Consequences of Condo Association Approval – NOT!

A condominium association acts by and through its Board of Directors. The Board of Directors acquires its authority to act and are bound by the terms and provisions of the Declaration of Condominium, Articles of Incorporation, By-laws, Rules and Regulations, and any Amendments to these documents (for purposes of this blog these documents shall be collectively referred to as the “Condo Docs”). Accordingly, one would reason that the ability of a Board of Directors to require and otherwise consider the merits of an Application for Approval of a Buyer (or Buyers), is limited to the constraints of the Condo Docs.

While on its face that might be true, there are many subjective bases on which a Board may rely in rejecting a Buyer’s Application for Approval.  In over three decades of practicing real estate in Florida, Massachusetts, and Rhode Island, I have never been involved with a transaction in which a buyer was rejected by a condo Board – until now!  Recently, I have had had two transactions terminate due to the Condo Board rejecting Buyers for financial reasons – bad credit.

Part of just about every Application for Approval required by a condominium association will include a section dealing with an Applicant’s credit.  Typically, this section will ask for a Social Security Number so that the Board can pull a credit report and conduct a background check. In addition, there may be requests for what might be considered private, personal information such as annual or monthly earnings, where the Applicant is employed, and a copy of the purchase contract. In Florida, a condo association is entitled to request and review all of these documents in considering whether an Applicant is able to pay the Association’s monthly/quarterly/annual association fees/dues, and to do so on a timely basis.

The determination of whether an Association has exceeded its authority, in most instances, will hinge on the terms and provisions of the Condo Docs, whether the Association has followed the Condo Docs and its own internal approval mechanisms, and the reasonableness of the Board in reaching a decision on the Application for Approval.  It will be hard for one to argue that a Board does not have the duty (and the obligation to the other unit owners), to determine if an Applicant is able to pay and pay on time.

In the event a Board rejects or otherwise disapproves a Buyer’s Application for Approval, the question is then raised: “What is the Buyer’s recourse?” The short answer is relatively little, if anything, aside from initiation of formal legal proceedings against the Board. The basis of such a suit would need to be grounded on a demonstrable claim of arbitrary and capricious action or discrimination on the part of the Board. I am not a litigator; however, I will suggest that such a claim will be ladened with very a difficult burden of proof.  Mere allegations will not carry the day.

The moral of this story, really, is to make certain that FR/BAR Form CR-5 Condominium Rider A. is utilized in any Contract for the sale of a condominium unit.  In pertinent part, Condominium Rider A provides:

1. CONDOMINIUM ASSOCIATION APPROVAL:

The Association’s approval of Buyer (CHECK ONE): __ is __ is not required. If approval is required, this Contract is contingent upon Buyer being approved by the Association no later than _____ (if left blank, then 5) days prior to Closing. Within _____ (if left blank, then 5) days after Effective Date Seller shall initiate the approval process with the Association and Buyer shall apply for such approval.  Buyer and Seller shall sign and deliver any documents required by the Association in order to complete the transfer of the Property and each shall use diligent effort to obtain such approval, including making personal appearances if required.  If Buyer is not approved within the state time period, this Contract shall terminate and Buyer shall be refunded the Deposit, thereby releasing Buyer and Seller from all further obligations under this Contract.

Notwithstanding that a Buyer’s lender may have made a loan approval decision based on its own criteria, this approval does not forfeit a condo association’s right to make its own, independent, determination of the creditworthiness of an Applicant. Even if an Applicant is paying cash, a Board can still reject an Application for Approval. When a Board rejects an Application, one would think it prudent for the Board to have proper documentation explaining why an Applicant was not acceptable.  However, this is not typically the case nor in fact is it a legal requirement.  Because of the high cost of litigation and difficulty overturning a Board’s decision, very few challenges are ever brought in Court. Someday, the right plaintiff, with enough moxie and money to burn, will bring an action to conclusion and help establish case law on the subject, which is now scarce.

In the meantime, it is imperative, on behalf of Buyers, that Condominium Rider A be utilized as part of the Contract.  Further, Buyers must diligently observe the requirements of the Rider (i.e., promptly initiate the approval process and provide the requested documentation), in order to preserve the right terminate the Contract and receive the return of the Deposit in the event the Application for Approval is denied.

If you are not sure of the correctness of a Board’s decision, or would like further explanation or clarification, contact one of the attorneys at Berlin Patten Ebling, or your local real estate attorney, for additional guidance.

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Mark C. Hanewich, Esq.  mhanewich@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

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