Facts: A limited partnership (LP) obtains an option on a ground lease for a parcel of land owned by a trust. The LP constructs condominiums on the land and subdivides the ground lease into multiple identical leases — one for each condo unit. The LP then enters into separate agreements with unit owners assigning one unit lease to each owner. The lease assignments require the owners of the units to pay a monthly assignment fee to the LP for a specified amount of time per an assignment fee provision contained in the unit leases. The LP does not record the unit leases against the property, but records each lease assignment and a memorandum against the condominiums, all referencing the unit leases.  Later, the LP partners dissolve the LP, each receiving a share of the assignment fees. The homeowners’ association (HOA) purchases the land underlying the condos from the trust and, subsequently, the interests in the assignment fees from all partners except one. The remaining partner continues to bill the unit owners for their share of the assignment fees based on the provision in the unit leases.

Claim: The HOA seeks to terminate the assignment fees, claiming the assignment fees are transfer fees since they are imposed by the unit leases for a transfer of interest in property and, thus, the fees are invalid as the LP failed to comply with transfer fee requirements to record the unit leases against the property and provide constructive notice to the unit owners.

Counter claim: The LP partner claims the assignment fees are enforceable since the LP recorded and provided unit owners with documents referencing the unit leases containing the assignment fee provision, thereby meeting the substantial compliance exemption for transfer fees.

Holding: A California court of appeals held the assignment fees are transfer fees but remain enforceable since the LP met the substantial compliance exemption for transfer fees by recording and providing unit owners with documents that reference the unit leases containing the assignment fee provision, thus giving constructive notice of the assignment fees.  [Marina Pacifica Homeowners Association v. Southern California Financial Corporation (December 16, 2014)_CA4th_]

Editor’s note — The HOA additionally claimed the assignment fees were not enforceable since the HOA’s purchase of the underlying land extinguished the unit leases and merged the interests of the lessor and lessees. However, the court dismissed this claim, holding the mutual intent of the parties to the lease agreement was to enforce an assignment fee for a specified amount of time and did not consider a purchase of the land by the HOA. Thus, the court ruled it was fair and reasonable to continue enforcing the assignment fee provision for the specified time period even after the unit leases were extinguished.

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