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Cape May Harbor Village and Yacht Club Association, Inc. v. Sbraga 21

421 N.J. Super. 56, 22 A.3d 158 (App. Div. 2011)

HOMEOWNERS ASSOCIATIONS; CONDOMINIUMS; DECLARATIONS — Decisions by homeowners associations are to be judged under the reasonableness standard and if an amendment to a Declaration was a reasonable measure, members of the association cannot claim a vested and immutable right to the provisions of the Declaration before its amendment where the declaration provided for future amendments.

A homeowners association was governed by a Declaration executed by the community’s initial developer in 1995. The community consisted of “twenty-four single-family homes, common areas, and a marina. There [were] forty boat slips, some of which were owned by homeowners, and others by the Association.” In June 2000, a married couple bought a lot and then constructed a home on it in 2005. Following a divorce, the property was placed solely in the wife’s name in 2007. In its original form, the Declaration contemplated the leasing of homes and boat slips. Specifically, the Declaration only restricted leasing less than an entire small lot, but did permit leasing of boat slips separate and apart from the lot. Further, the Declaration went on to require that any leases had to be in writing and would be subject to provisions in the Declaration. The owners were required to furnish the association with a copy of every lease and with information about every tenant. “By its terms, the Declaration could be amended only by a vote of at least 67% of all members of the Association.”

In 2009, when the wife was unable to sell her home, she decided to lease it by making weekly rentals during the summer season. When she asked the association’s president about this, he was not aware of any prior leasing during the history of the community and apparently was unaware that the Declaration allowed leasing. In fact, he believed that such activity was prohibited. That provided the motivation for a proposed amendment to the Declaration to prohibit leasing of homes. The amendment was overwhelmingly approved, but the leasing of boat slips unaffected. The minutes of the meeting where the approval took place “discussed concerns involving problems of living in a homeowner community where rentals were permitted, the negative impact on home values, anticipated problems with renters using the common area and dock, parking problems, and the lack of responsibility for noise and policing of infractions of the Association’s rules and regulations.”

The woman sued the association arguing that the amendment to the Declaration, adopted after she took title the property could not be enforced against her. In the proceedings before the lower court, the Association’s president “testified that it had never been brought to his attention that a social gathering at a home caused unruly behavior.” In fact, the association had never taken formal action due to any unruly behavior for any reason pertaining to any of the homes. He testified that the association had once asked a boat owner to cease running a charter service. He also testified that “[t]here were occasions when the Association had to direct people not to ‘stay’ or ‘live’ on their boats.” There were numerous other incidents dealing with the marina, but generally none with respect to the homes. He supported the proposition, believing that the “Association members wanted to keep it that way. ... and anticipat[ing] that weekly tenants would not be likely to have the same concerns and attitudes about the importance of maintaining a quiet residential neighborhood atmosphere.” The lower court “determined that, notwithstanding the fact that the amendment was passed by a supermajority of the entire membership of the Association, a factor which would support the more deferential business judgment rule, other factors weighed more heavily in favor of the less deferential reasonableness standard. Those factors were (1) that the restrictions under review were the result of an amendment, not the original Declaration, (2) that the restriction occurred after [the woman] bought into the community, not the original Declaration, (3) there were no prior restrictions on renting properties, and (4) ‘the fact that it impacts on property right.’” For those reasons, the lower court concluded that “all of those factors militated in favor of the amendment being entitled to less respect than it might otherwise, or, in the terms of [a prior case], [therefore] ... [it] would be appropriate to apply the reasonableness standard rather than the business judgment standard, which would mean that this amendment was not as protected as it might otherwise be.”

Applying those standards, the lower court characterized its mission as seeing “whether the action was reasonable, or perhaps rational, in the most general sense,” that is, whether “there [was] some reasonable basis for the action.” When the dispute reached the Appellate Division, it saw the lower court’s approach as being “akin to [a] comment in [a 2001 Appellate Division case] that if a court is unable ‘to perceive any reason in logic or policy ‘underlying the restriction in question, the restriction would not pass the reasonableness test.” In the alternative, the lower court “considered that one might address reasonableness as a balancing analysis to determine whether the amendment was more reasonable or not, [but the lower court] rejected this approach as illogical.”

Taking that all into account, the lower court believed that the community’s “homeowners, in good faith, could determine if it was in the best interest of the community to adopt this restriction on leasing.” Consequently, the court, based on the record before it, felt that with a small community, such as this one, the restriction was reasonable. It also addressed the woman’s “argument that the amendment was an unreasonable restraint on the alienability of the property.” It pointed out that “when one becomes part of a homeowners association, ‘one does, in fact, potentially face some restrictions on the ability to use and even alienate one’s property.’” For that reason, and because the “public policy against restricting alienability of property [does] not act as an absolute bar to implementing reasonable restrictions,” the lower court ruled that prohibiting leasing was “an available choice of action so long as the procedure was appropriately followed and had passed the reasonableness test.” For all of those reasons, it upheld the amendment, even though the woman’s property had been acquired well before the amendment was adopted.

In the appeal that followed, the Appellate Division believed that the woman’s argument could be simply stated as: “When she purchased this property, there was no prohibition against leasing, and any subsequently-imposed restriction on leasing cannot apply to her because it would impermissibly deprive her of a valuable property right and constitute a disfavored restraint on the alienation of property.” The Court even believed that the woman was urging a per se rule in this regard. The woman was disappointed because the Court said that she had ignored two important considerations. “First, although the original Declaration did not prohibit (and indeed contemplated) leasing of homes, it also contained provisions authorizing amendments of its provisions. Therefore, any purchaser was on notice that the provisions in the Declaration were not immutable. Second, the reasonableness rule, by its very nature, requires a fact-sensitive analysis of the restriction on a case-by-case basis, taking into consideration all relevant circumstances.” Despite the fact that the Court agreed with the woman “that the restriction [was] a significant one, in that it [affected] a fundamental property right and not some less significant aspect of the manner in which properties are used,” it believed that the lower court had taken this factor into consideration when it chose to apply the reasonableness standard.

The Court then re-analyzed its decision in Mulligan v. Panther Valley Property Owners Association, 337 N.J. Super. 293 (App. Div. 2001). It pointed out that in Mulligan the Court had “recognized the split among jurisdictions between application of the reasonableness standard and the business judgment rule, [noting] that the reasonableness standard appeared to constitute the majority view.” In Mulligan, the Court held “that the particular circumstances of each case would guide which rule [was] more appropriate.” It agreed with the lower court that the reasonableness standard was the more appropriate one. Although “New Jersey recognizes the public policy that restraints on the alienation of property are generally disfavored,” the law focuses on whether the restraint in question is reasonable or not. In that regard, even though a relevant out-of-state decision would give a higher degree of deference to an original document, its later amendments are still valid.

The Court agreed with the lower court that under the facts and circumstances of this case, “the amendment to the Declaration prohibiting leasing of homes in this community was a reasonable measure.” It pointed out that the woman could not “claim a vested and immutable right to one provision of the Declaration, to the exclusion of the applicability of another provision that authorizes amendments to the document.” Consequently, as long as the amendment was “substantively valid, the fact that the amended restriction was not part of the Declaration extant at the time of [the woman’s] purchase [was] of no consequence.

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