On November 21, 2011, the Georgia Supreme Court issued an interesting opinion involving application of a technical legal principle applicable to contracts that could have a wide ranging effect on existing legal relationships between lot owners in subdivisions, home owner associations, property owner associations, subdivision developers, and county and city governments. In an opinion written by Chief Justice Hunstein in Kennedy Development Company v. Camp, Appeal No. S11G0274 (Slip Op., Nov. 21, 2011), Georgia's highest court held that the statutory limitation on indemnity clauses in OCGA § 13-8-2 (b) applies to agreements between developers and associations under which a developer has attempted to turn over continuing liability to an association. The effect of the ruling in Kennedy was to prevent a developer who had been named as a defendant from seeking to hold an association responsible for a claim that a land owner had brought against the developer for damages to a lake caused by excess storm water.
Developers use and create detention ponds and retention ponds, or lakes, in subdivisions to capture the storm water runoff from new house and street construction. The addition of hard, impervious surfaces in connection with subdivision development increases and concentrates the volume and velocity of storm water runoff into drainages and streams. These changes to the natural, hydrology of land can cause injuries to down stream or down hill land owners, and lake owners, if detention and storm water pipes are not carefully constructed and maintained. Developers create homeowner and property owner associations to take over responsibility for the continued maintenance of ponds after developers leave the associations.
In the Kennedy Development Co. case, owners of property around a lake used as retention for another, uphill subdivision claimed damages due to an increase in storm water caused by development of the up hill subdivision. The land owners sued the developer of the uphill subdivision. The uphill subdivision developer then turned around and filed a claim against the homeowner association for the lots around the lake. The facts of the case as cited in the opinion indicate that the uphill subdivision used the down hill lake as retention for its development and entered into an agreement with the down hill association to accept liability for the lake. Accordingly, when the land owners damaged by problems with the lake sued the developer, it then sued the association that contracted with it to assume responsibility.
The focus of the opinion was a limitation on exculpatory clauses in contracts under which one party tries to assign its liabilities to another. Georgia contract law invalidates agreements where a party tries to assign liability for its "sole negligence" to another party. O.C.G.A. § 13-8-2. In the Kennedy Development Company case, the agreement between the developer and association contained language that did not comply with the limitations of the Georgia statute regarding indemnity clauses. The language of the clause attempted to assign all liability for the lake to the association including liability for the developer's "sole negligence" for the design of the storm water system. Because the contract was void, the assignment was void, and the developer's attempt to bring the association into the case failed.
The case is interesting. While the land owners damaged by the use of their lake might still pursue the developer, in many instances the developer will have disappeared by the time problems surface in detention ponds and retention ponds, or lakes used as retention. Many development companies in recent decades were thinly capitalized, one shot, development companies formed for one subdivision. As soon as the development is completed, many of the companies suffer administrative dissolution.
Another issue involves the continued maintenance of storm water systems. Where local governments refuse to accept dedication of storm water system components, including pipes and detention ponds, the obligation for maintenance of the system is left unattended. Associations came into vogue after the law required continued maintenance of detention ponds in order to service the need for a capitalized entity to take over responsibility. See Homeowners Associations, Wikipedia (primary driver of proliferation of homeowner associations was the U.S. Clean Water Act of 1972.)
If developers are limited in assignment of maintenance responsibilities under Georgia law to associations, then injured land owners suffering a nuisance due to flooding, excessive runoff from storm water, and erosion and sedimentation could find that there is no one to maintain the system that the law required. All of this could occur because the assignment clauses are void.
On the other hand, the opinion in the Kennedy Development Company case only applies to assignments that do not meet the limitations of Georgia contract law. An assignment that is limited to new and future maintenance responsibilities, and which does not act to assign liability for negligence in connection with the construction of the system itself, should still be valid. Moreover, Justice Hunstein's opinion in the case specifically noted that the only basis for the claim against the association was the assignment language of the agreement between the developer and the association. Other claims were not advanced.
In the past, many developers have cut corners to such an extent that there was no care in turning over responsibility to associations. Many developers have not paid attention to the issues. Since municipalities and counties have avoided acceptance of dedication of storm water easements, many of these systems are unattended and destined for for failure.
A Blog about Real Estate, How it Can Be Damaged, and Disputes Over its Transfer
This blog is a personal blog written to discuss legal issues affecting Georgia property, and how it is damaged, transferred, and fought over. I write this partly to keep abreast of the law, and partly to offer a forum for my writing. In order to find content, I often analyze Georgia Supreme Court decisions. I try to update this blog as I can, but writing is a time consuming process.