Daily Development for Friday, December 29, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

CONDOMINIUMS; ASSOCIATIONS; FIDUCIARY DUTIES: Where a condominium board has the right to rent common areas, it has a fiduciary duty to the unit owners not to give away valuable rights and where it has permitted the developer or others to utilize these facilities, it must monitor such use to protect the interests of unit owners.

Kim v. Flagship Condominium Owners Association, 327 N.J. Super. 544, 744 A.2d 227 (App. Div. 2000 ), cert. denied: 164 N.J. 190, 752 A.2d 1292 (N.J., 2000)

The master deed and bylaws of a condominium association empowered the association to administer the property for the benefit of the owners and also permitted unit owners the unrestricted right to rent their units to others. Most of the unit owners within the association participated in a rental program under contracts with one management company.

The management company placed advertisements, took reservations, maintained the units (but not the common areas), and operated the front desk of the condominium project as if it were a hotel. It received its management fees from the rental revenue. Although there was no written agreement between the management company and the association, it appeared that the management company made use of a portion of the common area, including a front desk in the main lobby, for purposes of operating the hotel business.

A particular unit owner withdrew from the rental program and sued the management company. As a result, the management company refused the unit owner's subsequent attempt to rejoin the rental program. The unit owner then sought the association's intervention with the management company on his behalf. The association declined to act, claiming that the relationship between the management company and the unit owners was a matter between those two parties and had nothing to do with the association itself.

In the lawsuit that followed, the unit owner charged that the association violated its fiduciary duty to protect the unit owner's interest in the matter. The lower court found no such duty, explaining that it found no selfdealing on the part of the association and that there was no articulated duty in the statutes, the condominium documents, or the case law which would require a condominium association to take the steps that the unit owner was suggesting.

On appeal, held: Reversed: The Appellate Division found that the Condominium Act sets forth the duties and responsibilities of a condominium association. Here, the master deed included a provision that the association was "formed to administer, manage, and operate the common affairs of the Unit Owners of the Condominium." Further, the Articles of Incorporation of the association stated that the association was "to provide for the maintenance, preservation and control of the common elements ... ," and the bylaws empowered the association's board to "cause the common elements to be maintained according to ... the master deed." According to the Court, the association's board of directors had a fiduciary duty to its members similar to that a corporate board has to its shareholders. That obligation includes the duty to preserve and protect the common elements and areas for the benefit of all of its members.

Further, the "common element" here was not merely the physical space in the lobby or office, but the common (if intangible) benefit derived from pooling units to permit a hoteltype operation. "When a condominium association allows a third party the use or benefit of any common element, such as the lobby or front office, or provides access to or information about its members to a third party, it must take reasonable steps to insure that it does not give away valuable rights and information without gaining some consideration or benefit for all of its members in return." Consequently, the Court held that because of its fiduciary obligation to all of its members, the association's board had the obligation to seek information needed to determine whether the management company's refusal to deal with this particular unit owner was proper. It could not simply defer to the management company's decision. Having done so, it violated its duties to the unit owner.

Reporter's Note: In addition to the above issues, there was an issue as to whether the principal of the management company, who served on the association's board of directors, could participate in decisions regarding business dealings between the management company and the association. The lower court did not explore the principal's role in deciding to reject the unit owner's request to intervene. While not suggesting either the principal's position as a member of the board, and the board's grant or authority to the management company was inherently improper, the Appellate Division requested the lower court to determine on remand whether there was any such improper involvement in the decision making process.

Editor's Comment 1: The "teeth" in this decision haven't yet completely emerged, but the decision obviously has ramifications for developer/association relationships in a wide variety of contexts both inside and outside of New Jersey. Where the majority of unit owners welcome and benefit the activities of a third party service provider, the association presumably can permit access by that provider to the common areas, but this decision indicates that individual unit owners can exploit that "power of permission" to leverage the association to protect them in disputes with the service provider.

When things are going well, and everyone is cooperating, this relationship makes some sense and gives the association a rationale to be a spokesperson for the legitimate interests of unit owners. But where do we draw the line when an individual owner's interests may run contrary to the desires of a majority of unit owners? The service provider presumable will argue that it represents the interests of that majority in the position it has taken with the dissident. Presumably, process could be developed that would permit the association to work out these disputes on a rational basis.

The duty may go beyond the simple duty to facilitate dispute resolution. Here, for instance, it seems clear that the court has required that the association impose special restrictions on the rental activities. The complaining unit owner had obtained a substantial judgment in earlier litigation against the agent, and the agent simply didn't want to do business with that owner. The agent argued that the owner could use an outside broker to rent its unit. But the court responded that the owner was entitled to benefit from the special privileges that the association had permitted to the agent, and, implicitly, the association was required to deny those privileges if the agent refused to deal with a unit owner on the sole basis that the owner had prevailed in expensive litigation during the last business relationship between agent and owner.

But such processes can be expensive and divisive, and can involve the association in petty squabbles that interfere with more important management responsibilities. The importance of this decision is that it appears to compel that kind of involvement, at the risk of subsequent liability for breach of fiduciary duties.

Editor's Comment 2: Here, the association was asked to involve itself in the dispute by one of the disputants. But should it have been monitoring the activities of the rental agency right along? Did it have a duty to inquire and insure that adequate protection of unit owners' interests existed? This, of course, could lead to a much larger number of liability claims, but may a conclusion necessarily drawn from the court's identification of a fiduciary relationship.

Editor's Comment 3: The court's comment about the "intangible assets" of the association. Could the image, reputation, and good will of the community also be assets which the association has the responsibility to manage for the benefit of all members? If, for instance, a group of owners establishes a golf tournament, or a festival, or some other activity that will benefit from the identification with the association and its common elements, does the association have a duty to supervise to insure that all members are treated fairly?

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