February 8, 2009

by Ronald Perl, Esquire

On November 3, 2005, the Appellate Division of Superior Court, in a case entitled Micheve, L.L.C. v. Wyndham Place Condominium Association, invalidated a capital contribution in a condominium association which was imposed by a resolution of the board of trustees. This case is similar to another Appellate Division decision from 1997 involving cooperatives. In that case, Sulcov v. 2100 Linwood Avenue, the Appellate Division struck down a flip fee imposed by a cooperative that was not authorized by the governing documents of the association. In both the Sulcov and Micheve cases the "capital contribution" or "flip fee" was imposed by resolution of the board rather than by the governing documents.

The concern created by the Micheve case is that it contains the statement that the imposition of a non-refundable capital contribution "violates the provisions of the Condominium Act, N.J.S.A. 46:8B-1 to -38, which require the common expenses for maintenance of a condominium's common elements to be charged to all unit owners". This statement is disturbing because the issue before the Court was whether such a fee could be imposed by resolution, not whether the Condominium Act prohibited such a provision in the association's governing documents. The opinion in Micheve went beyond what was necessary to decide the case.

The facts of the case, as reported by the Appellate Court, were that the condominium association imposed an assessment labeled as a capital contribution, but used for the purpose of "paying common expenses incurred for the maintenance, repair and replacement of the common elements". The Court characterized the non-refundable $750 capital contribution as "simply an additional source of funds for the [association's] common expenses." It found this imposition to be a discriminatory allocation of common expenses to a particular class of unit owners, i.e., new purchasers. The Court pointed to language within a section of the Condominium Act (N.J.S.A. 46:8B-17) which it interpreted to require that a condominium association's common expenses must be charged to the unit owners according to the percentage of their respective, undivided interest in the common elements. However, the Court failed to address the language within the same sentence which authorizes the association to assess "in such other proportions as may be provided in the master deed or by-laws." In an association whose governing documents contain a capital contribution requirement, it can certainly be argued that an assessment of a capital contribution is therefore authorized by the Condominium Act.

The Court, in making such a sweeping statement, relied upon the particular facts of the case in which the capital contribution had not been paid by all owners and that it was simply used to fund part of the association's annual budget. That is not true in many cases. In many associations, capital contributions have been collected pursuant to the governing documents from the first closing in the development. It can hardly be said to be discriminatory because each purchaser has paid it. Additionally, many capital contribution provisions in master deeds and by-laws state that the imposition is for purposes of raising and maintaining working capital in the association. The collection and use of working capital in community associations is generally recognized within the industry as a prudent financial practice. The statutory provision relating to the imposition of assessments does not address, and certainly does not prohibit, a master deed or bylaw provision authorizing the raising of working capital.

This opinion has created much confusion within the community association industry. Many associations are receiving objections to the collection of capital contributions that are legitimately imposed by the governing documents. We believe that the Court's statement concerning the lack of statutory authority for condominium governing documents to impose capital contributions is dictum, because it was not essential to the decision in this case. Rather, we see Micheve as a natural extension of the Sulcov holding to condominium associations. We have therefore advised our associations to continue collecting capital contributions that are authorized by specific provisions of the master deed or by-laws until such time as there is a decision that is more specifically on point. It is also important to remember that this decision specifically does not apply to homeowner's associations or cooperatives which are not governed by the Condominium Act.

This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to Ronald L. Perl, Esq. (609) 734-6349 or by email: info@hillwallack.com