By Robert Meisner
What is the duty of the Community Association (the Board of Directors) to act? I have been asked to write a brief article on whether Boards have a choice when it comes to enforcing the provisions of the Community Association Documents. What can be the consequences of that choice and to what extent is a precedent established by a Board’s refusal to enforce the Documents? Further, can reasonable limits be placed on or by the Board of Directors when dealing in this area?
As legal counsel for community associations of all varieties for over 25 years, I have generally been impressed with the expectation of the board of directors of a community association that its primary responsibility is to enforce the Community Association Documents, be it the Declaration of Covenants and Conditions in a homeowner association, the Master Deed and Bylaws in a condominium project, or an Occupancy Agreement in a cooperative association.
The members of the board of directors have a fiduciary responsibility to the association members to exercise due care in performing their duties, and to act reasonably and in good faith in accordance with the best interests of the association. The responsibilities of the board of directors include not only a duty to enforce the documents, but also to take action to amend the documents so as to keep the documents from becoming obsolete due to changes in community association law and practice. Such changes may be mandated by developments in governmental regulations such as the Federal Communication Commission rule governing satellite dish antennas and Federal and State Fair Housing laws which have caused some restrictions on antennas and definitions of “family” for occupancy purposes to be not only obsolete, but a source of potential liability to the association. The Board also has a duty to protect the association from liability through the purchase of insurance against foreseeable risks. Finally, the Board of Directors has a duty to promulgate reasonable rules and procedures and adopt policies to collect assessments, enforce its documents and otherwise administer the affairs of the association.
Suffice it to say that the general notion permeating community association boards is that they have a duty to enforce the provisions of the enabling documents. Interestingly, however, a close examination of most of the community association documents will reveal that not only is the community association given the right to enforce the documents, but so are the individual members of the association. It has often been an issue, not only considered by me but at the Community Associations Institute law seminars over these many years, as to whether or not a community association Board has a duty to enforce every restriction in the book, so to speak, regardless of the ramifications of doing so. In my opinion, the Board has a choice to determine when and if it chooses to enforce a restriction, but should establish criteria through adoption of a Bylaw enforcement policy regarding when and how a restriction should be enforced. While the Board can be criticized and perhaps be found liable for malfeasance or nonfeasance in failing to discharge its responsibilities by way of enforcement, a standard of reasonableness will normally be applied towards the decisions made by the board of directors and, at the least, the “business judgment rule” may determine whether the Board acted arbitrarily or capriciously in making such decisions.
The “business judgment rule” insulates an officer or director of a corporation from liability for a business decision made in good faith if he or she is not personally interested in the subject of the business judgment, is informed with respect to the matter to the extent he or she reasonably believes same to be appropriate under the circumstances, and rationally believes that the business judgment is in the best interests of the corporation. Under the business judgment rule, matters of business judgment and discretion are not subject to judicial review so long as directors of a corporation control its affairs within the limits of the law. In a recent case, the New York Court of Appeals held that the business judgment rule, or a standard analogous to the rule, should be applied in reviewing decisions of a community association board. Levandusky v One Fifth Avenue Apartment Corp., 553 NE 2d 1317 (NY 1990). The business judgment rule has been similarly applied to community association decisions by Courts in Washington, New Jersey, California and Colorado. See, e.g., Francis v Village Green Owners Assn, 723 P 2d 573, 229 Cal. Rptr. 456 (Cal. 1986). The business judgment rule has long been recognized as controlling law and applied with respect to boards of directors of corporations by Michigan Courts, although not specifically in the context of nonprofit community associations. Wagner Electric Corp. v Hydraulic Brake Co., 269 Mich 560 257 NW 884 (1934).
Obviously, if the Board establishes a policy in terms of how it chooses to enforce the documents, it will be on record as to the attitude and procedure it will utilize in enforcing these documents. By way of example, if a chronically alcoholic homeowner is pounding on the walls of his neighbor’s unit, that is the only unit that is being affected, and the complaining neighbor demands action by the Board, the Board is then faced with the task of determining whether or not this is a community wide issue which should be dealt with by the association as opposed to the individual member who is aggrieved. To the extent that the issue does not involve a community-wide situation, the Board may have the right to exercise its own business judgment to refrain from instituting any type of administrative and/or legal proceeding to deal with the violation, even if it is a valid complaint, and leave that matter to the individual complaining homeowner to pursue as he or she may choose, including litigation or an alternative dispute resolution process.
Obviously, if the Board makes a business decision not to pursue a particular violation of a restriction, covenant or rule, the Board must appreciate the consequences of that decision. First, there is a potential liability which could be imposed upon the Board for allegedly failing to “discharge its fiduciary responsibilities”. More importantly, however, if the Board fails to actively enforce a particular restriction or rule, the Board may find that it has established a precedent which may later be difficult for the association to disavow should a new Board come into power feeling differently about the restriction, covenant or rule in question. Obviously, the legal defenses of waiver and estoppel may be involved regarding whether or not members of the association relied to their detriment on the inaction taken by the Board in enforcing these restrictions, etc., although it has been held that prior inaction by the Board in enforcing Bylaws does not constitute waiver where the Board gave subsequent notice that it would begin enforcement. Board of Managers v Hudson View Towers, 582 NY 2d 142 (1992). These principles may come into play should the restriction and/or rule later be deemed to be a viable, enforceable provision which the Board seeks to establish. Of course, these cases are generally fact intensive on an individual basis and are normally distinguishable. However, if there is, by way of example, a ban on dogs which the Board so steadfastly refuses to enforce that members begin to bring in dogs without fear of retribution, it may well be difficult for future boards to come in and enforce that restriction without meeting the defenses of waiver and estoppel. Of course, in the case of a dog restriction, the association is faced with a greater potential of liability for its failure to enforce the restrictions, particularly if the dog, by way of example, bites a member of the association, thereby subjecting the association and its directors to potential liability to the extent that it can be established that they had a responsibility to enforce the restrictions and have failed to do so.
The fiduciary duty of the Board of Directors also may require the Board to determine whether there are construction defects in the common areas, in the case of a newly constructed project, and if so, to take action to seek redress for the deficiencies, at least when the Board members were selected by the developer (who may be held to a higher standard than owner-elected Board members). Board of Managers of the Fairways of North Hills Condominium v. Fairways at North Hills, 193 A.D. 2d 322, 603 NYS 2d 867 (1993). The Board’s duty to act in this case, in my view, should include the duty to determine whether the defects or problems are sufficient to merit the commencement of legal action against the developer, which the (association) Board generally has the right to commence on behalf of the association members. Whether there is a duty to commence litigation again ultimately falls within the business judgment of the Board so long as the Board intelligently investigates the issues and takes action or decides not to take action based on sound legal and economic analysis before the applicable statutes of limitation expire.
But what happens on such other issues which are more emotional in nature, for example, if a co-owner is allowed to place an American flag anywhere on the community premises, but then later decides to also put up political or religious signage which may be offensive to some or all of the members of the association. What can the Board do after it has allowed real estate brokers to put up signs advertising units for sale when a member of the association decides that he/she wants to put up a sign advertising a garage sale? Can you allow evergreens to be decorated with Christmas decorations, but forbid other types of religious ornaments to be shown on the common areas? The outcome of all such cases depends, of course, upon the specific facts, document language, applicable law, and the decision maker, as illustrated by a recently reported decision in California where the Court refused to order a condominium unit owner to remove a five-foot wooden cross from her front patio, although it violated Association rules. See “Judge Refuses to Remove Owner’s Cross”, COMMON GROUND, P. 12 (March/April 1998 ed.).
In some of these instances, it can be expected that a co-owner may threaten the Board of Directors with a claim that his/her “constitutional rights” have been violated because he/she has not been able to post a sign or otherwise express his/her views. One must remember, however, that the protections afforded individuals regarding “free speech” are only involved where “state action” is undertaken to prohibit free speech. Community associations have not, for the most part, been found to be “municipalities” which would spring into play the Fourteenth Amendment protections which everyone has regarding “state action”. The Pennsylvania Superior Court recently ruled that a condominium association’s bringing suit to enforce a Bylaw restriction against “For Sale” signs in windows did not constitute “state action” and thus could not be a violation of the right to free speech under the Constitution. Midlake on Big Boulder Lake Condominium Ass’n v Cappuccio, 673 A 2d 340 (PA Super, 1996). Whether or not in the future efforts will be made to extend constitutional protections to community association homeowners vis a vis action taken by the community association is speculative but it is not inconceivable that with the advent of communities such as “Celebration” near Orlando, Florida, courts may tend to look at community associations as more like a municipality than a private governing body.
As counsel for a community association, the experienced lawyer recognizes a duty to advise the association board of the legal ramifications of its acts or omissions. One thing that has proven certain over the years is that inconsistency on the part of the association can lead to potential problems in regard to document enforcement. The Board should generally take a proactive role in enforcing the documents uniformly and consistently, but it should have a policy with respect to how it chooses to enforce these documents, when and where. To the extent that the Board has established criteria in terms of what restrictions it will enforce and when they will be enforced, the Board will be better equipped to deal with novel and/or esoteric issues that may arise in connection with Bylaw enforcement. If the Board has restrictions which it feels are important to enforce, it should make those known to the members. If the Board is not prepared to enforce the restrictions, they should be deleted from the community association documents or it should be clearly expressed to the individual members that those restrictions will only be enforceable by such individual members. If the association members are displeased with the actions taken by the Board, they can exercise their political process pressure to remove the directors and/or change the policy.
But what happens when the Board is “gung ho” about enforcing a restriction or rule which you, as counsel for the association, know is either unenforceable as a matter of law or will not otherwise be upheld by the Courts? The association sometimes may elect to take a hard-line policy in regard to enforcing the documents notwithstanding the legal ramifications. Sometimes the economic power of the association will prevail against a member who may have a legitimate defense to a Bylaw enforcement case but does not have the economic wherewithal to fight the association. At other times the Board must recognize that if in fact it has been lax in enforcing its restrictions, it may not have a strong likelihood of prevailing should the case be pursued in Court. The Board may wish to seek alternative dispute resolution procedures in such an instance, abandon its efforts to enforce or make substantial compromises to achieve a settlement.
As the sense of “community” in associations becomes more desired, it appears more clear that associations will not only have the responsibility of enforcing the community association restrictions, but will have to take steps to help develop a better sense of community among their members. Publishing the criteria as to how and when the restrictions will be enforced can be a useful tool to insure consistency and understanding among the members of the association.
In summary, the duty to act remains until a court decides otherwise. On the other hand, the Board has the opportunity to exercise reasonable discretion in deciding when it is in the best interests of the association not to act and, generally speaking, courts will not intervene in the decisions of the Board unless there is no legal basis for those decisions to have been made and/or they were made in bad faith. Consultation with experienced counsel is imperative when adopting and implementing an effective enforcement policy. As the commercial goes, there should be “no surprises”.