Condominium associations derive their power and responsibilities from the Condominium Act, N.J.S.A. §46:8B-14 and 15. Courts treat condominium associations like they do corporations, holding that they have a fiduciary duty to their members like a board of directors does with their shareholders. Kim v. Flagship Condo. Owners Ass’n, 327 N.J. Super. 544, 550 (App. Div. 2000). Courts apply the business judgment rule when asked to rule on the legality of an action taken by a Board. Thanasoulis v. Winston Towers 200 Ass’n, Inc., 110 N.J. 650, 664 (1988) (Garibaldi, J., dissenting in part and concurring in part). A decision taken will remain legal if the actions “were authorized by statute or by its own bylaws or master deed,” and was not fraudulent, self-dealing by the Board, or unconscionable. Micheve, L.L.C. v. Wyndham Place at Freehold Condo. Ass’n, 381 N.J. Super. 148, 153-54 (App. Div. 2005) (citing Owners of the Manor Homes of Whittingham v. Whittingham Homeowners Ass’n, Inc., 367 N.J.Super. 314, 322, (App.Div.2004).
So for example, courts will not question a Board’s decision to calculate expenses for common areas using an alternative method allowed under the bylaws and master deed. Conversely, a special capital assessment levied solely upon a new purchaser of a condominium violates the Condominium Act’s requirements that common expenses “be charged to all unit owners based on their proportionate individual interests in the common elements” and would not be upheld. A Board’s decision to levy an emergency special assessment to pay back overdue debts and bills was also upheld by the courts, as the Board considered alternatives, such as taking out a loan to cover the costs, but could not get one. The action taken by the Board must be authorized by law, justified by an independent business reason, and have no evidence the Board benefitted directly as a product of self-dealing. As long as that is accomplished, any challenge to the action taken by the Board and its directors can proceed.
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Written by Stephen W. Kornas, Esq. of Hanlon Niemann & Wright