Ocean Club Condominium Association, Inc. v. Gardner

A-4853-96T3, 1998 WL 896718 (N.J. Super. App. Div. 1998)
  • Opinion Date: December 16, 1998

CONDOMINIUMS; DEVELOPERS—A condominium developer is required to contribute toward capital reserves, other than for capital improvements, which are defined as additions to the original project.

After taking control of the operations of a condominium, the association sued the developer, alleging, among other things, that the developer had failed to pay its proportionate share of common expenses during the approximately year-and-one-half when it was acting as the association. Specifically, the association argued that the developer had failed to pay its share of the so-called replacement reserve component of the common expense assessment. To the Court, there was no question that the sponsor and the association had an obligation to budget and collect common expenses, including “reserves for deferred maintenance, replacement and capital improvements of the common elements.” The applicable statute also requires an association to collect the cost of common expenses including the “maintenance, repair, replacement, cleaning and sanitation of the common elements.” There being no serious dispute about the association’s obligations, the question was whether the developer, while in control of the association, was exempt from them. Both the statute and the association’s by-laws declared that without written approval of the developer, no action could be taken to assess the developer as a unit owner for capital improvements. Consequently, the real dispute related to what is included within the term, “capital improvements.” Nothing in the condominium’s documents, the Condominium Act or the Administrative Code defines capital improvements. Testimony taken before the lower court led it to conclude that a capital improvement contemplates the creation of some new common facility or installation; that is, something beyond the items which were part of the original construction. To the Appellate Division, such a definition made sense from a policy point of view. In its view, for example, it is one thing for a developer to be obligated to contribute to the repair and replacement of various common facilities while the sponsor is still in control. At that point, the developer has a clear stake in the success of the facility since its profits flow from the sale of new units. This benefit is less direct with regard to the creation of new facilities. In this particular case, none of the budgets during the period of sponsor control provided for new construction.

The Public Offering Statement specifically relieved the sponsor (and any institutional lender) from assessments for capital improvements of any kind, “including reserves.” Consequently, the lower court raised the question of whether the reference to “reserves” was intended to embrace “replacement reserves.” Answering that question, it determined that the most logical conclusion was to distinguish between those reserves the need for replacement and repair and those relating to capital improvements. In its view, it is only the latter from which the sponsor was relieved.

The developer also argued that when it was given the option to substitute a subsidy guarantee for what would otherwise be the burden of filing a bond for deficits and operating expenses, it was relieved of the obligation to pay replacement reserves. The Court disagreed because it did not read the subsidy option as a limitation on a sponsor’s preturnover obligations.