January 1, 1900

by Ronald L. Perl

Common interest community governing documents will not be enforced in New Jersey if they are found to be in violation of a public policy or in conflict with a statute. The New Jersey Supreme Court recently reached that conclusion in a case entitled Brandon Farms Property Owners Association, Inc. v. Brandon Farms Condominium Association, Inc. In that case, the Court reviewed the relationship between a condominium association and the umbrella association of which it is a part. The issue was whether a condominium association could be held liable for common expenses owed by its unit owners to the umbrella association as required by the umbrella declaration. The Court unanimously held that the arrangement was unenforceable because it was contrary to the provisions of the New Jersey Condominium Act.

Brandon Farms is a housing development consisting of detached single family homes, townhomes and condominium units. Typical of communities containing different styles of housing and forms of ownership, a master declaration of covenants and restrictions was recorded to govern the overall property. Within this "umbrella" entity or "master association", the developer established a condominium association which was responsible for the management and operation of the condominium section and its common elements. The owners of all units, whether townhomes, detached homes or condominiums were each responsible for the payment of a monthly maintenance fee to the master association for the purpose of maintaining and operating the master "common elements and facilities." In addition to the common expense assessment imposed by the master association, there was a recreational limited common expense assessment which was mandatory for the townhome and condominium owners but optional for the owners of single family homes and a small condominium sub-association known as the Twin Pines Condominium Association.

Condominium Association To Pay Master Association Fees

At issue in the case was Section 7.21 of the master association declaration, which authorized the property owners’ association to impose a single assessment against the condominium association instead of individual assessments against the condominium unit owners. Thus, if an individual condominium unit owner failed to pay his or her assessment attributable to the property owners association, the condominium association would still have to pay the full amount due the property owners association and then would be solely responsible for collecting the fees from the owner.

Although set forth in the declaration, this arrangement was not implemented by the developer. Rather, the developer billed the individual condominium unit owners just as the owners of other units within the umbrella association. However, when the developer relinquished control to the unit owners, the property owners association sought to collect the fees from the condominium association in accordance with Section 7.21. The condominium association resisted, and the lawsuit ensued.

The trial court found that the arrangement contained in Section 7.21 placed a disproportionate burden on the owners of condominium units, which included owners of affordable housing units. The Appellate Division reversed the trial court, finding that Section 7.21 had a legitimate purpose and that the property owners association fee could be construed as any other "common expense" of the condominium association and therefore could be made part of the condominium association’s annual budget, like landscaping or any other common expense.

Fee Arrangement Held Contrary to Law

The Supreme Court, though, found that Section 7.21 violated the Condominium Act. The Court concluded that Section 7.21 constituted an "agreement" between the condominium association and the property owners association. It determined that Section 7.21 therefore usurped the power of the condominium governing board to determine whether the condominium association should enter into such an agreement. The Court relied heavily on its 2001 decision in Fox v. Kings Grant Maintenance Association, which dealt with another umbrella arrangement of a master property owners association and several sub-condominium associations within it. In that case, the Court invalidated a governance arrangement contained in the declaration whereby many of the decision-making and maintenance responsibilities of the various sub-associations were delegated to the master association. The Court found that such a delegation violated the Condominium Act by stripping the condominium associations of their statutory authority and mandate. The Brandon Farms Court found a similar unauthorized delegation of the authority of the Brandon Farms Condominium Association.

The Court also found that the owners of units within the condominium bore a disproportionate responsibility for a condominium unit owner’s default in payment. When the owner of a townhome or detached home defaulted in the payment of the master association fee, all of the other members of the master association, including the condominium owners, bore the cost of this default. In the case of a defaulting condominium owner, however, only the condominium owners were responsible for the default. The Court was particularly concerned with the impact this disproportionate responsibility had on the affordable housing units, which were all located within the condominium. The Court decided that the arrangement contemplated by Section 7.21 had a disproportionate detrimental impact on the condominium owners and thus was void as a matter of public policy.

Court’s Analysis Raises Questions

There are several concerns over the Court’s opinion in this case. First, the Court did not address the reasonable expectations of the parties. The governing documents contained a description of the financial relationships of the unit owners, the condominium association, and the property owners association. When a purchaser agreed to become a part of the Brandon Farms community, he or she presumably was aware of the respective financial obligations. Individuals made their purchase decisions relying at least in part on the arrangement set forth in the documents. Absent an unconscionable provision, the expectations of the parties should be fulfilled. (Interestingly, the assessment arrangement contained in the Brandon Farms Declaration was reviewed and approved by the New Jersey Department of Community Affairs, the regulatory agency governing community associations. Section 7.21 was not sufficiently disturbing that it concerned the regulators.)

Next, the Supreme Court adopted the factual findings of the trial court, which were based on limited evidence and only superficial analysis. The assumption seems to have been made that all delinquencies are uncollectible. The Court did not consider the assessment collection process and the impact of those costs on the unit owners. The Community Associations Institute (CAI), as amicus curiae, had argued that the arrangement contemplated by Section 7.21 would result in a single collection effort against a defaulting unit owner who would most likely be in default of both the condominium assessment and property owners assessment as well and therefore would result in greater economy and efficiency. The Court’s ruling, on the other hand, means that both the condominium association and the property owners association must independently seek collection of fees from a single defaulting owner.

Third, the Court relied, in part, on N.J.S.A. 46:8B-12.2, a statute which essentially prohibits a developer from entering into long term management, employment, service or maintenance contracts, or contracts for equipment or materials. In Brandon Farms, though, the declaration established the manner and method of collecting these fees, and the condominium’s master deed adopted the provisions of the declaration. This is not a question of the developer- controlled board entering into a contract relating to the collection of fees; the developer established the collection method through the constituent documents, to which the individual unit owners are contractually bound. One wonders whether the Court might have reached a different conclusion had the condominium’s master deed expressly repeated Section 7.21 verbatim instead of adopting it by reference.

The Supreme Court has clearly indicated that it will review governing and financial arrangements in common interest communities on the basis of fairness and equity. While no one can argue that governing documents should be anything but fair and equitable, some deference should be given to the reasonable expectations of the parties and the relationships that have been created by approved, published and recorded documents. There was no demonstrable evidence that the arrangement in Brandon Farms was so onerous or burdensome that it should be invalidated.

The Supreme Court thus has indicated a willingness, in both the Brandon Farms and Kings Grant cases, to rewrite association documents when it perceives an inequity. We may see more cases in the future challenging governing documents in which allegations of inequitable treatment are raised.

Ronald L. Perl is a partner of Hill Wallack where he is partner-in-charge of the Community Association Law Practice Group. He is Adjunct Professor at Seton Hall Law School and a member of the College of Community Association Lawyers.