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Mongeon Bay Properties, LLC v. Mallets Bay Homeowners Association

Supreme Court of Vermont

June 10, 2016

Mongeon Bay Properties, LLC
Mallets Bay Homeowner's Association, Anthony J. Sineni and Merrimack Mortgage Company

         On Appeal from Superior Court, Chittenden Unit, Civil Division Dennis R. Pearson, J.

          David H. Greenberg, Burlington, for Plaintiff-Appellant.

          David D. Aman of Heilmann, Ekman, Cooley & Gagnon, Inc., Burlington, for Defendant-Appellee Malletts Bay Homeowner's Association, Inc.

          PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.

          ROBINSON, J.

         ¶ 1. This case calls upon us to determine whether, and under what circumstances, a court may decline on equitable grounds to enforce a provision in a long-term ground lease giving the lessor the right to terminate the lease and reenter the premises in the event of a default. Plaintiff Mongeon Bay Properties, LLC (MBP) sued defendant Mallets Bay Homeowner's Association seeking to void a multi-year ground lease for property abutting Lake Champlain on account of alleged breaches of the covenants in that agreement.[1] After a bench trial, the trial court concluded that the Association had violated its obligations under the lease by failing to reasonably maintain the embankments abutting Lake Champlain to protect them from erosion. However, the court declined to enforce the forfeiture clause in the lease against the Association, and awarded MBP damages to enable it to undertake the necessary restoration and bank protection. The Association appeals the trial court's ruling that it breached the lease, and MBP appeals the trial court's award of damages in lieu of forfeiture. We affirm the trial court's determination that the Association breached the lease, but reverse its refusals to declare termination of the lease and to issue a writ of possession to MBP. We remand for reconsideration of MBP's remedy.

         ¶ 2. The trial court made the following findings. There are over twenty-five camps within the Association, ten of which are situated immediately on the shore of Lake Champlain at the eastern edge of Malletts Bay, all perched above a twenty to twenty-five foot embankment, on a strip of land just west of East Lakeshore Drive in Colchester. The Mongeon family owned the entire land parcel on which these camps were built, and built many of the camp structures. Over time, what had been camp rentals became seasonal residences owned by camp occupants, although the underlying land continued to be owned by the Mongeon family.

         ¶ 3. In October 1995, members of the Mongeon family set up a partnership to own the land under the camps, and the partnership entered into a ground lease with the Association. That lease encompassed the entire parcel on which all of the subject camps were located, and provided that the Association would pay $28, 000 per year for the first year, and then annual increases calculated by adding any increase in property tax applicable to the parcel and an annual increase based on the consumer price index. That twenty-five year lease was set to expire in April 2021.

         ¶ 4. In December 2002, the parties extended the ground lease, adding fifteen years to the term so that it would expire in 2036. There have been some changes to the Mongeon family side of this ground lease, and MBP is now the 100% owner of the underlying land and is the sole lessor in the ground lease. This lease is between MBP and the Association; there are not individual leases between MBP and any camp owners within the Association.

         ¶ 5. The annual lease payment was intentionally set at what might be considered below-market"' rates to allow camp owners to maintain their individual properties, as well as the land and overall grounds. Most recently, the monthly Association payment by each camp owner, to cover the annual ground rent plus insurance and other expenses, was $290 per month. The Association is current with all required lease payments.

         ¶ 6. Among other things, the lease provides:

In no event shall the Lessee do or permit any act or thing which might (1) impair the value or usefulness of the Land or any part thereof, or (ii) constitute a public or private nuisance or violation of law. . .
The Lessee at its expense will keep the Land and premises in good and clean order and condition and will make all necessary or appropriate steps to keep them in good condition. The Lessee shall not permit the land to be overloaded, damaged, stripped, or defaced, nor suffer any waste.
The lessee will protect, indemnify and save harmless the Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses . . . imposed upon or incurred by or asserted against Lessor or against the Land by reason of the occurrence or existence of any of the following . . . (d) any failure on the part of the Lessee to perform or comply with the terms of this Lease.

         At the end of the lease term, the Association is required to surrender the land "in good order and condition."

         ¶ 7. The lease includes as an "Event of Default" the following:

[I]f the Lessee shall fail to perform or comply with any terms of this Lease . . . and such failure shall continue for more than 45 days after the Lessee receives notice or [has] knowledge of such failure. . . .

         With respect to remedies for default, the lease states:

[I]n the event that an Event of Default shall have occurred, [and] upon issuance of a writ of possession, the rights of the Lessee . . . shall immediately cease and become void.
If any event of Default shall have occurred and be continuing, whether or not the term of this lease shall have been terminated pursuant to the Lease, the Lessor may enter upon and repossess the Land or any part thereof pursuant to Vermont law. If any Event of Default occurs, Lessee shall be responsible for all of Lessor's attorney's fees and costs of litigation.

         ¶ 8. In the spring of 2011, the surface level of Lake Champlain reached its highest- ever recorded level, causing widespread damage along the eastern lakefront including Malletts Bay. Below the ten camps situated on the edge of Lake Champlain, there is a significant slope running down to the water's edge, and the then-existing seawall protection was spotty at best. The area below the ten camps was significantly impacted by the spring flooding. The injury to and impact on the land owned by MBP as a result of this flooding was likely greater than it would have been, even from the unusual confluence of otherwise natural events, because of the lack of adequate seawall protection at the foot of the embankment area, lack of appropriate bank stabilization, and inadequate vegetation and other erosion control measures on the bank itself. The ongoing erosion problems along the affected embankment were and are preventable by reasonable and ordinarily required repairs and upkeep that the Association was obligated to perform under the ground lease terms.

         ¶ 9. The land around the camp at 937 East Lakeshore Drive was particularly damaged, and the pre-existing stairway down to the lake located by that camp was in danger of immediate collapse. The lease expressly requires the Association to maintain the stairway. After the individual camp owner and the Association collectively failed to address the issue in the summer of 2011, the Town of Colchester began to have more serious discussions with the camp owner about stabilizing the bank by his house.

         ¶ 10. In September 2011, MBP through counsel sent the Association a notice of default under the ground lease. The letter cited the Association's "failure to maintain the retaining walls on [the] waterfront, undermining camps and creating hazard of collapse and bodily injury and causing a diminution in the value of the property."[2] In this letter, MBP gave the Association forty-five days to cure the defects. In December 2011, after the parties and counsel had met to discuss the matter, the Association by letter denied that any default existed. It took no steps to remedy the situation within forty-five days of MBP's notice of default.

         ¶ 11. In the meantime, the Town issued the owner of the camp at 937 East Lakeshore Drive a notice of violation of Town ordinances alleging that his structure was "unsafe and constitutes a potential hazard" because the rear porch had lost part of its foundation and was partially detached from the structure. The Association was alerted to this. Neither the camp owner nor the Association took any action within thirty days of the Town's notice of violation.

         ¶ 12. MBP then filed this suit against the Association in January 2012 seeking damages and a declaration that the ground lease is void and forfeited because of the Association's violations.

         ¶ 13. For most of the time since the inception of the lease, and until the latest events regarding the severe bank erosion in the spring of 2011, the Association, and its directors and officers, as well as apparently most camp owners, who are also Association members, have taken the position that each individual camp owner is solely responsible for all repairs to and maintenance of that owner's structure, including adjacent grounds and more particularly the embankment alongside the ten camps fronting the lake on the west side of East Lakeshore Drive. This "understanding" was almost universally held within the Association, despite the clear obligations the ground lease imposes on the Association collectively, and not on individual camp owners, to prevent waste or damage to the land. The parties' stipulation in late February 2012 that the Association would undertake collective action to address the particular bank erosion and ground stability issues at 937 East Lakeshore Drive that were the subject of the Town's notice of violation represented the Association's first real recognition of its duties as lessee and a major shift in the Association's prior position and understanding. It would not have happened but for the Town's pursuit of alleged violations and MBP's threat of default.

         ¶ 14. After MBP filed suit, in April 2012 the Town issued a second notice of violation regarding the property at 937 East Lakeshore Drive, this time directed to the Association. The Association retained an excavating contractor who dumped three to four cubic yards of unscreened topsoil over the bank and spread it around and seeded it with some geotextile matting. There was no engineering plan for this work, it did not include any removal of the failed foundation at the back end of the camp, and it did not include any structural stabilization to the embankment or addition of any riprap or other seawall-type protection at the lake level. The work was inadequate and failed to address or correct the issues that were the basis for the Town's notice of violation.

         ¶ 15. The Association then hired a different contractor who pulled out the failed foundation with cables, installed large boulders at the foot of the embankment to create a seawall for this particular lot, and installed a new swale, with riprap, running diagonally across the slope to carry runoff from the paved parking area adjacent to the camp at 937 East Lakeshore. But there was no plan to tie this work to an integrated approach to dealing with all of the runoff coming from the roofs of the camp structures. This work was completed in 2013 and satisfied the Town in connection with its notices of violation.

         ¶ 16. However, the 2013 work was primarily for immediate stabilization, and not long term restoration. By the summer of 2014, it was apparent that the more extensive repair work in 2013, while perhaps addressing the Town's violation notices, was still inadequate for the purposes of the ground lease. The work did not entirely remediate the bank erosion issues immediately beneath the camp at 937 East Lakeshore Drive, and by 2014 that work was already failing in part. For that reason, MBP retained its own engineering consultant to prepare an ...

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