STAR-BULLETIN / JANUARY 1997 A new Hawaii Supreme Court ruling over condominium condemnation came after Kamehameha Schools challenged the city's planned conversion of the Kahala Beach Condos, which sits next to the Kahala Mandarin Hotel.

Lease-to-fee
cases clouded

A state high court ruling forces
a reassessment of the city's
leasehold condo condemnations

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By Gordon Y.K. Pang
gpang@starbulletin.com

About 32,000 leasehold condominium owners could have a tough time buying the fee interests of land under their buildings, following a recent Hawaii Supreme Court decision.

The high court ruling, issued Thursday, has also put a legal cloud over a number of lease-to-fee cases being processed by the city. And it has opened up the possibility that the city may have to pay for legal fees in past leasehold conversion cases.

But at least one City Council member said he thinks the situation can be remedied by amending the leasehold conversion ordinance.

At the center of the storm is the city's ordinance passed in 1991 to help leasehold owner-occupants gain title to the land under their units.

The ordinance says qualifying lessees can petition to have condemnation begin when a landowner either refuses to sell the fee interest or no purchase price can be negotiated. The city would condemn the land and turn over the fee interests to the eligible unit owners.

Kamehameha Schools, the state's largest landowner, challenged the city's conversion of the Kahala Beach condominium project on a series of issues, including the minimum number of unit owners needed to trigger proceedings leading to condemnation.

The most significant part of the court's ruling last week is its interpretation of the ordinance to mean that no conversion action will begin unless a minimum of either 25 owner-occupants, or 50 percent of the owners of all units in a project need to agree to the action.

The City Council has contended the law means either 25 owner-occupants or 50 percent of owner-occupants.

But the court opinion said 50 percent of condominium units "means just that -- 50 percent of all the units in the condominium development."

The court upheld that the conversion program is valid and enforceable, but said the Council meant "to achieve its objective by means of condemnation in bulk, rather than on an ad hoc, unit-by-unit basis."

Adding absentee owners into the percentage would severely curtail the number of leasehold buildings, and lessees, eligible for conversion, said Michael Pang, principal broker for Monarch Properties.

"By my estimation, somewhere within 80 to 90 percent of the condemnation projects on Oahu would automatically have been ineligible because they don't contain the requisite number of owner-occupied units, said Pang, whose company has shepherded a number of the condominium owners through the process.

The city did not have the number of condominiums or owners affected immediately by the decision.

But according to Pang, 29 condominium projects have been approved by the city for condemnation. He estimated that there are 32,000 owners of units in about 370 leasehold condominium buildings on Oahu.

Of those, 12 have settled; four of the remaining 17 meet the 50 percent minimum, leaving 13 projects in question, Pang said.

Pang said he expects the 12 who have cleared to be OK. "It's very hard to undo a closed real estate transaction," he said.

City Corporation Counsel David Arakawa, in a written release, said: "The ruling affirms all of the Circuit Court's decisions in favor of the city, except the Supreme Court adopted a narrower definition of condominium lessees who are eligible for leasehold conversion."

While the city is still studying the ramifications of the ruling, Arakawa said, "it appears that this ruling may deprive a significant number of Honolulu's condominium lessees of any chance to convert to fee simple."

Arakawa said the ruling "may also result in the dismissal of some lease-fee conversion cases that are presently pending if it is determined that they failed to meet the new standard."

If that happens, he said, "the court may require the city to pay certain expenses incurred by the landowners in those cases."

Arakawa did not give estimates on how much that might cost.

That aspect of the ruling has Councilman Romy Cachola worried.

The landowners, Cachola said, "had to expend a lot of money, hiring lawyers defending themselves against the condemnation action."

The city is exploring its options, including filing for motions for reconsideration with the court and amending the conversion ordinance, Arakawa said.

Council Policy Chairman John Henry Felix said he is already drafting a bill that would amend the ordinance to state specifically "50 percent of owner-occupants" can be eligible.

"The intent of the law was to take care of people who owned condos in leasehold situations," he said.

Kamehameha Schools attorneys could not be reached for comment. Martin Anderson, attorney for Kahala Beach, also did not return calls.

The road to condemnation Honolulu's 1991 leasehold conversion ordinance for condominiums allows qualified lessees to petition the City Council for a condemnation action when landowners either refuse to sell the fee interest, or no purchase price can be negotiated. A qualified lessee must: >> Own no fee simple property on Oahu that is suitable for residential purposes. >> Live in the unit and have owned it for one year preceding the application. >> Declare Hawaii as the lessees' principal home, including paying state taxes. >> Group with enough other qualified lessees within a project to meet the minimum requirements. The Supreme Court's decision Thursday said the group must include 50 percent of all owners of a project, not just 50 percent of owner-occupants as the city has been interpreting.