expert witnesses (usually appraisers and the appraisers’ reports) and the depositions of these expert witnesses. In the case study, the expert witnesses should include a general contractor/architect/engineer in addition to the appraiser in order to determine the cost and feasibility of reconstruction of the common area amenities. Since all of the unit owners may be submitting claims for compensation, the State may wish to take the deposition of each unit owner. This is a fairly cumbersome and expensive approach to discovery. You may wish to suggest that declarations be provided in lieu of deposition testimony, except for those few unit owners who will be designated to testify at trial.
Sometimes, settlement of these types of cases can be more difficult than the trial. The governing documents may contain impediments to settlement. For example, the CC&Rs may provide that 90% of the unit owners must consent to any conveyance of the common area. The CC&Rs may also provide that all holders of first deeds of trust must consent to any conveyance of the common area. Assuming there are no such impediments or you have determined how to address these impediments, you must determine what percentage of the unit owners is required to approve a settlement. Can a non-consenting unit owner be forced to accept a settlement? If not, will the eminent domain action continue on as to those who do not accept the settlement? Will the State accept this type of piecemeal settlement? Probably not. How does this issue get resolved? Does the trial court have authority to make an appropriate order to address this issue?
Another problem with settlement is the division of the settlement proceeds. In the case study, some of the housing units are close to the expanded freeway and other housing units are a considerable distance from the expanded freeway. Should the owners of the units closer to the freeway receive a larger portion of the settlement than the owners of the units further from the freeway? If so, how is this allocation to be made? One solution is to ask the appraiser to make an equitable allocation based on the acquisition’s impact of the fair market value on the housing unit. Suppose a unit owner does not like the appraiser’s allocation?
Another problem with settlement is the allocation of settlement proceeds between the community association and the unit owners. Should all the proceeds go to the community association to build a replacement swimming pool, guest parking area and clubhouse? If there are insufficient proceeds, which amenity should not be replaced? If there are excess proceeds available, should the excess be distributed to the unit owners or retained by the community association to provide additional amenities (jacuzzi, playground equipment, tennis court) or a dues reduction? Alternatively, should the settlement proceeds be distributed to the unit owners?
Many of these issues can and should be addressed in the retainer agreement.
One of the key issues at trial is the selection of which unit owners to testify. With 100 housing units and more than 200 unit owners, the selection process is difficult. How many should be selected? What should they say? My suggestion is 4 to 5 unit owners, who are most adversely affected by the acquisition. Each unit owner should address a different adverse aspect of the acquisition.
In connection with the verdict, make sure that the verdict form clearly identifies how the proceeds of the award will be allocated between the unit owners and the community association.
There is not much literature available on the subject of eminent domain and the community association. It is anticipated that there will be more of this type of litigation in the future. I have attempted to provide you with some of the issues that must be considered by a community association in an eminent domain action.
- An Introduction To Eminent Domain
- Eminent Domain and the Community Association
- Can a contractor assert a mechanic’s lien right against the association and/or its members?
- What authority does the association have to correct termite infestation in the common area of a condominium?
- Can an association convey common area to a member?
- Developer Transition in a Community Association- Overview
- What Should A Board of Directors Do At The Time Of Developer Transition?
- Recent Developments In Homeowner Association Law A shift in the balance of power