State Sav. & Loan Ass'n v. Kauaian Development Co.

• Decision Date: 27 September 1968
• Docket Number: No. 4590,4590
• Citation: 445 P.2d 109,50 Haw. 540
• Court: Hawaii Supreme Court
• Parties: STATE SAVINGS & LOAN ASSOCIATION, a corporation, Plaintiff-Appellee, v. KAUAIAN DEVELOPMENT COMPANY, Inc., Kauaian Land Company, Inc., et al., Defendants-Appellants.

Page 109

445 P.2d 109

50 Haw. 540

STATE SAVINGS & LOAN ASSOCIATION, a corporation, Plaintiff-Appellee, v. KAUAIAN DEVELOPMENT COMPANY, Inc., Kauaian Land Company Inc., et al., Defendants-Appellants.

No. 4590.

Supreme Court of Hawai'i.

Sept. 27, 1968.

Syllabus by the Court

1. A horizontal property regime is established when a developer, sole owner, or co-owners declare their intention to do so by recording a master lease or deed and a declaration of submission containing the information required by the statute.

2. A declaration is the operative document creating a horizontal property regime and subdivides the declarant's interest in the land horizontally as well as vertically.

3. Contracts conveying interests in individual units may be binding once the Real Estate Commission issues a final report and subsequent issuance of supplementary reports does not make those contracts unenforceable.

4. The overall objectives of the H.P.R.A. will best be effectuated by recognizing the rights of contract purchasers as superior to the right of a subsequent mortgagee receiving his mortgage with knowledge of the contracts.

5. Legal and equitable estates merge only when the estates are commensurate.

6. Merger of estates will not be permitted to impair the rights of third parties.

7. A contract purchaser with an interest superior to a subsequent mortgage may voluntarily subordinate his interest to that mortgage.

8. The doctrine of estoppel may be invoked only by a party who establishes reliance.

9. Waiver cannot be predicated on the failure to exercise a right before the right becomes enforceable.

10. The H.P.R.A. did not change the law relating to mechanics' and materialmen's liens.

11. A mechanic's lien attaches to equitable interests under a contract of sale.

12. A statute requiring filing of a mechanic's lien 'not later than torty-five days after the date of completion' sets only the outside limit on filing and does not make invalid a filing before the forty-five day period begins.

Helen B. Ryan, Honolulu (Ryan & Ryan, Honolulu, of counsel) and Milton W. B. Choy, Honolulu (Kim & Choy, Honolulu, of counsel), for certain defendants-appellants.

James S. Campbell and Douglas E. Prior, Honolulu (Smith, Wild, Beebe & Cades, Honolulu, of counsel), for plaintiff-appellee.

Ton Seek Pai, Honolulu (Okumura & Takushi, Honolulu, of counsel), for Better-Built Hawaii, Limited and Johnson & Rognstad.

Norito Kawakami, and Edward Stanwood, Lihue, for defendant-appellee Kauai Commercial Company, Ltd.

Tatsuo Asari, Lihue, for lien-claimant E. F. Nilson, defendant-appellee.

Before ABE and LEVINSON, JJ., KING, Circuit Judge, in place of RICHARDSON, C. J., disqualified, DOI, Circuit Judge, in place of MARUMOTO, J., disqualified, and Fukushima, Circuit Judge, assigned by reason of vacancy.

LEVINSON, Justice.

This is the first case to reach this court involving a condominum. The statute under which we decide this case is the Horizontal Property Regimes Act, S.L.H.1961, Act 180, as amended by S.L.H.1962, Act 9 (hereinafter 'H.P.R.A.' shall mean Act 180 as amended by Act 9). ¹ The plaintiff, State Savings & Loan Association, brought this action to foreclose a mortgage given to it by Kauaian Development Co., Inc. (hereinafter 'Corporation') to secure a construction loan. This appeal involves two distinct issues: State Savings' right to foreclose against the interests of purchasers of individual apartments and the right of persons claiming mechanic's and materialman's liens to foreclose against those interests.

I. State Savings' Mortgage

On May 17, 1962, Mr. and Mrs. Antone Vidinha, as seller, and Mr. and Mrs. Milo Marchetti, Jr., as buyer, entered into an agreement of sale relating to the fee of the land involved in this suit. ² The Vidinhas retained legal title until the full price was paid, but the Marchettis had the right to possession of the land. On August 29, the Marchettis leased the land to Mr. Marchetti, doing business as the Kauaian Development Company (hereinafter 'Company'), for 55 years (hereinafter the lease will be referred to as 'Master Lease 1'). ³ Master Lease 1 was recorded in the Bureau of Conveyances on August 31, 1962. It required the Company to construct and have ready for occupancy within two years from the date of execution of Master Lease 1 all or a part of a hotel apartment complex conforming to plans approved by the lessor. The 55 year term was to begin.

When all or a part of the improvements are ready for occupancy as evidenced by written stipulation signed by Lessor and Lessee. * * *

On October 19, the Company recorded in the Bureau of Conveyances a document entitled 'Declaration', which purported to submit the leasehold created by Master Lease 1 to a horizontal property regime. The document described the land covered by the lease and the book and page where it was recorded, the number, location, and area of the apartments to be constructed, and the general common elements of the structures to be constructed.

On February 8, 1963, the Real Estate Commission issued a 'Final Report' pursuant to § 21 of the H.P.R.A. The report listed the Vidinhas as the fee simple owners of the land, indicated the existence of the agreement of sale entered into by the Vidinhas and the Marchettis, and listed Master Lease 1 as an encumbrance on the fee.

On August 2, the Corporation was formed. On the same day the Marchettis and the Company assigned their interest in the agreement of sale and Master Lease 1 to the Corporation.

On September 13, the Real Estate Commission issued a supplementary public report, as provided for in section 24 of the H.P.R.A., indicating that the Vidinhas owned the fee, that the agreement to sell the fee had been assigned to the Corporation, and that the fee was encumbered by Master Lease 1 which also had been assigned to the Corporation.

On September 20, the Corporation recorded an amended declaration which, among other things, increased the number of units in the building to be constructed.

On November 12, the contractor wrote a letter to the Corporation confirming that construction had commenced on November 11.

On November 13, the Vidinhas conveyed the fee to the Corporation.

Between August 28, 1963 and November 19, 1963, the Corporation had executed 56 documents entitled 'Contract of Sale' by which the Corporation agreed to sell and the purchasers agreed to buy individual units in the proposed buildings. ⁴ Each contract contained a clause providing for termination and return of the down payment in the event that construction was not commenced by December 31, 1963. The contracts also contained a clause indicating that the purchaser had received and read a copy of the Real Estate Commission's final report on the project.

After a loan commitment from Island Federal Savings and Loan Association of Honolulu for financing the individual purchases and construction of the buildings was withdrawn late in 1963, the Corporation entered into negotiations with State Savings for financing construction. Although State Savings' vice-president, J. Ralph Brown, expressed an interest in financing the individual units also, he made it clear from the outset that the Board of Directors in Salt Lake City, Utah, refused to commit State Savings to do so. The Corporation's vice-president and general counsel, Ralph E. Corey, accepted the construction loan with the clear understanding struction loan with the clear understanding that State Savings was not committed to financing the purchases of the individual units. ⁵

On January 17, 1964, the Corporation executed the mortgage on which this action is based to secure State Savings' construction loan to the Corporation of $800,000. The mortgage covers the land, all improvements in existence or to be built, and all rents or profits from the land or improvements. The mortgage was taken subject to the declaration. The mortgage neither mentions Master Lease 1 specifically nor refers to any contracts for the sale of individual units. State Savings had actual knowledge of the existence of such contracts when it took the mortgage.

Early in 1964, the Corporation hired an attorney to review all the existing documents relating to the proposed condominium project. In June, he informed the Corporation and State Savings that Master Lease 1 had been exinguished by merger and that the supposed horizontal property regime was at that time nonexistent.

On July 6, 1964, the Corporation created the Kauaian Development Land Company, Inc. (hereinafter 'Land Corporation'), conveyed the fee to it, and became lessee from the Land Corporation for a term of 55 years to begin on the first day of business operation of the Hyatt House Kauai project (hereinafter this lease will be referred to as 'Master Lease 2'). The deed conveying the fee to the Land Corporation states that it is subject to State Savings' mortgage. ⁶ Master Lease 2 contains a covenant by the Corporation that it will 'observe and perform the terms and conditions of the mortgage, * * * and pay the loan secured by the mortgage.' Master Lease 2 was never submitted to a horizontal property regime, except as it may be considered an amendment of Master Lease 1.

On July 29, 1964, the Corporation recorded the indentures of lease and leasehold condominimum deeds demising and transferring to the purchasers their interest in the land and buildings. At the same time, individual mortgages and pledge agreements of these interests by the purchasers to the Corporation and assignments of the mortgages and pledge agreements to State Savings, not requested or accepted by State Savings, were recorded.

In August, 1964, the purchasers agreed to amend the contracts of sale. ⁷ Under the amendments the purchasers agreed to perform, pro rata, the terms of Master Lease 2.

Late in 1964, the Corporation and all but seven of the purchasers executed a document which purported to amend the leases and deeds and completely supersede the...