Articles Posted in Community Associations

No matter whether you are a first time home buyer or veteran repeat purchaser chances are you have been mentally preparing for the deluge of paper that accompanies this major purchase. The sheer magnitude of documents is understandably overwhelming. Document after document is slid across the shiny, polished conference table in your attorney’s office. At a certain point you become automated; sign here, initial there—a few hours later and you may have just signed your first born child away. Yet, when purchasing a condominium or townhouse keep your wits about you and break out your reading glasses because there is one document you want to read—the Public Offering Statement.

A developer of a community development is required under New Jersey’s Planned Real Estate Development Full Disclosure Act to register the planned development with the Division of Housing and Development in the State Department of Community Affairs. In connection with its registration, the developer must also submit a proposed Public Offering Statement. Once approved, the Public Offering Statement must be freely available to all prospective purchasers prior to the closing of the unit.

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In a decision that has renewed the faith of condominium law practitioners in our state’s judicial system, the New Jersey Appellate Division recently issued a strongly worded opinion in Port Liberte II Condo. Ass’n v. New Liberty Residential Urban Renewal Co. et. al., 2014 N.J. Super. LEXIS 19 (App. Div. Jan. 21, 2014) (approved for publication on January 31, 2014), that has prevented a grave injustice and allowed unit owners to control their own fates by having the power to validate unauthorized decisions of the board.

In what has been exclaimed as a “big win” for condominium associations and unit owners, the Appellate Division has determined that a condominium board’s decision to file suit without taking a pre-litigation vote, required by the association’s bylaws, can be affirmed at a later time by the membership and cannot be challenged by the defendants. Designed to protect the financial interests of the unit owners, the bylaws cannot be used by defendant developers and contractors to suppress those very same interests. Non-homeowners, therefore, do not have standing to challenge unauthorized or procedurally defective decisions of the board to start suit.

Faced with widespread construction defects in the common elements of its 225-unit community with a price tag in excess of thirty million dollars for repairs, the Port Liberte II Condominium Association filed suit in 2008 against those responsible, the Developer and the contractors that built the development. Several years into the law suit, the defendants sought dismissal of the entire action because the Association had not obtained a community vote to approve the filing of the suit, as required by a provision of the bylaws drafted by the Developer. To rectify that oversight, the Association held two separate votes to ratify the original filing of the suit, the first in October of 2009, which was approved by the community 72 votes to 3, and a second in October of 2011, which was approved by a vote of 65 to 1. Armed with these two examples of overwhelming support in the community for the lawsuit, the Association opposed the defendants’ motions to dismiss the case arguing that the defendants, as outsiders who owned no units in the community, had no standing to enforce the bylaws, and, even if they had such standing, the original filing of the suit was overwhelmingly ratified by the unit owners.

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Every day condominium associations battle delinquencies and employ creative strategies for collecting unpaid assessments. Sometimes ambitious collection efforts are successful – sometimes not. One aggressive strategy employed by associations is the appointment of a rent receivership for a vacated or abandoned unit owned by a delinquent owner. If successful, a receivership would entitle the association to collect rent for a unit it technically does not own and apply the monies received towards the owed arrearage. While the concept sounds good in theory, it is actually quite difficult to accomplish in practice given the likely upside down mortgage on the property, the inevitable foreclosure proceedings by the bank, and the fact that abandoned units are not occupied by paying tenants.

All those dissuading factors, however, did not stop one association from trying. Faced with over $30,000 of unpaid maintenance dues for two abandoned units, Woodlake at King’s Grant Condominium Association, made an application to the Chancery Court for an appointment of a rent receiver. The Chancery Judge denied the Association’s request finding that the “extraordinary remedy of appointing a rent receiver” was not appropriate under those facts and circumstances. The Association appealed and the Appellate Division issued an unpublished decision on April 1, 2014 affirming the judge’s denial of the Association’s application. See Woodlake at King’s Grant Condo. Ass’n v. Coudriet, 2014 N.J. Super. Unpub. LEXIS 714 (App. Div. Unpub. 2014).

Despite recognizing that the Association was seeking the appointment of a receiver so that it could rent out defendants’ vacant units and recoup some of the assessment monies owed by the defendants, the Appellate Court did not find legal support or plaintiff’s arguments persuasive in favor of forcing the defendants to rent their units or for allowing the Association to rent those units to new tenants. Even though the Association’s assessment liens would remain unpaid after a foreclosure sale because the mortgage liens on the units exceeded their fair market value thereby leaving the Association with no remedy, the Appellate Division found no authority in the bylaws or in the Condominium Act for providing the appointment of a rent receiver.

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The short answer is – Yes! The Condominium Act specifically obligates all unit owners to pay a proportionate share of the common expenses. Even where a unit owner waives the right to use a common element or abandons the unit there is no exemption from liability for common expenses. The Condominium Act, N.J.S.A. 46:8B-1 to -38, provides in pertinent part:

A unit owner, shall by acceptance of title, be conclusively presumed to have agreed to pay his proportionate share of common expenses accruing while he is the owner of a unit. . . . No unit owner may exempt himself from liability for his share of common expenses by waiver of the enjoyment of the right to use any of the common elements or abandonment of his unit or otherwise . . .
[N.J.S.A. 46:8B-17.]

The “or otherwise” language implies that the obligation of unit owners to pay the proportionate share of the common expense is absolute and does not yield to other considerations, such as disputes with the Association. See Holbert v. Great Gorge Vill. S. Condo. Council, 281 N.J. Super. 222 (Ch. Div. 1994) (plaintiff owner was obligated to pay for previously unpaid common expenses, plus interest, despite having brought suit against defendant condominium association for alleged mismanagement of condominium affairs).

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Under the statute of repose, no action to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property may be brought more than ten (10) years after the performance of “such services and construction.” N.J.S.A. § 2A:14-1.1. Essentially, the statute of repose provides that an injury occurring more than ten years after completion of improvements to real property does not give rise to a cause of action at all.

The New Jersey Supreme Court has held that the ten-year statute of repose for bringing an action against a contractor or an architect begins to run as of “substantial completion” of the real property. Russo Farms v. Vineland Bd. of Educ., 144 N.J. 84, 117 (1996). The Court defined “substantial completion” as the date when construction is sufficiently complete so that an owner can occupy or utilize the building. Therefore, generally when the architect certifies as much to the owner and a Certificate of Occupancy is issued attesting to the building’s fitness for occupancy, the real property is substantially complete and the statute of repose begins to run.

One important concept has evolved from recent developments of case law interpreting the statute of repose: the start date for the ten-year time limit of the statute of repose is not the same for all contractors and design professionals on a particular project; the start date differs depending on a party’s continued involvement with a construction project. See State v. Perini Corp., 425 N.J. Super. 62 (App. Div. 2012). The Perini Court engaged in a lengthy discourse of the relevant case law interpreting New Jersey’s statute of repose from which it derived three guiding principles: First, the trigger date is the date of substantial completion, not completion of every last task of the contractor; Second, separate trigger dates apply to subcontractors that have substantially completed their work, even if the improvement as a whole is not completed and ready for use and a certificate of occupancy has not been issued; Third, the trigger date for any single contractor runs from completion of that contractor’s entire work on the “improvement,” not from discrete tasks. [425 N.J. Super. at 74-75 (internal quotations omitted).] This means that certain contractors, who performed services on a job site early on, can benefit from a repose period that commences earlier than the date of substantial completion.

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The novel nature of condominium ownership, specifically the transition process, affects the statute of limitations analysis. The Planned Real Estate Development Full Disclosure Act requires that the developer of a condominium staff the board of trustees of an association and control the affairs of the association until seventy-five percent of the units in the development are sold. During that period of control, the developer is under a fiduciary responsibility to the association to act in the best interest of the association and its membership. Pragmatically speaking, however, a developer-controlled association is much different than a homeowner controlled association. Even if certain problems with construction are discovered during developer-control, it cannot be realistically expected that the developer-controlled board would take steps to investigate those defects and litigate, on behalf of the association, if necessary. Therefore, equity and common sense suggest that the earliest the statute of limitations clock could begin to run against an association for construction defect claims is the date of transition, at which time the unit owners take control of the board of trustees for the first time.

To this end, our courts recognize the inherent unfairness in allowing statutes of limitations to run against an association while the developer controls its board. The reason is clear – individual unit owners lack standing to assert claims for faulty construction affecting the common elements prior to transition. Thus, equity cannot support the running of limitation periods against an association that legally cannot assert its rights during the period of developer control.

In New Jersey, the Law Division decision in Terrace Condominium Ass’n v. Midlantic Nat. Bank, 268 N.J. Super. 488 (Law Div. 1993), clearly stands for the proposition that statutes should be tolled when the unit owners of a condominium are not in control of the Board. In Terrace, a condominium association brought an action against a bank that took over construction of the building. At the time the bank took over, some of the units had been sold, but construction was still continuing. Construction was later completed under the bank’s watch, and almost immediately its residents experienced numerous problems with water infiltration into their units. Midlantic, the bank/owner in question, engaged an engineer to document the problems and provide a solution. Most of these repairs were “short-lived or improper repairs to the most significant of the [] problems and generally had the effect of concealing the true causes of the problems.”

Transition occurred and the Association filed suit against Midlantic. Midlantic raised a statute of limitations defense as to several of the building warranty claims. The court found that because the bank had effectuated repairs, the statute of limitations did not run against the unit owners because they relied upon the bank to effectuate the proper repairs while in control of the Association. Additionally, the court found that, notwithstanding the repairs undertaken by Midlantic, the “unit owners had no control of the Association, and should not be bound by the period of time thereto.” This is true “even if each unit owner could have sued the Bank while the Bank was in control of the Association” and that “it may well be that ordinarily the right to make such claims should be tolled or deferred until the unit owners control the association.”

There is also an unpublished decision by the Appellate Division that directly addresses a condominium Association’s ability to control its own destiny. The Appellate Division decision captioned Skyline Condominium Assoc. v. Falkin, No. A-3913-98, A-3860-98, A-3792-98 (App. Div. September 10, 2001), is right on point. In the Skyline opinion, the Appellate Division was faced with the issue of “determining the first date that a plaintiff obtained the enforceable right to institute and maintain an action regarding the controversy” for the purposes of the entire controversy doctrine.

Recognizing the difficulty in running the statute of limitations clock while the individual unit owners are not in control of their association’s board, the Skyline Court concluded that the statute of limitations on an action for construction defects by a condominium association against a sponsor should be tolled until the unit owners control the association.

In New Jersey, construction defect claims are subject to a six-year statute of limitations, N.J.S.A. 2A:14-1, which is subject to the discovery rule, and a separate ten-year statute of absolute repose, N.J.S.A. 2A:14-1.1, after which potential causes of action no longer exist.

Under New Jersey’s discovery rule, the accrual of a cause of action is deferred until the injured person knows or should know that he has sustained an injury and knows or should know that an injury of which he is aware is attributable to the fault of another person. The discovery rule is an equitable principle by which an accrual of a cause of action is delayed until the injured party discovers, or by the exercise of reasonable diligence and intelligence, should have discovered, that he may have a basis for an actionable claim. Once the injured party knows that it has been injured and that the injury is the fault of another, it has the requisite knowledge for the period of limitations to commence running.

Put simply, for a cause of action to accrue, the injured plaintiff must have knowledge of both injury and fault. Lynch v. Rubacky, 85 N.J. 65, 70 (1981) (“the discovery rule centers upon an injured party’s knowledge concerning the origin and existence of his injuries as related to the conduct of another person”). This rule applies to complex construction defect cases involving hidden construction and design defects.

Among the relevant factors in analyzing whether the discovery rule applies are the nature of the injury and the difficulties inherent in discovering it. Vispisiano v. Ashland Chem. Co., 107 N.J. 416, 428 (1987). For example, in a toxic tort case, such as that presented in Vispisiano, diagnosing a plaintiff’s injury is but the first step in establishing a chain of causation. Id. at 429. The plaintiff’s suspicion that he had been poisoned, after comparing his symptoms to those of a co-worker, was not sufficient to accrue a cause of action, particularly in the face of his doctors’ repeatedly rejecting plaintiff’s concerns that he had been poisoned while working at a chemical plant. Id. at 436.

Applying the foregoing to the condominium construction defect setting gives rise to the argument that a plaintiff association’s cause of action accrues when it receives an engineer’s report (either during transition or afterwards) that first apprises the association of the defects afflicting its buildings and the suspected causes of those defects. However, it may be the case that the requisite knowledge is obtained at an earlier date when unit owner board members learn of defects.

This blog is the fifth and final installment in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

A Board that acts in reliance upon advice of its experts and legal professionals cannot be held liable for negligence or breach of fiduciary duty if that advice turns out to be wrong. A provision of the New Jersey Nonprofit Corporation Act specifically provides, in relevant part:

Trustees and members of any committee designated by the board shall discharge their duties in good faith and with that degree of diligence, care and skill which ordinary, prudent persons would exercise under similar circumstances in like positions. In discharging their duties, trustees and members of any committee designated by the board shall not be liable if, acting in good faith, they rely on the opinion of counsel for the corporation or upon written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of accountants or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board.

[N.J.S.A. § 15A:6-14 (emphasis added).]

Therefore, a Board is encouraged to seek the advice of counsel; however, as a practical matter, the Board should always use its best business judgment in making informed decisions that affect its association and community.

This blog is the fourth in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

When liability for any of these breaches is imposed on an individual director or trustee, the issue of indemnification arises. In New Jersey, because condominium associations are generally organized as not-for-profit corporations under the Nonprofit Corporation Act, indemnification may be available to an officer of an entity organized under this Act provided that the officer (1) “acted in good faith and in a manner which the [officer] reasonably believed to be in or not opposed to the best interests of the corporation,” and (2) “with respect to an criminal proceeding, the [officer] had no reasonable cause to believe the conduct was unlawful.” N.J.S.A. 15A:3-4(b). If the director can satisfy this standard, he can recover from the association both expenses incurred in the litigation and the amount paid in satisfaction of a judgment rendered against him. Id. However, entitlement to indemnification for a claim for punitive damages will not likely be available because it is generally against public policy to provide indemnification for punitive damages. Johnson & Johnson v. Aetna Cas., 285 N.J. Super. 575 (App. Div. 1995).

This blog is the third in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

New Jersey courts that have considered the application of the business judgment rule have concluded that the scope of judicial review of condominium association decisions is limited to a two-pronged test: (1) whether an association’s action was authorized by statute or its own bylaws and, if so, (2) whether the action was fraudulent, self-dealing or unconscionable. Thanasoulis, supra, 110 N.J. at 655; see also Chin v. Coventry Square Condo, 270 N.J. Super. 323, 328-29, (App. Div. 1994); Siller, supra, 93 N.J. at 382; Papalexiou v. Tower West Condo, 167 N.J. Super. 516, 527 (Ch. Div. 1979).

In Thanasoulis, the New Jersey Supreme Court considered whether a rule adopted by the board of directors of a condominium association increasing the parking fee for tenants of nonresidents owners but not for those of resident owners constituted a breach of the board’s fiduciary duty to the nonresident owners. In a 4-3 decision, the Supreme Court determined that the association was without requisite authority to enact the revised parking fee schedule in such a discriminatory manner, and thus failed to meet even the first prong of the test. The majority held that the association’s regulation was not authorized by either the Condominium Act or the condominium’s master deed. The Court noted that by substituting itself as the lessor of the unit owner’s parking space and thereby severing the owner’s right to the parking space, the association had, in effect, confiscated for its own use the value of the unit owner’s parking space. The Court reject the argument that the regulation was a security measure aimed at the prevention of subletting parking spaces to people not residing in the building since the same end could have been accomplished through other means.

Perhaps the clearest explication of the business judgment rule is contained in Papalexiou v. Tower West Condominium, in which individual unit owners challenged the authority of the board to levy a special emergency assessment upon the membership. In upholding the assessment, the court said:

The refusal to enforce arbitrary and capricious rules promulgated by governing boards of condominiums is simply an application of the “business judgment” rule. This rule requires the presence of fraud or lack of good faith in the conduct of a corporation’s internal affairs before the decisions of a board of directors can be questioned. If the corporate directors’ conduct is authorized, a showing must be made of fraud, self-dealing or unconscionable conduct to justify judicial review . . . Although directors of a corporation have a fiduciary relationship to the shareholders, they are not expected to be incapable of error. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties. Courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence.

[Papalexiou, supra, 167 N.J. Super. at 527 (citations omitted) (emphasis added).]

Accordingly, to hold a Board member personally liable, a plaintiff must establish evidence that illustrates self-dealing or a lack of good-faith in carrying out the duties of the Board.

Nevertheless, the business-judgment rule does not apply to shield board members where the action of the association is in violation of the Condominium Act, the association’s master deed, or its by-laws. Micheve, L.L.C. v. Wyndham Place at Freehold Condo. Ass’n, 381 N.J. Super. 148, 154 (App. Div. 2005), certif. denied, 186 N.J. 256 (2006). Likewise, where the Board acts without authority derived from its governing documents or statute, it is similarly unprotected by the business judgment rule. See Verna v. Links at Valleybrook Neighborhood Ass’n, 371 N.J. Super. 77, 93 (App. Div. 2004) (Only when a board’s actions are authorized and of the type that justify application of the “business judgment” rule, will a court refrain from second-guessing its actions).

Generally, enforcing rules and other constituent document provisions, such as the duty to collect assessments, is an area of special sensitivity for board members and associations, which may be attacked for breach of fiduciary duty for failure of such enforcement as well as for discriminatory enforcement. In Glen v. June, 344 N.J. Super. 371 (App. Div. 2001), the court found that an association had breached its fiduciary duty by depriving an owner of the use of his driveway, a limited common element, and a garage, which was apparently part of his unit. The court concluded that an award of damages would be appropriate for the breach of fiduciary duty. The court also found that an attempt to humiliate the owner by piling snow in his driveway was a breach of fiduciary duty, although it offered no remedy for that incident.

Necessarily, self-dealing must be avoided, corporate opportunity enhanced, and facts which have a bearing on association concerns must be honestly and fully disclosed. The issue of self-dealing was considered in Owners of the Manor Homes of Whittingham v. Whittingham Homeowners Ass’n, Inc., 367 N.J. Super. 314, 323 (App. Div. 2004). There, the allegation was that the Board members breached their fiduciary duties by changing the method of calculating maintenance assessments (i.e. by re-measuring the units) several years after the condominium had been in operation. As a result, the monthly assessments for certain types of residences increased while it decreased for others. Plaintiffs alleged self-dealing, but that was rejected by the court because there was no evidence that the Association or Board benefited by the remeasuring. Moreover, there was an independent business reason for doing the remeasurement, i.e. the source of the developer measurements were unclear and contradicted by architectural drawings. Accordingly, in order for a breach of fiduciary duty claim to pass muster, a plaintiff must come forward with evidence that the Board or an individual Board member received some type of direct benefit from an authorized act of the Board.

Nonetheless, breach of fiduciary duty to “maintain, repair and replace” common area of the condominium could cause a trustee to be liable for the cost of returning the condominium to the position that it would have been in had such maintenance been undertaken. See Berish v. Bornstein, 770 N.E.2d 961 (Mass. 2002), remanded to 21 Mass. L. Rptr. 530 (Mass. Super. 2006) (trustee was also the developer). Notably, however, our research produced no published New Jersey case that considered this issue.

An association’s fiduciary duty will in certain circumstances include the duty to warn owners of a known dangerous condition. See Siddons v. Cook, 382 N.J. Super. 1, 10-11 (App. Div. 2005), where the association knew that faulty dishwasher hoses had flooded several condos but did not notify the unit owners. The court examined the nature of the risk, the interests a notification would protect, and the ease with which the association could notify the owners, in holding that the association breached its duty to warn the unit owners.

Additionally, a director’s breach of fiduciary duty owed to unit owners may expose the director to liability for punitive damages. For instance, in Scott v. Williams, 607 S.W.2d 267 (Tex. Ct. App. 1980), unit owners brought suit against the directors of the association alleging that the directors had controlled the condominium for the their own personal gain and had mismanaged its affairs and misapplied its funds. The trial court enjoined the directors from controlling the affairs of the condominium to maximize their profits, awarded damages for the directors’ failure to repair the common elements of the condominium, and awarded punitive damages. The Texas Appellate Court affirmed the grant of an injunction but reversed and remanded for a new trial that part of the award dealing with damages. The appellate court reversed the damage award on the sole ground that the plaintiffs had no standing to sue on behalf of other unit owners who may have been damaged by the directors’ conduct and who were not joined as plaintiffs in the suit. At no point in its opinion did the Scott court indicate that the punitive damage awards were improper. Even if the Association has obtained directors and officers insurance, policies of this nature do not cover intentional acts.

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