STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DIVISION OF FLORIDA LAND SALES ) AND CONDOMINIUMS, DEPARTMENT OF ) BUSINESS REGULATION, )

)

Petitioner, )

)

vs. ) CASE NO. 79-1544

)

HOVNANIAN FLORIDA, INC., )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice an administrative hearing was held in the above-styled cause before Delphene C. Strickland, Hearing Officer of the Division of Administrative Hearings, commencing at 1:30 p.m. on June 24, 1980 in Tallahassee, Florida

APPEARANCES

For Petitioner: Mary Jo M. Gallay, Esquire

Department of Business Regulation 725 South Bronough Street Tallahassee, Florida 32301

For Respondent: Samuel Spector, Esquire

Cynthia S. Tunnicliff, Esquire Guyte P. McCord, III, Esquire SPECTOR & TUNNICLIFF, P. A.

Suite 750 Barnett Bank Building Post Office Box 82

Tallahassee, Florida 32302 ISSUE

Whether Petitioner, Division of Florida Land Sales and Condominiums, Department of Business Regulation, should issue an order requiring Respondent, Hovnanian Florida, Inc., to cease and desist from enforcing "Paragraph XXIV - Rent Adjustment" in a Lease Agreement dated July 8, 1971 and attached as Exhibit

3 to a Declaration of Condominium creating Covered Bridge Condominium No. 18 filed and recorded on December 14, 1978.

FINDINGS OF FACT

1. Petitioner, Division of Florida Land Sales and Condominiums of the Department of Business Regulation, is seeking by a Cease and Dosist Order to enforce the provisions of Chapter 718, Florida Statutes, the "Condominium Act," pursuant to the authority granted in Sections 718.501(1) and 498.051, Florida Statutes, alleging that it has evidence that Respondent has violated Section

   718.401(8), Florida Statutes, by binding an owner of a condominium parcel in Covered Bridge Condominium Phase 18 to the provisions of a long-term lease that contains an escalation clause.

   
   

2. Respondent, Hovnanian Florida, Inc., is a "developer" as defined in Section 718.103(13), Florida Statutes. Kevork S. Hovnanian is the President of the corporation. Covered Bridge Condominium Association, Inc., incorporated on June 8, 1971, is an "association" as defined in Section 718.103(2) subscribed to by Kevork S. Hovnanian, Lawrence Dombrowski and John R. Langly (Respondent's Exhibit A). Covered Bridge Condominium No. 18 was created by a "Declaration of Condominium," as defined in Section 718.103(12) and filed on December 14, 1978. Attached as "Exhibit 3" and expressly made a part of Covered Bridge Condominium No. 18 is a "Lease Agreement" dated July 8, 1971 in which Respondent was the lessor and Covered Bridge Condominium Association, Inc. is a lessee (Petitioner's Exhibit 1). Kevork S. Hovnanian is the assignee of the Lease Agreement by assignment from Respondent on June 24, 1974 (Respondent's Exhibit C).

   
   

3. Covered Bridge Condominium Association, Inc. is the association responsible for operation of the condominium, Covered Bridge Condominium No. 18. Paragraph IX of the foregoing Declaration, The Operating Entity, states in C.(9) in part that "Every owner of a Condominium Parcel, whether he has acquired his ownership by gift, conveyance or transfer by operation of law, or otherwise, shall be bound by the Bylaws of the Association (Exhibit 2), the provisions of this Declaration and the Long-Term Lease" (Exhibit 3). (Petitioner's Exhibit 1) IX A. provides in part: "Covered Bridge Condominium Association, Inc. shall administer, supervise and shall act by and on behalf of the owners of the family units in Covered Bridge Condominium No. 18 in accordance with this instrument, the Bylaws of the Association annexed hereto as 'Exhibit No. 2' and in accordance with the Condominium Act of the State of Florida, its supplements and amendments." Paragraph XIX of the Declaration, Long-Term Lease, requires each original purchaser from the Developer to execute a copy of the Long-Term Lease to secure the unit owner's (original purchaser's) obligation to pay his share of the common expenses as to the Long-Term Lease. The Long-Term Lease referred to in Paragraphs VIII, IX, X, XI, XII, XV, XVII, XIX, XX and XII of the Declaration was attached as "Exhibit 3" and is the aforesaid Lease Agreement of July 8, 1971 in which the Respondent is the lessor and the Developer, and Kevork S. Hovnanian is the assignee.

   
   

4. Paragraph XXI, Miscellaneous Provisions, Section G, provides: "If any of the provisions of this Declaration, or of the Bylaws, or of the Long-Term Lease attached hereto, or of the Condominium Act, or any section, sentence, clause, phrase, or work, or the application thereof, in any circumstance, is held invalid, the validity of the remainder of this Declaration, the Bylaws, the Long-Term Lease or the Condominium Act, and of the application of any such provision, action, sentence, clause, phrase, or word, in other circumstances, shall not be affected thereby." XXI K. provides: "The captions used in this Declaration of Condominium and Exhibits annexed hereto, are inserted solely as a matter of convenience and shall not be relied upon and/or used in construing the effect or meaning of any of the text of this Declaration or Exhibits hereto annexed." XXI N. provides in part: "By way of clarification as to Article XIX of this Declaration, the Long-Term Lease may be amended by an instrument in writing, executed by the Lessor and the Condominium Association, by and through its Board of Directors except there shall be no Amendment affecting the Long- Term Lease which would change a unit owner's rent under the Long-Term Lease nor the manner of sharing common expenses under the Long-Term Lease, nor impair the rights of unit owners to the use and enjoyment of the recreational facilities,

   without the unit owners so affected, and all record owners of Institutional Mortgages thereon, joining in the execution of said Amendment."

   
   

5. The Bylaws in Article XIV, Rules and Regulations, Section 4, "Recreation Area and Facilities," establish rules for the recreational facilities. Section 5, "Conflict," provides that should conflict arise the Condominium Act shall prevail (Respondent's Exhibit B).

   
   

6. Section IX, Improvements, of the Lease Agreement provides in part: "The Lessor covenants and warrants unto the Lessee that it has constructed, or is in the process of constructing upon the aforedescribed premises, at Lessor's

   cost and expense, certain recreational facilities, consisting of a swimming pool and sundeck areas, shuffleboard courts, Community Center Building which will include and provide for a meeting area, cardroom, space for arts and crafts, sewing, and billiards, together with equipment and personalty contained therein, and such other improvements and personalty as Lessor determines in its sole discretion." Section XXIV, Rent Adjustment, provides in part: "Lessor and Lessee herein covenant and agree that the rental payments Provided for in Article III above, shall be adjusted, higher or lower, based upon the Cost of Living Index, as hereinafter defined and provided in this Paragraph at one (1) year intervals, commencing January 1st, 1972, and continuing yearly thereafter throughout the term of this Lease" (Petitioner's Exhibit 1).

   
   

7. On September 26, 1979 Respondent sold by Warranty Deed a condominium in Covered Bridge Condominium No. 18 to Mr. and Mrs. Milton Marcus. The deed recited the fact of the assignment of the recreational facilities and further recited: "The Long-Term Lease as to the recreational facilities ... has been contemporaneously entered into by the Grantee(s) herein." On the same date the parties executed an "Acknowledgement of Lease Agreement" which recited their covenant to be bound by the 1979 Long-Term Lease Agreement (Petitioner's Exhibit 2). On October 15, 1979 Respondent sold another condominium in Covered Bridge Condominium No. 18 to Mr. and Mrs. Saul Schwartz with similar recitations and with a similar lease acknowledgement agreement (Petitioner's Composite Exhibit 3)

   
   

8. Rental payments attributed to the escalation clause in the Long-Term Lease were paid by Covered Bridge Condominium Association, Inc. subsequent to June 4, 1975, the effective date of Section 718.401(8), Florida Statutes, which declared that public policy precludes the inclusion or enforcement of escalation clauses (Stipulation)

   
   

9. On June 5, 1979 Petitioner Division of Florida Land Sales and Condominiums served a Notice to Show Cause why a cease and desist order should not issue on Respondent Hovnanian Florida, Inc. alleging:

   
   

   1. Covered Bridge, Phase 18, is a condominium created pursuant to the provisions of Chapter 718, Florida Statutes.

   2. The Respondent is offering for sale and has closed on contracts for sale of condominium parcels in the condominium.

   3. Article IX of the Declaration of Condominium binds the owner of a condominium parcel to the provisions of a long-term lease, attached to the Declaration of Condominium as Exhibit 3. Section XXIV of said long-term lease contains an escalation clause as defined and

      prohibited by Section 718.701(8)(a), Florida Statutes (1978 Supp.).

      
      

10. On July 17, 1979 Petitioner requested an administrative hearing. A Notice of Hearing was mailed by the Division of Administrative Hearings on August 6, 1979 notifying the parties that a formal hearing would be held October 24, 1979 in West Palm Beach, Florida. The notice recited:

    
    

    ISSUES: Whether a cease and desist order should be entered against the Respondent for an escala- tion clause prohibited by statute.

    
    

    AUTHORITY: Chapters 120 and 718, F.S. Sections 718.401 and 718.501(b), F.S.; Section 478.171(1), F.S.

    
    

11. The hearing was rescheduled and then continued numerous times but went to hearing on April 15, 1980. In the initial stage of the formal hearing on that date the parties jointly moved for a Continuance on the basis of an attached Stipulation, infra, which it was stated would change the character of the hearing and limit the necessity for an extended hearing. The Stipulation is set forth in full for clarity:

"Stipulation

1. A Declaration of Condominium creating Covered Bridge Condominium No. 18, address 7240

   Covered Bridge Boulevard, Lake Worth, Florida, 33463, was filed and recorded on December 14, 1978, in the Circuit Court of Palm Beach County.

2. Section XI, entitled "Assessments" of the Declaration states that "the portion of the common expenses under the Long-Term Lease

   shall be fixed and determined by the Lessor as provided under said Lease." Common expenses are defined in Section IH of the Declaration as "the expenses for which the unit owners are liable to the Association."

3. Section XIX of the Declaration, entitled "Long-Term Lease" refers to a Lease and Assignment "... attached hereto as Exhibit 3 and made a part hereof, just as though said Lease were fully set forth herein." Payments under the lease are declared to be common expenses in Section XIX. By the above- referenced language, the Long-Term Lease is incorporated in and made a part of the Declaration of Condominium.

4. Section XIX requires that each unit owner execute a copy of the Long-Term Lease attached as Exhibit 3, and that such lease be recorded in the Public Records of Palm Beach County, together with the deed conveying the unit to the owners.

5. Exhibit No. 3 of the Declaration entitled "Lease Agreement" is an agreement between

   Hovnanian Florida, Inc., lessor, and Covered Bridge Condominium Association, Inc., lessee, the entity responsible for the operation of the condominium. Therein, it is stated that any reference to an obligation of a "lessee" shall be deemed to include Covered Bridge Condominium Association, Inc., and all individual lessees, jointly and severally.

6. The Long-Term Lease, in Section III C states that rent due under it shall be the obliga-

   tion of the Individual Lessees and the Lessee-Association.

7. Section XXIV of the Long-Term Lease provides that rental payments due under the lease

   shall be adjusted yearly. Such adjustment is computed by utilizing a nationally recognized comodity or consumer price index.

8. Such lease was assigned to KEVORK S. HOVNANIAN by HOVNANIAN FLORIDA, INC., on June 24, 1974.

9. Subsequent to the recordation of the Declara- tion of Covered Bridge Condominium No. 18,

   the developer did sell units to purchasers, and close on such sales. Purchasers were required to and did sign acknowledgements of Lease Agreement, in which purchasers have agreed to be bound by all the terms, covenants and conditions, set forth in the Long-Term Lease, and acknowledged that their signatures constituted an acknowledgement of the Long- Term Lease Agreement and their covenant to be bound by it. Such purchasers purchased sub- sequent to June 4, 1975.

10. In 1975, Section 711.231, Florida Statutes, became effective on June 4, 1975. That act declared that the public policy of this state precludes the inclusion or enforcement of escalation clauses in leases for recreational facilities on other commonly used facilities serving residential condominiums. That statute has since been renumbered and is now Section 718.401(8), Florida Statutes.

11. It is the position of the developer that all rents, including portions due under the esca- lation clause, are and remain the obligation

    of the association--lessees and the association remains bound to assess unit owners amounts necessary to pay such rents. The lessor has demanded such amounts from the lessee(s), and the lessee Association has refused to pay them. Rental payments attributed to the escalation clause were paid by the association to the lessor subsequent to June 4, 1975.

12. It is stipulated that the following documents are placed before the Hearing Officer for con- sideration in deciding this matter, subject to

the recitals in #13 relating to the determina-

tion of the relevancy and admissability in this cause

For petitioner:

1. Warranty Deed - Hovnanian, Inc. to Saul, Shirly & Schwartz

2. Acknowledgement & Acceptance by Grantee, Saul, Shirly & Schwartz

3. Acknowledgement of Lease Agreement Milton & Rose Marcus

4. Warranty Deed Hovnanian, Inc. to Milton & Rose Marcus

5. Amendment to Declaration of Condominium Covered Bridge No. 18

   Recorded August 31, 1979

6. Amendment to Declaration of Condominium Covered Bridge No. 18

   Recorded April 26, 1977

7. Amendment to Declaration of Condominium Covered Bridge No. 18

   Recorded February 21, 1979

8. Declaration of Condominium Covered Bridge No. 18, with Exhibits Recorded December 14, 1978

9. Complaint for Damages and Declaratory Relief, Case No. 79-306, 15th Judicial Circuit.

10. Answer, Affirmative Defenses and Counterclaim, Case No. 79-306, 15th Judicial Circuit.

11. Offering Circulars Without Exhibits

    
    

    For Respondent:

    1. All documents listed by Petitioner:

    2. Bylaws of Covered Bridge Condominium Association, Inc., as recorded in Official Record Book 1913 at pages 1025 through 1054 and in official Record Book 1013 at pages 1085 and 1086 of the Public Records of Palm Beach County.

    3. Assignment of Lease dated June 24, 1974 as duly recorded in Official Record Book 2320 at pages 1096 through 1100 of the Public Records of Palm Beach County, Florida.

    4. Covered Bridge Plat #1, as recorded in Plat Book 29 on Page 44 of the Public Records of Palm Beach County, Florida.

    5. Covered Bridge Plat #2 as recorded in Plat Book 29 on page 79 of the Public Records of Palm Beach County, Florida.

    6. 1976 Settlement Agreement entered into between Kevork Hovnanian, Hov- nanian Florida, Inc. and Covered

       Bridge Condominium Association, Inc.

    7. Exhibit 4, Offering Circular

    
    

    1. Petitioner and Respondent agree and stipulate that the facts recited in this stipulation and the documents are true and accurate. The parties reserve the right to present legal arguments directed to the relevancy and/or materiality of any and all facts and documentary evidence, or the contents thereof, to this action.

    2. This stipulation is contingent upon the Hearing Officer granting a Motion for Con- tinuance of the hearing scheduled in this matter for April 15 and 16, 1980. The parties agree that this stipulation will not be intro- duced into evidence in any proceeding or used in any manner unless and until the above- referenced Motion for Continuance is granted and, in the event the Motion for Continuance is denied, this stipulation is null and void. In no event will this stipulation be used in any other proceeding.

       
       

       The parties agree that should the stipu- lation be accepted and the hearing continued by the Hearing Officer no witnesses will be called in this cause at any future time, and additional documentary evidence will be placed before the Hearing Officer only upon the agreement of both the Petitioner and Respon- dent to such admission. Petitioner and Respondent agree that the sole remaining matters to be placed before the Hearing Officer shall consist of legal arguments re- lating to the admissability of evidence as stated above, and argument pertinent to the disposition of this cause."

       
       

12. The hearing was continued and rescheduled to be heard June 24, 1980. The Notice of Hearing was in the same form and showed the same issue and authorities as stated in each of the previous notices, but with the addition: "issues involved in Stipulation filed April 15, 1980." Thereafter, a Motion to Dismiss for failure to state a course of action was denied.

    
    

13. At the commencement of the formal hearing rescheduled for June 24, 1980, Petitioner moved to amend the complaint on the grounds that Article IX (9) of the Declaration was cited in error in the complaint rather than Article XIX (19). The Motion to Amend was orally granted. A Motion for Continuance was then presented by Respondent on the grounds that since the Motion for Amendment had been granted the Respondent had insufficient time to prepare a defense to the amended charge and had not been informed of the issue involved in the case. Believing that the Notice to Show Cause, both original and as amended, together with the Stipulation filed at the previous hearing and the issue and authorities stated in the numerous Notices of Hearing, the Motions and Memoranda filed by Respondent, and the length of time from the inception of the case to the date of hearing had given Respondent adequate notice of the issues involved in the case

    and the time to prepare, the Hearing Officer denied Respondent's Motion for Continuance of the administrative hearing then in process.

    
    

14. Exerpts from the voluminous documentary evidence which was introduced at the hearing are hereinbefore detailed, but a capsule summary of the facts follows:

    
    

15. Covered Bridge Condominium Association, Inc. and the plats of the property show that it was anticipated in June of 1971 that Covered Bridge Condominium No. 18 might be erected on said corporate property and that when erected, purchasers of the' condominium units would become members of the Association. The Bylaws in 1971 authorized the Board of Directors of the Association to enter into long-term leases of recreational facilities. The Developer entered into the subject lease agreement that contained an escalation clause with the Association in July of 1971. The lease provided that common expenses would be assessed against all condominium units. Respondent created Covered Bridge Condominium No. 18 by "Declaration of Condominium" on December 13, 1978 "pursuant to Chapter 718, Florida Statutes (1976)." It incorporated the lease agreement of 1971 by reference as well as the Bylaws of 1971 and provided that the operating entity of 1971 should be Covered Bridge Condominium Association, Inc. The Declaration stated under "Operating-Entity" that Covered Bridge Condominium No. 18 should be administered under Covered Bridge Condominium Association, Inc., its Bylaws and "in accordance with the Condominium Act of the State of Florida, its supplements and amendments." Respondent expressly sought to tie the owners to the long-term lease which contained an escalation clause. When the new units in the condominium created in 1978 were sold in 1979, the deeds bound the purchasers to the 1971 lease agreement which provided recreational facilities to the condominium parcel.

    
    

16. The parties submitted proposed findings of fact and memoranda of law, and Respondent submitted a proposed recommended order. These instruments were considered in the writing of this order. To the extent the proposed findings of fact have not been adopted in or are inconsistent with factual findings in this order, they have been specifically rejected as being irrelevant or not having been supported by the evidence.

    
    

    CONCLUSIONS OF LAW

    
    

17. The Division of Administrative Hearings has jurisdiction of this matter pursuant to Chapter 120 and Sections 718.501(1) and 498.051, Florida Statutes.

    
    

18. Chapter 718, Condominium, Florida Statutes, has been the subject of litigation, and the meaning and validity of Section 718.401(H)(a)(formerly Section 711.231) has been determined in several recent cases. Essentially, that section of the Condominium Act declares escalation clauses in condominium recreation leases void for public policy and prohibits their enforcement.

    
    

19. In Fleeman v. Case, 342 So.2d 815 (December 22, 1976), Section 718.401(8)(a) was attacked insofar as it operates retroactively. The statute was held inapplicable to the contracts in the three consolidated cases there inasmuch as the subject recreation leases and management contracts were entered into before the effective date of tee statute, that is June 4, 1975. It held that the statute is only prospective in application, and even had the legislature intended retroactive application the Court would have held it invalid as impairing the obligation of contract under Article I, Section 10 of both the United States and Florida Constitutions.

20. In Kaufnan v. Shere, Fla.App., 347 So.2d 262 (May 3, 1977) the trial court refused to invalidate rent increases prior to the effective date of the statute, citing Fleeman, supra, but prohibited further rent increases subsequent thereto. The trial judge held that Section 718.401(8)(a) was incorporated in the Declaration which antedated the enactment of the statute, by virtue of the express wording of the Declaration itself. The prohibition against further rent increases subsequent to the effective date of the statute was affirmed on appeal.

    
    

21. In Palm-Aire County Club, Etc. v. F.P.A. Corporation, April 21, 1978, the Court concluded that the rent escalation clauses in the recreational leases had not been voided by virtue of an automatic amendment of condominium documents triggered by the adoption of Section 718.401(8)(a) . It distinguished the Kaufman case, holding that unlike Palm-Aire the Declaration of Condominium, which antedated the enactment of the statute, expressly adopted the provisions of the Condominium Act. A close reading of Palm-Aire as reported shows that the "Condominium documents" in Palm-Aire, like Kaufman, also antedate the enactment of the statute. A different result was reached inasmuch as the Declaration in Kaufman expressly provided that it should be amended when the Condominium Act was amended.

    
    

22. The facts in the foregoing cited cases are unlike the subject case inasmuch as the condominium documents in those cases all antedated the effective date of Section 718.401(8)(a), June 4, 1975. In the instant case the Declaration creating Covered Bridge Condominium No. 18 was dated December 13, 1978, and the sale of the condominium units was in September and October of 1979. The statute was in effect at the time the condominium was created by Declaration of Condominium and the units were built and purchased. The attempt to bind the purchasers to the escalation clause in the 1971 lease agreement failed because said clause had been declared void as it affects condominiums created, built and purchased subsequent to the effective date of the statute.

    As in Kaufman, supra, the Declaration adopts the Condominium Act and in Section IX A. expressly adopts its supplements and amendments. The provision in Paragraph XXI of the Declaration for an exclusive method of amendment of the Long-Term Lease, but which does not include an automatic amendment whenever there is a change in the Condominium Act, is contrary to other sections of the Declaration and is resolved by the Bylaws of the Declaration in Article XIV, Section 5, which declares that the Condominium Act is to control in the event of conflict.

    
    

23. Section 718.401(8)(a), Florida Statutes, clearly controls the parties in this case and prohibits the enforcement of the subject escalation clause as it pertains to Covered Bridge Condominium No. 18 created in 1978 and purchasers of said condominium parcels.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law the Hearing Officer recommends that an order be entered requiring Respondent Hovnanian Florida, Inc. to cease and desist from enforcing the escalation clause in the "Lease Agreement" of 1971 as it pertains to the condominium created in 1978, Covered Bridge Condominium No. 18, and the purchasers of units in said condominium.

DONE and ORDERED this 29th day of August, 1980, in Tallahassee, Leon County, Florida.

DELPHENE C. STRICKLAND

Hearing Officer

Division of Administrative Hearings Room 101, Collins Building Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 2nd day of September, 1980.

COPIES FURNISHED:

Mary Jo M. Gallay, Esquire Department of Business Regulation 725 South Bronough Street Tallahassee, Florida 32301

Samuel Spector, Esquire Cynthia S. Tunnicliff, Esquire Guyte P. McCord, III, Esquire SPECTOR & TUNNICLIFF, P. A.

Suite 750 Barnett Bank Building Post Office Box 82

Tallahassee, Florida 32302

Docket for Case No: 79-001544

Orders for Case No: 79-001544