Daily Development for Monday, November 21. 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

CONDOMINIUMS; USE RESTRICTIONS; SALE OF UNITS:   Condominium association, through amendment of bylaws, can restrict sale of small studio apartments in complex of much larger apartments so that studios can be sold only to owners of one of the larger apartments.

Demchick v. 90 East End Ave. Condominium, 796 NYS2d 72 (App. Div. 2005)

The condominium project in question consisted of a number of thirty eight large luxury apartments and five small studios.  The studios were located on the second floor, along with the gym, the children’s playroom, and the laundry facilities.   The sale agent for the developer told a number of prospective buyers that these smaller units were limited specifically for use for household staff or guests of owners of the larger apartments, and that they could not be sold separately. 

Plaintiffs acquired one of the larger apartments and one of the studios, which they used for storage.  They claimed that their agent did not tell them that resale of the studio was restricted, and indeed it turned out that the condominium documents did not restrict resale of the studios.

Subsequent to plaintiffs’ purchase of their units, another owner proposed to sell one of the studios separately, and the association board discovered the fact that the condominium documents and the expectations of most of the owners did not coincide with respect to the saleability of the studio units.  The board initiated a vote to amend the bylaws to restrict such sale, and the amendment passed by majority vote of the unit owners despite plaintiffs’ objection.

The plaintiffs then brought suit to set aside the restriction as an unlawful restraint on alienation.  The trial court found the restriction to be an unenforceable restraint on alienation, and granted plaintiffs’ summary judgment.   In a very brief opinion, and apparently as a matter of first impression, the appeals court reversed.

The court found that the restriction was consistent with a reasonable motive to maintain the nature of the entire building as a high end luxury residence and that, although unlimited in duration, the restriction could always be changed by a majority vote of the residents.  It further noted that New York statutes permit condominium associations to restrict sale or leasing of units, subject to the common law doctrine against unreasonable restraints.  In context, the court ruled, this was not an unreasonable restraint.

Comment 1: The editor views this case as a moderate and balanced review of a specific sale restraint, and not a license for every condominium association to restrict the sale of units indiscriminately.  The smaller units clearly were, by design and function, of a nature distinct from the primary residential character of the building, and the bylaws amendment likely corrected an oversight by the developer (or perhaps the developer’s lawyer had warned it about the restraints on alienation doctrine.) 

If condominium interests in New York have authority generally to amend their bylaws to protect the “high end” character of their residences and thus maintain the value of their investment, then the editor is not particularly troubled or surprised by this ruling New York applies the “business judgment rule” to condominium decisions generally - philosophically the most permissive of standards for review of these decisions, although in practice there may not be a lot of difference among the various standards.

Comment 2: Some commentators have noted that the most common distinction observed between condominium and coop developments in New York is that the former are freely transferable while coop units can normally be sold only to persons approved by the coop board.  This likely is true as a matter of practice.  Further, it is often stated that coop interests, being personal property, are not subject to the restraint on alienation doctrine, and that is why the distinction exists.

In fact, in the 1980's a New York court found that coop interests were real property interests for purposes of the restraint on alienation doctrine and struck down a sale restriction in a coop development.  A 1990's decision from a higher appellate court ignored that holding and concluded that sales of coop interests could be controlled by the coop board. 

Coops argue that the more interdependent nature of the coop relationship is the real reason that they should have the authority to restrict resale.  Every coop unit depends on every other coop unit to pay to support the general expenses of the master mortgage and other corporate expenses.  Although condominium owners also pay maintenance assessments, they are not used to pay the master mortgage. 

Comment 3: The editor is not ready to conclude finally that  the differences between coops and condominiums are sufficient to justify different judicial treatment of sale restrictions.  He simply notes that this particular case, permitting restrictions on resale of special purpose units is not a wholesale abandonment of that distinction in New York.

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