Washington Court Holds Association Liable for Following Cost Allocations in Declaration

The Washington Court of Appeals recently issued an opinion that may invalidate the cost or voting allocations of many existing condominiums. In Mohandessi v. Urban Venture LLC, the court ruled that the common expense allocations in the declaration for the 2200 Westlake condominium in Seattle violated the Washington Condominium Act and that two homeowners could sue the association for making assessments per the declaration. Developers should take this case as a warning to follow the statute strictly in allocating common expenses and votes. Association boards should run for their lives.

The Condominium Act and the Washington Uniform Common Interest Ownership Act require a condominium declaration to allocate to each unit a fraction or percentage of the common expenses, common ownership, and votes, and to state the formulas or methods used to establish those allocations. They also state that the allocations may not discriminate in favor of units owned by the declarant or its affiliates.

2200 Westlake is a four-unit “master” condominium created in 2006. It contains a 90,000 sf commercial unit, a 153-room hotel unit, a 43,000 sf grocery unit, and a residential unit containing 259 dwellings. The declaration allocated common expenses to the units based on the “declared value” of the units. The declaration contained a table setting forth the areas, declared values, and allocations for the units. The declaration gave the highest value to the residential unit. It did not identify a formula or method used to derive the declared values, nor did it describe how the values were derived.

Two homeowners sued to invalidate the common expense assessments. At trial, the defendants argued that the allocation was based on the value of the units, and that the table setting forth the declared values satisfied the statute. They acknowledged, however, that they could not identify the source of the values or the formula used to derive the values. The trial court rejected the defendant’s argument, finding that the declaration violated the Condominium Act for failing to state the formula used to derive the common expense liability. It dismissed the case, however, based on the statute of limitations.

The Court of Appeals held the table did not satisfy the statute because it did not allow a court to evaluate whether the allocations discriminate in favor of the declarant. However, it reversed the trial court on the statute of limitations and held that since the declaration was deficient, every time the association adopted a budget based on the declaration, it violated its duty of good faith. In reaching this last conclusion, the court itself violated the Condominium Act. The court noted that a provision was added to the declaration allowing the board to assess any expense that benefited fewer than all the units to only the benefited units. It argued that the board acted in bad faith because it could have assessed expenses differently under that provision. The problem with the court’s argument is that such a provision itself violates the Condominium Act. The Condominium Act requires the association to assess expenses according to the common expense fraction unless the declaration contains a provision requiring it to allocate specific expenses that only benefit some units to those units. In that case, the association must allocate those expenses to those units. Unless the declaration contains a specific mandatory allocation for such expenses, they must be allocated according to the common expense liability. The reason for this is simple: the allocations are fundamental aspects of ownership that can only be changed by owner vote. The board has no power to change the allocations. Owners should not be subjected to allocation changes from year to year and subject to subject.

The takeaways for condominium developers are: (i) use a formula for allocations of expenses, ownership, and voting, (ii) explain the formula in the declaration, (iii) avoid result-driven allocations, (iv) require mandatory arbitration of owner and association disputes, and (v) consider imposing time limits on such claims.

The takeaway for an association board is to call your attorney immediately. The court held that the association was acting in bad faith for following the terms of the declaration, and that the association had a duty to implement an illegal provision in the declaration. The court has created an annual cause of action for homeowners to contest allocations they dislike. Association boards need good advice. Hopefully, the Washington Supreme Court will reverse this portion of the case on appeal.