Kim v. Flagship Condominium Owners Association

327 N.J. Super. 544, 744 A.2d 227 (App. Div. 2000)
  • Opinion Date: January 31, 2000

CONDOMINIUMS; FIDUCIARY DUTY—Where a condominium board has the right to rent common areas, it has a fiduciary duty to the unit owners not to give away valuable rights and to provide information to them.

The master deed and by-laws of a condominium association empowered the association to administer the property for the benefit of the owners and also permitted unit owners the unrestricted right to rent their units to others. Most of the unit owners within the association participated in a rental program under contracts with one management company. The management company placed advertisements, took reservations, maintained the units (but not the common areas), and operated the front desk of the condominium project as if it were a hotel. It received its management fees from the rental revenue. Although there was no written agreement between the management company and the association, it appeared that the management company made use of a portion of the common area, including a front desk in the main lobby, for purposes of operating the hotel business. A particular unit owner withdrew from the rental program and sued the management company. As a result, the management company refused the unit owner’s subsequent attempt to rejoin the rental program and the unit owner then sought the association’s intervention with the management company on his behalf. The association declined to act, claiming that the relationship between the management company and the unit owners was a matter between those two parties and had nothing to do with the association itself. In the law suit that followed, the unit owner charged that the association violated its fiduciary duty to protect the unit owner’s interest in the matter. The lower court found no such duty, explaining that it found no self-dealing on the part of the association and that there was no articulated duty in the statutes, the condominium documents, or the case law which would require a condominium association to take the steps that the unit owner was suggesting. The Appellate Division reversed. It found that the Condominium Act sets forth the duties and responsibilities of a condominium association. Here, the master deed included a provision that the association was “formed to administer, manage, and operate the common affairs of the Unit Owners of the Condominium.” Further, the Articles of Incorporation of the association stated that the association was “to provide for the maintenance, preservation and control of the common elements ... ,” and the by-laws empowered the association’s board to “cause the common elements to be maintained according to ... the master deed.” According to the Court, the association’s board of directors had a fiduciary duty to its members similar to that a corporate board has to its shareholders. That obligation includes the duty to preserve and protect the common elements and areas for the benefit of all of its members. Further, the “common element” here was not merely the physical space in the lobby or office, but the common (if intangible) benefit derived from pooling units to permit a hotel-type operation. “When a condominium association allows a third party the use or benefit of any common element, such as the lobby or front office, or provides access to or information about its members to a third party, it must take reasonable steps to insure that it does not give away valuable rights and information without gaining some consideration or benefit for all of its members in return.” Consequently, the Court held that because of its fiduciary obligation to all of its members, the association’s board had the obligation to seek information needed to determine whether the management company’s refusal to deal with this particular unit owner was proper. It could not simply defer to the management company’s decision. Having done so, it violated its duties to the unit owner.

In addition, there was an issue as to whether the principal of the management company, who served on the association’s board of directors, could participate in decisions regarding business dealings between the management company and the association. The lower court did not explore the principal’s role in deciding to reject the unit owner’s request to intervene. While not suggesting either the principal’s position as a member of the board, and the board’s grant or authority to the management company was inherently improper, the Appellate Division requested the lower court to determine on remand whether there was any such improper involvement in the decision making process.