January 30, 2018
By Adam Leitman Bailey and John M. Desiderio
Adam Leitman Bailey and John M. Desiderio review the authority given to boards of condominiums and cooperative corporations to impost and enforce respectively on condo unit owners and cooperative shareholder-tenants who violate building house rules.
This article will review the authority given to boards of condominiums and cooperative corporations to impose and enforce fines respectively on condo unit owners and cooperative shareholder-tenants who violate building house rules. Boards of condominiums and cooperative corporations have almost unlimited powers over their buildings’ operations and the manner in which condominium unit owners and cooperative shareholders may utilize the apartments and common spaces in their buildings. Unless the conduct amounts to egregious discrimination between unit owners or shareholders similarly situated, self-dealing, or other bad faith or outright unlawful action, the business judgment rule precludes judicial second-guessing of board decision-making.[1]
Nevertheless, boards must act within the boundaries of the authority provided to them by statute and/or by their buildings’ governing documents and by-laws. For condominiums, board authority to fine unit owners and residents is grounded in the Condominium Act[2]and in each condominium’s declaration and by-laws. For a cooperative, the authority is determined by the provisions included in its certificate of incorporation, the proprietary lease, and by-laws.
Condominiums
Section 339-j of the Condominium Act grants boards express authority to impose monetary fines on “each unit owner” who does not “comply strictly” with the “bylaws, rules, regulations, resolutions and decisions adopted pursuant thereto.”[3] As further prescribed therein:
Failure to comply with any of the same shall be ground for an action to recover sums due, for damages or injunctive relief or both maintainable by the board of managers on behalf of the unit owners or, in a proper case, by an aggrieved unit owner.
Thus where a unit owner violates a condominium’s by-law or other duly adopted rule or regulation, the board has statutory authority to fine or maintain an action against the offending unit owner. The inquiry for the court then focuses on (a) whether the board was authorized to adopt the specific rule or regulation at issue, or (b) whether the fine imposed on the unit owner is reasonable. The application of these principles is illustrated in the following cases.
In Minkin v. Board of Directors of the Cortlandt Ridge Homeowners Ass’n,[4] a group of owners of single-family homes within the community brought an action to recover damages from their board for breach of fiduciary duty and for a judgment declaring that the defendant board was not authorized to provide for landscaping services to be performed on their properties. The action arose when the board retained a landscaping company to perform landscaping services for all of the single-family homes in the community. The homeowners were charged for the landscaping services. The homeowners refused to pay the charges and claimed that the board lacked authority to charge them for the services. The board then assessed fees and fines against the homeowners. The board also assessed fees and fines against the homeowners after they made their own changes to the landscaping in the front of their properties, on the grounds that the homeowners failed to obtain board approval for the changes. The homeowners argued that the board exceeded its authority in imposing all the fines levied against them.
In determining whether the fines and fees were properly assessed, the Second Department first noted that the declaration of covenants, which governed the board’s authority, expressly authorized the board (a) to provide landscaping services for the front portions of the properties of single-family homes within the subject community, and (b) to charge the homeowners for said services. The court reasoned that, since the board was authorized to provide landscaping services to be performed on the front portions of the properties, the homeowners were therefore required to pay fines and fees assessed against them for not paying the landscaping charges. The court held that the board’s actions respecting those charges were protected from judicial review pursuant to the business judgment rule.
Nevertheless, the court also found that the board did not demonstrate its prima facie entitlement to judgment as a matter of law for ALL the charges, fees, or fines levied against homeowners. The court found that triable issues of fact existed as to whether the total fees and fines assessed included charges for services performed on the side and rear of the homeowners’ properties. Although the declaration of covenants authorized the board to provide for and collect charges for landscaping services performed on the front portions of the homeowners’ properties, the declaration was silent on the board’s authority to provide landscaping services to the sides and rears of the properties.
Noting that the board had failed to provide any evidence as to how the fees that were imposed were allocated between the front, sides, and rears of the properties, the court held that the homeowners were entitled to enjoin the board from collecting such charges, fees, and fines as were not allocated solely to the front portion of the properties. The court also ruled that the board did not demonstrate its prima facie entitlement to judgment as a matter of law to enforce and collect charges, fees, or fines levied against the homeowners for changes made to landscaping in front of the homeowners’ properties. The court held that there were triable issues of fact as to whether or not the board had authorized the changes.
However, the homeowners’ cause of action to recover damages for breach of fiduciary duty was dismissed. The court found the that the various board actions challenged by the homeowners “were within the board’s authority, and taken in good faith for the benefit of the homeowners’ association, and, thus, that such actions were protected from judicial review pursuant to the business judgment rule.”
In Gabriel v. Board of Managers of Gallery House Condominium,[5] the First Department similarly held that a condominium board of managers lacked authority to impose a fine against homeowners. In Gabriel, several unit owners brought an action against the board seeking to invalidate fines of $500 per day that the board had imposed on unit owners who violated a newly amended house rule that restricted owners from subletting their units to guests. The unit owners also sought injunctive relief to enjoin the board from imposing such fines in the future.
The First Department duly recognized that the imposition of fines to implement rules and regulations as provided for in the bylaws was within the board’s power and authority. However, the court noted that the board was unable to cite persuasive authority to support its imposition of such a hefty fine, and that the imposition of the fine did not amount to a mere administrative fee or nominal fine for a resident’s noncompliance with certain rules. Accordingly, the court held that the board lacked the authority to impose such fines because the $500-per-day fine for unit owners violating the guest policy was a penalty to residents and was confiscatory in nature.[6]
Cooperatives
Unlike condominiums, there is no statute that authorizes a cooperative board of directors to assess monetary fines. Instead, a cooperative board seeking to assess monetary fines against tenant-shareholders for violating house rules must do so pursuant to explicit authorization found within the governing documents, i.e., the certificate of incorporation, proprietary lease, and by-laws duly adopted in accordance therewith. Thus, where cooperative boards possess authority provided in the by-laws to adopt additional rules and regulations, the boards also possess the implicit authority to impose fines for any violation thereof.
In Cohan v. Board of Directors of 700 Shore Road Waters Edge,[7] the board of a cooperative corporation assessed a fine of $3,000 on a tenant-shareholder for an alleged illegal sublet of her apartment after receiving noise complaints from other tenant-shareholders. The shareholder advised the board that she was residing full-time in the apartment with her sister. Nevertheless, the board refused to rescind the fine. The tenant-shareholder commenced a lawsuit to rescind the fine on the ground that the proprietary lease permitted occupancy by a shareholder and certain family members, including sisters. In response, the board moved to dismiss the shareholder’s action arguing that its authority to impose the $3,000 fine was derived from the sublet policy included in the cooperative’s handbook which stated that the board “does not permit shareholders to sublet their apartments,” and that “[a]ny shareholder who sublets their apartment is subject to a $3,000 fine.”
The Second Department rejected the board’s argument, finding that the board was without authority under its governing documents to assess the fine for the alleged illegal sublet. As the court explained, “[t]he proprietary lease, by-laws, shareholder handbook, and the ‘house rules’ adopted by the board fail[ed] to substantiate the board’s claim that the ‘sublet policy’ recited in the shareholder handbook was an enforceable ‘house rule’ incorporated and made binding on the petitioner under the proprietary lease.” While giving due deference to the business judgment rule, the Second Department noted that “[t]he business judgment rule does not apply when a cooperative board acts outside the scope of its authority or violates its own governing documents.”
Policies Prohibiting Unit Owners from Leasing Their Apartments
The limits of board authority is similarly at issue regarding policies restricting unit owners from leasing their apartments. In Olszewski v. Cannon Point,[8] condominium owners brought an action to challenge and enjoin newly enacted house rules that imposed numerous limitations and restrictions on unit owners that sought to lease their properties. One restriction stated that no unit may be rented for a period of less than two weeks, and that lessees who rent a unit for less than 90 days were precluded from having guests or pets on the property. In challenging this rule, the homeowners alleged that the restrictions violated the bylaws which provided in pertinent part that “‘[a]ny [h]ome may be conveyed or leased by its…[o]wner free of any restrictions’ —- provided that the common charges or HOA expenses assessed against such unit have been paid.”
Pursuant to said provision, the unit owners sought a declaratory judgment declaring the rule and the restriction null and void. The condominium board argued that the by-laws also provided that the board may “make reasonable rules and regulations and…amend the same from time to time, and that such rules and regulations shall be binding upon the[homeowners] when the [b]oard has approved them in writing.” The board thus argued that the creation of the rule was within the board’s discretion and was therefore protected by the business judgment rule.
The Third Department rejected the board’s argument. The court explained that the by-law provisions must be read “as a whole.” It held, therefore, that the board “may indeed adopt reasonable rules and regulations relative to the business and/or property of the condominium [association],” but only if “such rules and regulations do not conflict with or purport to impair a right expressly granted to the individual homeowners…by the relevant bylaws.” The court noted that the new lease restrictions “do not appear anywhere in the governing bylaws and, more to the point, are in direct conflict with the provisions thereof granting homeowners the right to convey or lease their properties ‘free of any restrictions.’” Accordingly, the court held that, “[u]nder these circumstances, the plain and unequivocal provisions of the bylaws relative to the rental of individual homeowner units precludes [the board] from unilaterally adopting the 2014 rules in the fashion accomplished here.” The court explained that “[t]o hold otherwise would render meaningless the provisions permitting homeowners to convey or lease their properties ‘free of any restrictions.’”[9]
“That is not to say,” the court noted, “that [the board] cannot adopt reasonable rules governing, among other things, the rental or individual homeowner units.…Here, however,…to the extent that [the board] wish[es] to impose rules in this area, [the board] may do so—but only if the rules so adopted do not in fact conflict with the rights and privileges conveyed to [homeowners] pursuant to the relevant provisions of the bylaws or, failing that, [the board] successfully [employs] the procedures set forth in the declarations and bylaws relative to the amendment thereof.”
Similarly, in Gabriel, supra,[10] the board amended its rental and guest policy to prohibit unit owners from leasing their apartments for a period greater than one year. However, prior to the amendment, the only restriction in the by-laws regarding an owner’s use of his unit was that it could not be used for transient residency. The homeowners argued that the board lacked authority to institute such a house rule, and the board argued that the restriction was a mere clarification of the by-laws that restricted transient residency.
In agreeing with the homeowners, the First Department held that the board’s amendment to the rules prohibiting unit owners from leasing their units for a period greater than one year was unenforceable. The court explained that “[c]ontrary to the board’s argument…the 2014 amendment requiring that leases be limited to no more than one year does not constitute mere clarification of the bylaws. Rather, it amends the permitted use of plaintiffs’ units.” The court further noted that the “only restriction in the bylaws regarding an owner’s use of the apartment is that it cannot be used for transient tenancy,” and pointed out that the board had “failed to offer any explanation as to how requiring leases not to exceed one year is in keeping with the prohibition on transient tenancies.”
Conclusion
It is clear that condominium and cooperative boards do have authority to govern the operations and use of the common spaces and units that are integral to the buildings or homeowner developments subject to their governing documents. However, as shown in the cases discussed above, boards may not exercise powers over their owners or shareholders that are not expressly or implicitly given them by statute or by their governing documents (for condominiums: the declaration and by-laws; for cooperatives: the certificate of incorporation, proprietary lease, and by-laws). While courts do recognize the broad discretionary authority boards have under the business judgment rule, boards cannot presume that the business judgment rule will insulate them from legitimate unit owner or shareholder complaints when a board’s action exceeds its rightful authority. In such cases, the courts will not hesitate to rebuke unwarranted board action.
ENDNOTES:
1. Levandusky v. One Fifth Avenue Apartment Corp., 75 NY2d 530, 554 NYS2d 807 (1990).
2. Article 9-B, Real Property Law, Section, Section 339-j.
3. Id.; See generally Board of Managers of Plymouth Village Condominium v. Mahaney, 272 A.D.2d 283, 707 N.Y.S.2d 353 (2d Dept. 2000).
4. Minkin v. Board of Directors of Cortlandt Ride Homeowners Ass’n, Inc., 149 A.D.3d 723 (2d Dept. 2017).
5. Gabriel v. Board of Managers of Gallery House Condominium, 130 A.D.3d 482 (1st Dept. 2015).
6. See, e.g., Sandra’s Jewel Box v. 401 Hotel, 273 AD2d 1, 3 (1st Dept. 2000); see also Adam Leitman Bailey & Dov Treiman, Defining the Limits Of Liquidated Damages Clauses, N.Y.L.J. (Dec. 31, 2014), http://www.newyorklawjournal.com/id=1202713659926/Defining-the-Limits-of-Liquidated-Damages-Clauses?slreturn=20170716192534.
7. Cohan v. Board of Directors of 700 Shore Road Waters Edge, Inc., 108 A.D.3d 697, 969 N.Y.S.2d 547 (2d Dept. 2013).
8. Olszewski v. Cannon Point Ass’n, Inc., 148 A.D.3d 1306, 49 N.Y.S.3d 571 (3d Dept. 2017)
9. The authors are aware that NY Multiple Dwelling Law, Article 1, Section 4-8, prohibits apartment owners from renting their units for a period of less than 30 days. The restrictions in this case dealt with leases for a period less than 90 days, and so the MDL provision does not apply.
10. Gabriel, note 5, supra, 130 A.D.3d, at 483.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. John M. Desiderio is a partner at the firm. Joshua Filsoof, a law student and extern at the firm, contributed to the preparation of this article.
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