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Esposito v. Riviera at Freehold Homeowners Association, Inc.

A-6001-09T1 (N.J. Super. App. Div. 2011) (Unpublished)

HOMEOWNERS ASSOCIATIONS — Unlike for a condominium association, where an association needs to act reasonably when amending an organic document, similar actions by homeowners associations are only governed by the business judgment rule.

Buyers entered into a contract to purchase a home within an adult active community. Prior to closing on their home, they decided to replace the front door despite being warned that they could not do so without submitting the necessary application and receiving approval from the board of the homeowners association. Under both the declaration and the rules of the homeowners association, exterior modifications needed approval. The buyers asserted that prior to changing the door they spoke with an employee of the property management company who gave them permission. After the installation, they submitted an application. The board denied the request because the door did not “blend with the architecture of the community.” Pursuant to the Association’s alternate dispute procedures, the buyers requested a hearing, but the request was denied.

The buyers, now owners, sued, but the lower court found for the association. It directed that the door be removed and be replaced with an approved door in accordance with the board’s guidelines. It also reserved decision about the payment of the association’s attorney’s fees, fines, and the association’s engineering firm’s costs of services. Additionally the lower court entered a supplemental order of judgment, on the reserved decision, awarding fines, attorney’s fees, and costs.

The buyers appealed, but the Appellate Division affirmed the lower court’s findings and awarded the attorney’s fees, fines, and costs against them. In their appeal, the owners posited that the lower court should have applied the “reasonableness” and “material adverse effect” standards and had it done so, the owners believed that their replacement door would have been a permitted exterior modification. Instead, the lower court had used the “business judgment rule” (BJR).

The BJR protects common interest community residents from arbitrary decision-making. It has been applied to homeowners’ association’s boards or governing bodies because they have a “fiduciary relationship to the unit owners, comparable to the obligation that a board of directors of a corporation owes to its stockholders.” Under the BJR, a homeowner’s association’s rules and regulations will be invalidated if: (1) they are not authorized by statute or by the bylaws of the organization; or (2) the association’s actions are “fraudulent, self-dealing or unconscionable.”

Residents of common interest communities are also protected by N.J.S.A. 45:22A-44, the Planned Real Estate Full Disclosure Act, which provides, in relevant part, that “the association shall exercise its powers and discharge its functions in a manner that protects and furthers the health, safety and general welfare of the residents of the community.”

The BJR was modified, when applied to a condominium association, to include a reasonableness test and require a condominium association to act consistently with the Condominium Act and its governing documents and requiring an association to act “reasonably and in good faith.” If a contested act of an association meets these tests, then the judiciary will not interfere.

The Court also addressed how the BJR and its “reasonableness” standard applied with regard to actions by an association’s membership, as a whole, when amending a property owners’ association’s declaration or covenants, easements, and restrictions. Prior case law holds that if a substantial change took place after an individual took up residence, the resident would be entitled to have the amendments judged on their reasonableness.

Since this project was not governed by a condominium association, the Condominium Act did not apply and the Court refused to extend the “reasonableness” and “material adverse effect” standard to this matter.

Regarding the supplemental judgment, the Court found that the association’s by-laws gave the board the power to enforce the by-laws and to charge the breaching party with up to the entire cost to restore the association to its original position. Additionally, the Condominium Act states that in the event an association institutes a legal action for the collection of any fines, then the “defendant(s) shall be responsible for payment of reasonable attorneys’ fees of the Association plus interest and costs of suit.” Because restrictive covenants are contracts, the rules of contract construction were applied. Therefore, the Court held that there was no reason to disturb the lower court’s findings regarding the award of fines, attorney’s fees, and costs.

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