Pennsylvania Commonwealth Court Finds that a Homeowners Association is Intended Third-Party Beneficiary of Development Agreement with Right To Enforce its Terms

July 2014Articles In the Zone

In the case of College Woods Homeowners Association v. Trappe Borough, 2014 WL 3056140 (July 7, 2014), College Woods Homeowners Association (Association) filed a contract action against Trappe Borough (Borough) seeking to compel the Borough to take dedication of two streets within the residential development. The Association argued that it was an intended third party beneficiary with standing to enforce a Subdivision and Development Agreement between the Borough and the developer of the residential subdivision (the Agreement).

By way of background, after the developer had completed construction of the roads and other public improvements within the development, the borough engineer confirmed that the improvements had been completed in compliance with the relevant Borough requirements and the Agreement. Yet, despite the developer’s request, the Borough refused to release the developer’s escrow until the developer sued the Borough, at which point the escrow was released, but the streets were never accepted for dedication by the Borough. Four years later, the Association sent a letter to the Borough requesting that the Borough accept dedication of the streets, but the Borough did not agree to accepted dedication. As a result, the Association filed a complaint claiming that the Borough had a contractual obligation pursuant to the Agreement to accept dedication of the streets within the development. After both the Association and the Borough filed motions for summary judgment, the trial court granted the Borough’s motion, determining that there were no material facts in dispute and holding that the Association was not an intended third party beneficiary to the Agreement and, as a result, had no standing to enforce the Agreement. The trial court also held that the Agreement did not impose an obligation on the Borough to accept dedication of the streets.

Thereafter, the Association filed the subject appeal with the Pennsylvania Commonwealth Court, arguing that it was an intended third party beneficiary with standing to enforce the Agreement and further arguing that the Agreement imposed a duty on the Borough to accept dedication of the streets.

In determining whether the Association was a third party beneficiary of the Agreement, the Commonwealth Court cited the Pennsylvania Supreme Court’s decision in Guy v. Liederbach, 459 A.2d 744 (Pa. 1983), noting that such a determination requires a two part test: “(1) the recognition of the beneficiary’s right must be ‘appropriate to effectuate the intention of the parties’, and (2) the performance must ‘satisfy an obligation of the promisee to pay money to the beneficiary’ or ‘the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.’”

The court then noted that the first part of the test sets forth a standing requirement which leaves discretion with the court to determine whether recognition of third party beneficiary status would be appropriate. Because the court concluded that the Agreement contained a promise by the Borough to the developer to accept dedication of the streets, the court deemed that, in order to appropriately effectuate the parties’ intention, the Association’s right to enforce that promise should be recognized. The court appropriately noted that, until the streets are accepted for dedication by the Borough, the Association has the obligation to maintain those streets, thereby further confirming the Association’s status as the main beneficiary of the promise.

The second prong of the test required the court to determine whether the circumstances indicated that the developer intended to give the Association the benefit of the Borough’s promise to accept dedication of the streets. The court held that the Association is the only party with an interest in enforcing the Borough’s obligation to accept dedication of the streets since the developer’s escrow had been released. Further, in looking at the provisions of the Agreement itself, the court found that the Agreement evidenced an intention to benefit not only the developer and the Borough, but also potential purchases of properties in the development, such as the Association’s members.

In finding that both prongs of the test were met, the court, in an unreported decision, reversed the decision of the trial court and held that the Association was an intended third party beneficiary to the Agreement with the right to enforce the Agreement.

Yet the court did not stop there. The court went on to address whether the Association could establish that the Agreement imposed a duty on the Borough to accept dedication of the streets. In holding that the Agreement did impose such a duty on the Borough, the court noted that the Agreement contained multiple instances of language requiring or contemplating the offer of dedication of public improvements to the Borough and language assuming the Borough’s acceptance of such offer. Specifically, the Agreement contained language requiring the developer to complete the improvements and receive approval from the Borough Engineer for the improvements, which improvements would then be offered to the Borough for dedication and, so long as the requirements of the Agreement had been met, the Borough would accept dedication. Given these provisions, the court held that it was the intention of the parties not only for the developer to offer the streets for dedication, but also for the Borough to accept dedication once the terms of the Agreement had been met.

Although this was an unreported decision of the Commonwealth Court, it is telling of where the court stands on matters of dedication. Based on this case, if the agreement between the developer and the municipality contains language indicating that certain public improvements are proposed to be offered for dedication upon completion in accordance with the municipality’s standards, such language will be construed as an assumption that the municipality has agreed to accept dedication of such improvements. Further, the homeowners with the development will become third party beneficiaries of the assumption of acceptance of dedication and will have the ultimate right to enforce such dedication.

View the entire issue of In the Zone (pdf)