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Zephyr Lofts Condominium Association, Inc. v. Henderson Lofts Urban Renewal, L.L.C.

A-1311-08T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONDOMINIUMS; CONTRACTORS; ARBITRATION — A condominium association does not have standing to sue a contractor for individual claims common to many unit owners, and where the unit owners are generally compelled to arbitrate with a contractor over claims, if the association’s own claims regarding common elements are inextricably related to those of the unit owners, the association is also bound to arbitration.

A condominium association sued its sponsor/developer and certain individuals and entities allegedly having an interest in the sponsor/developer. They also sued the parties who were allegedly responsible for the marketing and sale of the units, the attorneys who prepared the public offering statement (POS), and the architect who had surveyed the property and prepared a report that appeared in the POS. The association made numerous allegations, including ones of negligent construction, breach of implied warranties, negligent failure to establish an adequate reserve budget for replacement of common elements and facilities, breach of fiduciary duties, common law fraud, and violations of the Consumer Fraud Act. The defendants filed a joint motion to dismiss the complaint and compel arbitration. This motion was based in part on the fact that virtually all of the original owners and the owners of 74 out of 102 current units had signed agreements consenting to submit any claims arising out of their purchase agreements to binding arbitration.

The lower court dismissed the condominium association’s complaint and entered an order compelling the parties to arbitrate. It ruled that agreements between the sponsor/developer and the purchasers of certain units in the condominium generally required binding arbitration of claims arising from the agreement. It refused to allow the association to sue in the name of one unit owner and avoid arbitration. The condominium association appealed.

The Appellate Division affirmed. It rejected the condominium association’s contention that it had standing to assert the claims in its complaint and rejected the association’s argument that it was not asserting claims of the unit owners. It also rejected the argument that the arbitration agreements executed by unit owners were not binding upon the condominium association. The Court noted that most of the owners had executed written agreements in which they agreed to submit to binding arbitration disputes related to the condominium. The Court also noted that, under the Condominium Act, the association is a representative body that acts on behalf of the unit owners and has primary responsibility to protect their interests in the common elements. It held that unit owners nevertheless retained the right to assert claims regarding their own units. Here, the Court stated that although the association asserted claims concerning the common elements, many of the claims related to individual units or portions of the condominium. Further, many of the claims, such as the adequacy of the reserve budget, involved the alleged failure to disclose, or the misrepresentation of, facts to unit owners. Since most of the present unit owners had agreed to arbitrate, and the association chose to include the unit owners’ claims in the complaint, the Court believed the association was bound by the unit owners’ agreements to arbitrate. It stated that to do otherwise would allow the unit owners to do an end-run around their arbitration agreement merely because the association was asserting their claims on their behalf. For those reasons, the Court disagreed with the association that it was being compelled to arbitrate in violation of the Condominium Act. The Court opined that the association’s own claims regarding the common elements were inextricably related to those of the unit owners which required arbitration. Thus, they could not be separately alleged before the Court. The Court concluded that where, as here, there is a substantial nexus between the subject matter of an arbitration agreement and the claims raised, the issues must be submitted to arbitration.

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