How long does a recipient of an HOA’s notice of contract termination have to take legal action?

HOA Contract

Double Diamond v. Second Jud. Dist. Ct. (Nev. Supreme Ct. – July 30, 2015)

NRS 116.3105(2) permits a homeowners’ association that provides at least 90 days’ notice to terminate any contract that is not in good faith or was unconscionable to the units’ owners at the time entered into. The issue is whether the 90 days’ notice operates as a statute of limitations or a notice for the recipient to commence litigation.

In 1996, Rowe, the developer of Double Diamond Ranch Master Association (the Association) entered into a Maintenance and Operation Agreement (Maintenance Agreement) with the City of Reno. Because the property was in a flood zone, the Federal Emergency Management Agency required the developer to obtain a Letter of Map Revision and enter into the Maintenance Agreement prior to developing the South Meadows and Double Diamond Ranch homes in Reno, Nevada. The Maintenance Agreement required, among other obligations, that the Association maintain certain flood control channels, provide rock rip-rap protection in the Double Diamond/South Meadows area, and file an annual report.

In February 2012, the Association gave notice to the City that it was terminating the contract pursuant to NRS 116.3105(2). This statute permits homeowners’ associations to terminate at any time a contract that was entered into by a declarant if the contract was (1) unconscionable to the units’ owners at the time entered into, and (2) the association provides 90 days’ notice to the recipient. In its notice, the Association claimed that it should not have been a party to the Maintenance Agreement because Mr. Rowe signed the agreement on the Association’s behalf one day before the Association legally came into being. Further, the Association claimed that Mr. Rowe entered into the Maintenance Agreement for his own benefit, in order to develop the adjacent property as he desired. Finally, the Association claimed that the City never sought to enforce the Maintenance Agreement and only learned about its existence recently. Later that month, the City rejected the Association’s notice of termination.

In October 2013, the City brought an action against the Association seeking specific performance of the Maintenance Agreement. The Association moved to dismiss the complaint for failure to state a claim for relief and failure to join indispensable parties. More specifically, the Association argued that the contract was invalid as the Association had statutorily terminated the Maintenance Agreement 20 months before. The Association also contended that it did not own the property at issue, and other indispensable parties were necessary, such as the land owner and Mr. Rowe, the developer.

At the hearing on the motion, the Association argued that the statute required the recipient of the notice of contract termination to file suit within 90 days. More specifically, the Association argued that the burden shifted to the recipient to bring a cause of action within that time if it questioned an association’s claim of unconscionability or lack of good faith. The district court ultimately denied the Association’s motion to dismiss. The court determined that there were several genuine issues of material fact; for example, whether the Association, including the property owners, benefited from the Maintenance Agreement and whether the parties’ agreement was unconscionable. Further, the court stated that the statute provided no guidance as to when a recipient must pursue legal action, and instead, the City’s letter rejecting the Association’s notice of termination provided enough notice to the Association that a justiciable controversy may exist as a result. Thereafter, the Association petitioned the Nevada Supreme Court for a writ of mandamus or prohibition directing the district court to vacate its order denying the Association’s motion to dismiss and to order dismissal instead.

The Association argued that the statute required the recipient of a notice of contract termination under NRS 116.3105(2) to take legal action within 90 days, otherwise the 90-day language was superfluous. The Association further argued that the 90-day notice shifted the burden to the recipient to commence an action.

Pursuant to NRS 116.3105, a homeowners’ association may terminate contracts or leases entered into by declarants after giving 90 days’ notice. NRS 116.3105(1) permits associations to terminate contracts within two years of an executive board’s election by its units’ owners. In addition, NRS 116.3105(2) permits associations to terminate contracts at any time if the declarant did not enter into the contract in good faith or the contract was unconscionable to the units’ owners at the time of contract formation. The Association argued that the statute required the recipient of the notice to file legal action within the 90-day period.

NRS 116.3105(2) states in full as follows:

The association may terminate without penalty, at any time after the executive board elected by the units’ owners pursuant to NRS 116.31034 takes office upon not less than 90 days’ notice to the other party, any contract or lease that is not in good faith or was unconscionable to the units’ owners at the time entered into.

The Nevada Supreme Court pointed out that the statute did not expressly indicate what rights and obligations a recipient has when it receives an association’s notice of termination of a contract. The Court explained that the 90 days’ notice could indicate the time frame a party has to pursue legal action; on the other hand, the 90 days’ notice could merely indicate the period the association must continue to perform under the contract before termination. Accordingly, the Court concluded that NRS 116.3105(2) was ambiguous, and looked to the intent of the Legislature and to related statutes.

The Court explained that when the Legislature codified NRS Chapter 116, it modeled the chapter on the Uniform Common Interest Ownership Act (UCIOA). Nevada did not amend any of the UCIOA language in the section of the bill that became NRS 116.3105(2), and thus, the statute mirrors section 3-105 of the UCIOA. Testimony from one of the committee hearings on Assembly Bill 221 indicated that association management and consumer protection were the two most common threads throughout the bill. Further, the UCIOA offered purchaser protections, including the power of an association to terminate sweetheart contracts entered into by the developer.

The Court noted that the commentary to the UCIOA reflects that the purpose behind this law was to address the common problem in the development of planned community projects: the temptation on the part of the developer, while in control of the association to engage in self-dealing contracts. Thus, this law allows an association to terminate any contract that is not bona fide or is unconscionable: certain contracts are so critical to the operation of the common interest community and to the unit owners’ full enjoyment of their rights of ownership that they should be voidable by the unit owners.

The Court further noted that the Restatement (Third) of Property also permits a similar termination of a contract entered into by a developer that is not bona fide or is unconscionable to the members, and also recognizes the conflicting interests of the declarant and the association. The developer’s primary interest is in completing and selling the project, while that of the purchasers is in maintaining their property values and establishing the quality of life they expected when buying the property. Recognizing that an association’s members have little opportunity to protect themselves while the association is under the control of the developer, this rule permits associations to treat certain contracts as voidable. However, the Court noted that neither the UCIOA nor the Restatement speaks to whether a recipient can challenge the termination notice and when a recipient of a termination notice must file an action against the association.

Thus, the Court explained that interpreting the statute as a statute of limitations as the Association suggested would require the Court to read additional language into the statute, which it declined to do.

Moreover, in State Indus. Ins. V. Jersch, 101 Nev. 690, 794 P.2d 172 (1985), the Nevada Supreme Court identified three purposes for which statutes of limitations are intended to operate:

First, there is an evidentiary purpose. The desire is to reduce the likelihood of error or fraud that may occur when evaluating factual matters occurring many years before. Memories fade, witnesses disappear, and evidence may be lost. Second, there is a desire to assure a potential defendant that he will not be liable under the law for an indefinite period of time. Third, there is a desire to discourage prospective claimants from “sleeping on their rights.”

The Court in this case explained that considering these purposes here, the evidentiary purpose was moot since the statute permits an association to terminate contracts at any time. The Court believed that because an association can terminate a contract at any time, time passage, fading memories, disappearing witnesses, and lost evidence are seemingly less important than preserving an association’s right to terminate.

The Court further explained that the second and third purposes would be incongruent with the customary statute of limitations for contracts (either four or six years depending on if the contract is in writing). While a potential defendant should not have to worry about liability after a certain period of time, as described above, the Court determined that the customary statute of limitations for contracts found in NRS 11.190 should apply, as reducing the four-year or six-year limit to 90 days, while allowing an association to terminate a contract at any time, appears unequal. Similarly, the desire to discourage prospective claimants from sleeping on their rights and permitting a 90-day limitations period, but allowing the association to terminate at any time, essentially permits an association to sleep on its rights while one-sidedly denying a notice recipient the typical period of limitation.

Thus, the Court concluded that neither the statute’s plain language nor legislative history showed that the Legislature intended for the 90 days’ notice requirement in NRS 116.3105(2) to act as a statute of limitations for a notice recipient to commence litigation. Rather, upon notice from an association, the notice recipient would then have the customary period of limitations for contracts under NRS 11.190 in which to commence an action.

Because the Court concluded that the 90-day notice period in NRS 116.3105(2) did not operate as a statute of limitations or shift the burden to a notice recipient to file an action, it concluded that the district court did not err in denying the Association’s motion to dismiss.

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