## Facts

- A developer created a condominium project under Hawaii’s Horizontal Property Regime Act using a declaration and a master lease (ML1).
- Before the lender’s construction mortgage, the developer entered into contracts to sell condominium units or related interests to individual purchasers.
- The lender later made a construction loan to the developer and took a mortgage on the project with actual knowledge of the purchasers’ existing contracts.
- After the developer defaulted, the lender sought foreclosure against the project, including the purchasers’ contract interests.
- The lender and/or developer contended that ML1 (and thus the condominium regime) had been extinguished by merger of estates or by surrender.
- The trial court ruled in the lender’s favor, subordinating purchasers’ interests and accepting findings supporting extinguishment of ML1.
- Purchasers appealed.

## Issues

1. Whether the project documents established a condominium (horizontal property regime) and whether ML1 remained in effect.
2. Whether units created under the regime were separate, conveyable real-property interests.
3. Whether purchasers’ pre-mortgage unit sale contracts created interests superior to a later mortgagee that took with knowledge of those contracts.
4. Whether ML1 was extinguished by merger of estates or by surrender.
5. Whether purchasers nonetheless subordinated their interests to the mortgage through later deeds, leases, or a related agreement.

## Decision

- The court held that the condominium regime was established and that ML1 had been submitted to the regime and remained in effect.
- The court held that the individual units created by the declaration were separate interests susceptible to conveyance.
- The court held that purchasers’ contracts created interests in the units superior to the lender’s later mortgage because the mortgagee took with knowledge and most contracts predated the mortgage.
- The court rejected extinguishment of ML1 by merger as a matter of law based on the documents.
- The court held there was insufficient evidence to support the trial court’s finding of surrender of ML1.
- The court remanded for the trial court to determine whether purchasers subordinated their interests to the mortgage by subsequent instruments or agreements.

## Legal Principles

- A declaration filed under the Horizontal Property Regime Act creates a distinct form of real property and defines unit-owner rights; units are separately conveyable interests.
- A purchaser’s pre-mortgage contract interest in a condominium unit may have priority over a subsequent mortgage taken with actual knowledge of the purchaser’s contract.
- Merger of estates that would extinguish a lease and related condominium structure is not presumed; it turns on the legal effect of the governing documents and the requisite intent.
- A finding that a lease was surrendered must be supported by evidence; absent sufficient support, the lease remains effective.
- Even where purchasers’ interests are initially senior, alleged subordination by later deeds, leases, or agreements is a distinct question requiring determination on remand.

## Conclusion

The court determined that the condominium regime remained valid under ML1, that unit purchasers held conveyable property interests, and that purchasers’ pre-mortgage contract interests were superior to a later mortgage taken with notice; it rejected merger and surrender theories but remanded to decide whether later documents subordinated purchasers’ interests to the mortgage.


State Sav. & Loan Ass'n v. Kauaian Dev. Co., 50 Haw. 540, 445 P.2d 109 (Haw. 1968)