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anti-litigation provision for condiminium documents

Supreme Judicial Court Considering Whether Anti-Litigation Provision In Condominium Documents Offends Public Policy

On October 5, 2017, the Supreme Judicial Court heard oral argument in the matter of Trustees of the Cambridge Point Condominium Trust v. Cambridge Point, LLC, et al. (SJC-12327) – and the Court’s impending decision could have a drastic impact on the ability of condominium associations to recover for defective construction and design. The case concerns the enforceability of anti-litigation provisions, which are commonly found in condominium documents – serving as poison pills meant to discourage condominium boards from bringing lawsuits against the developer.

The trustees alleged that the developer and its affiliates controlled over 30% of the units – essentially making compliance with the subject bylaw impossible. The trustees contended that this pro-developer, anti-litigation provision should be declared void as violative of public policy.

In Cambridge Point, the condominium trustees initiated a $2 million construction defect lawsuit against the developer/declarant of the condominium, contractors and developer-appointed trustees. In brief, the 42-unit condominium, located on Massachusetts Avenue in Cambridge, was allegedly plagued by water leaks due to deficiencies associated with the construction of the building envelope and balconies. The lawsuit was dismissed by the Trial Court because the trustees failed to comply with an anti-litigation provision, which had been inserted into the condominium bylaws by the developer. The trustees appealed the Trial Court’s decision and the Supreme Judicial Court accepted the trustees’ request for direct appellate review.

The subject bylaw provision reads, in pertinent part, as follows:

Notwithstanding any provision of the Master Deed, or the Declaration of Trust of the Condominium Trust, or of these Bylaws or the Rules and Regulations to the contrary, neither the Trustees acting in their capacity as such Trustees, or acting as representatives of the Unit Owners, nor any class of the Unit Owners shall bring any litigation whatsoever unless a copy of the proposed complaint in such litigation has been delivered to all of the Unit Owners, and not less than eighty percent (80%) of all Unit Owners consent in writing to the bringing of such litigation within sixty (60) days after a copy of such complaint has been delivered to the Unit Owners and specifying as part of the written consent a specific monetary limitation to be paid as legal fees and costs and expenses to be incurred in connection therewith which amount shall be separately assessed as a special assessment effective forthwith at the time of said affirmative consent…

In sum, the anti-litigation provision requires the trustees to obtain the advance affirmative vote of 80% of all condominium unit owners prior to filing suit against the developer. This 80% vote must be obtained within a 60-day window – after a draft complaint has been prepared and circulated along with a not-to-exceed litigation budget for the lawsuit. Additionally, once the 80% vote is obtained, the trustees must immediately specially assess all of the unit owners the total amount budgeted for the litigation.

The trustees alleged that the developer and its affiliates controlled over 30% of the units – essentially making compliance with the subject bylaw impossible. The trustees contended that this pro-developer, anti-litigation provision should be declared void as violative of public policy.

It is notable that Chief Justice Ralph D. Gants previously considered a similar issue – when he served as a Trial Court judge – in the matter of Harris v. McIntyre, 2000 WL 942559, *10 - *11 (Mass. Super.). In that case, a developer-appointed trustee sought to shield himself from claims advanced by the condominium’s elected trustees, in a construction defect case, based upon a provision in the declaration of trust that limited the liability of the trustees. The Court noted that the provision at issue in that case might pass muster if it served to protect elected unit owners. The Court found, however, that such provisions “cannot survive careful judicial scrutiny when the provision is enacted by the developer to protect the officers it selects to manage the Trust from liability.” He found, therefore, that the provision was void as violative of public policy because it so decidedly favored the developer-appointed trustee.

A compelling argument can similarly be made that a poison pill provision – insofar as it relates to claims against the developer – should be void as violative of public policy, as such provisions are enacted by the developer as a deterrent to discourage lawsuits against the developer, and to give the developer advance warning of any potential lawsuit. Indeed, such anti-litigation provisions appear to violate both the Condominium Act and provisions that are found in most condominium documents.

Specifically, G.L. c. 183A §10(b)(4) provides that a condominium board “shall have, among its other powers, the following rights and powers . . . To conduct litigation and to be subject to suit as to any course of action involving the common areas and facilities or arising out of the enforcement of the by-laws, administrative rules or restrictions in the master deed.” See Strauss v. Oyster River Condominium Trust, 417 Mass. 442 (1994). Additionally, most condominium documents include terms providing that – in the event of a conflict between the condominium documents and Chapter 183A – the provisions of the Chapter 183A shall control.

Poison pill provisions, such as the one at issue in Cambridge Point, directly conflict with G.L. c. 183A §10(b)(4) because they take away from a condominium board the exclusive power of conducting litigation concerning the common areas of the Condominium. In other words, such a provision would allow 21% of the unit owners to veto any proposed litigation concerning the condominium’s common areas, and further subject any such proposed litigation to additional restrictions imposed by individual unit owners.

It can also be argued that these poison pill provisions – which require a condominium board to provide (i) a copy of its proposed complaint, and (ii) a not-to-exceed litigation budget, to its litigation adversary (i.e., the developer) – are overreaching, as a matter of law, they require and force disclosure of attorney-client communications and attorney work product.

At oral argument for the Cambridge Point matter, Chief Justice Gants – perhaps harkening back to his decision in Harris – pointedly noted that “it’s a rather extraordinary thing to say 20% can veto any effort to obtain a remedy against [a developer] for the defects that may be latent as a result of [the developer’s] negligent construction.”

Distinguishing Bettencourt

The Appeals Court had recently found that a similar provision contained within a condominium’s by-laws – requiring the consent of 80% of the unit owners prior to commencing litigation – “does not offend public policy.” Bettencourt v. Trustees of the Sassaquin Village Condominium Trust, 90 Mass. App. Ct. 1106 (2016)(Rule 1:28). Despite the nearly identical anti-litigation provisions at issue in the two cases, the Bettencourt decision appears distinguishable from Cambridge Point.

In Bettencourt, certain unit owners filed a complaint against the trustees of the condominium trust for breach of fiduciary duty based upon the trustees’ general mismanagement of the condominium. The trustees moved to dismiss the unit owners’ complaint on the ground that the owners lacked standing to bring derivative claims on behalf of the condominium because they did not obtain approval for the lawsuit from eighty percent of the unit owners – as the by-laws of the condominium required. According to the Appellant’s Brief, the “consent requirement” provided, in pertinent part, as follows:

…Notwithstanding any provision of the Master Deed, or the Declaration of Trust of the Condominium Trust, or of these Bylaws or the Rules and Regulations to the contrary, neither the Trustee(s) acting in their capacity as Trustee(s) or acting as representatives of the Unit Owners, nor any class of Unit Owners shall bring any litigation whatsoever unless a copy of the proposed complaint in such litigation has been delivered to all of the Unit Owners, and not less than eighty percent (80%) of all Unit Owners consent in writing to the bringing of such litigation within sixty (60) days after a copy of such complaint has been delivered to the Unit Owners and specifying in as part of the written consent a specific monetary limitation to be paid as legal fees and costs and expenses to be incurred in connection therewith, which amount shall be separately assessed as a special assessment effective forthwith of said affirmative consent.

The unit owners did not dispute the fact that they did not obtain consent from eighty percent of the unit owners to bring their lawsuit. They contended that they were entitled to bring the lawsuit because the consent requirement was unconscionable and void as against public policy. The Appeals Court upheld the Superior Court judge’s conclusion that the “consent requirement” mandated dismissal of the unit owners’ derivative claims.

While this unpublished Bettencourt decision is unfortunate, it is distinguishable from a scenario where a board advances claims against a developer. In Bettencourt, the trustees, who each owned and resided in units at the condominium, were elected by a majority of the unit owners to serve on the condominium board. The Appeals Court noted that “because the consent requirement applies to all unit owners, including the trustees, it is not ‘one-sided’ as the plaintiffs claim.” In essence, it appears that the Court determined that the “consent requirement” did not “offend public policy” because the unit owners and the trustees (who were also unit owners) stood on equal footing with respect to the impact of the provision.

Options for Associations Saddled with Similar Provisions

The anti-litigation provisions at issue in Cambridge Point and Bettencourt are common provisions inserted in to condominium documents by developers. As noted above, they effectively serve as poison pills to discourage condominium boards from suing the developer. Accordingly, any appellate decision that validates such a poison pill provision would appear to be a significant impediment to any board’s efforts to litigate against a developer for issues like construction defects.

A condominium board, which is contemplating a lawsuit against the developer and is faced with the impediment of a poison pill provision, should consider the following tactics:

A Declaratory Judgment Action: A claim, seeking declaratory relief under G.L. c. 231A, should be advanced in the underlying lawsuit to have the court find that the poison pill provision is null and void. The claim should be based on the reasoning discussed above (e.g., the provision violates public policy and conflicts with both the Condominium Act and the condominium documents).

Amending the Condominium Documents: The board should seek to amend the condominium documents to have the poison pill provision deleted or replaced with revised language. See Board of Trustees of the Old Stone Bridge Acres Condominium Trust v. Longview Realty Trust, 23 Mass. L. Rptr. 449 (Mass. Super. 2008).

A condominium board – subject to a poison pill provision – that is contemplating litigation against a developer would be well advised to wait until the Supreme Judicial Court issues a decision in the Cambridge Point matter before initiating a costly civil action. However, such a board must simultaneously consider the potential downside of temporarily forgoing a lawsuit. These potential issues would include a lapse of the statute of limitations or repose, or the possibility that the developer divests itself of its assets (i.e., condominium units) before the board has an opportunity to seek a real estate attachment.

The Supreme Judicial Court’s decision in Cambridge Point could dramatically alter the ability of condominium associations to pursue claims against developers for defective construction. A decision in favor of the condominium trustees will likely mean that developers can no longer hide behind these provisions when threatened with litigation. However, if the Supreme Judicial Court upholds the Trial Court’s decision, condominium associations may be left with no recourse when they discover that the common areas of their condominiums suffer from latent design and construction deficiencies. Indeed, such a verdict will likely embolden developers to draft even more onerous provisions (e.g., requiring 100% unit owner consent or, perhaps, written authorization from the developer to sue the developer). Hopefully, the Supreme Judicial Court – possibly persuaded by Chief Justice Gants’s decision in Harris – will view these anti-litigation provisions, at least insofar as they are invoked by developers, as an affront to public policy.

The Real Estate Bar Association for Massachusetts, Inc. (“REBA”) submitted an amicus brief in support of the Trustees of the Cambridge Point Condominium Trust, which was co-authored by Thomas Moriarty and Kimberly Bielan – of Moriarty Troyer & Malloy LLC – and Cailin Burke, Julie Heinzelman, and Diane Rubin of Prince Lobel Tye LLP.

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If you have an enforcement case or need assistance in interpreting your condominium governing documents, you can email David Rogers at drogers@lawmtm.com or any of our other attorneys at Moriarty Troyer and Malloy at info@lawmtm.com.

David Rogers