Ebert v. Briar Knoll Condominium Association
In a recent case, New Jersey’s appellate court held that a common interest community may breach its fiduciary duty to its members by failing to maintain the common elements, failing to increase special assessments and monthly maintenance fees sufficiently to maintain the property, and fund adequate reserves. In Ebert v. Briar Knoll Condominium Association, Ms. Ebert alleged that the board of trustees failed to hold meetings open to the members and failed to provide proper notice of board meetings. Importantly, she also alleged that the association was not maintaining the property, was not setting aside adequate reserves and was not raising special assessments and monthly maintenance fees sufficient to fund both of these things.
The appellate court reiterated the longstanding rule that a condominium has a fiduciary duty to its owners, and that said condominium is responsible, by law, to maintain, repair and replace common elements. The appellate then added that a condominium must assess and collect funds for common expenses sufficient to carry out those responsibilities. Then it wrote that a board’s decision associated with repairs, reserves and the amount of condo fees and assessments is protected by the "business judgment" rule only if the board’s actions or inactions were authorized by law or its governing documents and, if so, whether the actions or inactions were "fraudulent, self-dealing or unconscionable".
Here, Ms. Ebert presented evidence that the condominium had "allowed the common elements to deteriorate" thereby diminishing the value of the common property. She presented evidence that the condominium "failed to provide adequate reserves for the maintenance of common elements by refusing over the course of years to increase maintenance fees sufficiently to create such reserves". This evidence included the condominium’s own reserve report which recommended to the board, at that time, that "maintenance fees are increased threefold in order to create adequate reserves".
Cases like this one, and others, remind common interest community associations that despite the objections of owners, or concerns about a backlash, a condominium and its board must raise maintenance fees to a level sufficient to maintain the property and set aside "adequate" reserves. Note also New Jersey’s Planned Real Estate Development Full Disclosure law, or PREDFDA, which requires via its regulations that each association (not just condominiums) must "prepare and adopt an operating budget which shall provide for… adequate reserves for repair and replacement of the common elements and facilities". A condominium board that fails to raise its maintenance fees to levels sufficient to maintain the property and set aside adequate reserves could very well be found to have breached its fiduciary duty.