Wednesday, September 23, 2020

Condominiums’ Rights to Approve Transfers


A condominium association’s right to approve sales or leases is almost mythical. Most people believe associations have an inherent right to approve sales or leases, but that is not the case. Authority to approve sales or leases must be provided in the declaration of the condominium. Section 718.104 (5) Florida Statutes provides that a declaration of condominium, as originally recorded or as amended, may include restrictions concerning use, occupancy and transfer of units.

That means the declaration of a condominium must be read to see if association approval is required, and if so, limitations on the association’s power. The statute recognizes the importance of maintaining a community in multi-unit housing, but confirms the Association’s power to regulate transfers must be accepted by the owners before it can be exercised. A person buying a condominium unit buys with actual or constructive knowledge of provisions of the declaration and is bound by them. That makes it important to review any limitations on sales or rentals, especially if a buyer is purchasing and plans on renting the unit. 

Rules can be changed by unit owners voting to amend the declaration. Changing rental rules were addressed by Florida’s Supreme Court in the 2002 case of Woodside Village Condominium Association v. Jahren. That case started when an investment group bought a condominium and the owners in the condominium later amended the declaration to limit rentals. The investment group argued the amendment was a violation of their property rights. The trial court disagreed and explained the investment group bought knowing unit owners could amend the declaration at any time. The investment group appealed and was successful, with the appellate court ruling that the change was a deprivation of property rights. The case ended up at the Florida Supreme Court and the Justices agreed with the trial court, leaving the investment group with a condominium unit they could no longer rent as intended.

The legislature was apparently aghast and shortly after the Supreme Court’s decision amended Florida’s Condominium Act. The Act now provides that an amendment limiting an owner’s right to rent a unit applies only to unit owners who consent to the amendment and unit owners who acquire title after the effective date of the amendment. That did not retroactively protect the investor group in the Jahren case, but protects owners now.

The Condominium Act does not merely address rental limitations. It also provides that condominium associations may charge a fee for approval of leases or sales, as long as the fee is provided in the declaration, articles or bylaws. The fee may not be more than $100 per applicant and a husband/wife or parent/dependent child are considered one applicant. Renewal of lease or sublease with the same tenant cannot be charged a fee. The association can also charge a security deposit in connection with approval of a lease, not to exceed the equivalent of one month’s rent, but only if the authority to do so is in the declaration or bylaws.

When someone buys a condominium, the buyer inherits liability for assessments unpaid by the prior owner and those coming due after the buyer becomes the owner. To avoid surprises, buyers request condominium associations provide a letter confirming the status of assessments. Those letters are known as estoppel letters for years, most associations charged $100 for an estoppel letter. A few greedy condos, mostly in the Miami area, charged five and even ten times that amount. To reign in that abuse, the 2017 legislature again amended Florida’s Condominium Act to cap the fee for estoppel letters at $250. That reduced the fees charged by the greedy, but almost every other condominium association quickly increased their estoppel fee to $250. The statute does not limit estoppel fees to condos with such authority in their governing documents so every Florida condominium can charge the fee unless its governing documents prohibit it. 

The Board of Directors of many condominium associations takes their approval responsibility seriously, and they should. The board has a fiduciary obligation to those in their condominium community to protect the community. However, that authority cannot be exercised unreasonably. When a condominium association unreasonably denies approval of a lease or sale, the association can be subjected to a claim for damages and board members might even be personally liable, notwithstanding substantial protection for condominium board members found in Florida’s Condominium Act and Not-For-Profit Corporations Act.

Court cases have held that when an association has the unfettered right to disapprove a sale, such unlimited authority can be unenforceable as an unreasonable restriction on the ability of an owner to sell. Some experts have gone so far as to state an association must buy a condominium unit when it refuses to approve a sale. I am not so sure that is law in Florida, since there could be very good reasons to disapprove a buyer that should not trigger for purchase by the association. What might those be? Most experts agree that the conviction of a violent felony might be sufficient or a history of refusing to follow the rules where the proposed new owner has lived.

Some associations believe the financial history of a buyer is important. Many associations make a credit report part of the approval process, and one local association went so far as to require tax returns be submitted. The prospective owner in the latter case went to court and the judge ruled insisting on tax returns was overreaching and unenforceable. Most agree that the financial records for a tenant are almost irrelevant since it is the unit owner who is responsible for paying the association. However, condominiums can refuse to approve a transfer when the unit owner is delinquent in amounts due to the association. 

What happens when an association wrongfully refuses to approve a transfer? In Barnett and Klein v. The President of Palm Beach, a Condominium, an owner recovered damages for tortious interference with a contractual relationship when the association denied his effort to rent relying on a rule adopted by the board instead of a limitation in the declaration. The rule was held beyond the board’s authority. In Phillips v. Hunter Trails Community Association, the rejected buyer recovered almost $200,000 in damages even though the association exercised a right of first refusal. In that case, the purchaser was African American and established that he was denied approval because of his race.

Condominiums are on a slippery slope when exercising approval authority. They must act reasonably. The reason for disapproval must also meet the requirements of statutes. Many federal laws provide protection to people who could have been denied approval in the past. The Fair Housing Act includes familial status (children) as a protected class. Those with disabilities are similarly protected. Condominiums must apply approval procedures with an even hand. When an association fails to do so, the result can be an expensive education for the Board of Directors and owners. 

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.

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