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anti-litigation provision for condiminium documents

Supreme Judicial Court Rules That Anti-Litigation Provision in Condominium Documents Offends Public Policy When Invoked by Developer

Last week, the Supreme Judicial Court ruled that a condominium developer could not invoke an anti-litigation provision in the condominium’s governing documents to avoid liability – finding that the subject provision “is void because it contravenes public policy.” Similar anti-litigation provisions are commonly found in condominium documents and have traditionally served as “poison pills” meant to discourage condominium boards from bringing lawsuits against the developer. The SJC’s decision in Trustees of the Cambridge Point Condominium Trust v. Cambridge Point, LLC, et al. (SJC-12327) will undoubtedly have a dramatic impact on the ability of condominium associations to recover for defective construction and design.

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.

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 read, 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 required 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 had to be obtained within a 60-day window – after a draft complaint had been prepared and circulated along with a not-to-exceed litigation budget for the lawsuit. Additionally, once the 80% vote was obtained, the trustees had to 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.

The SJC agreed and – recognizing that public policy strongly favors the safety and habitability of homes – found the subject bylaw void, noting as follows:

We begin by recognizing that the bylaw provision’s requirement of the consent of at least eighty per cent of all the unit owners makes it effectively impossible for the trustees to sue the developers of a condominium for damages arising from the defective construction and design of common areas or facilities where, as here, the developers or their affiliates retain an ownership interest in at least twenty per cent of the units. The developers are not likely to sue themselves. And if the trustees cannot file suit against the developers, no one can, because their authority to bring such a suit is “exclusive” as to the common areas and facilities of the condominium. See Berish, 437 Mass. at 265. Moreover, if the developers or their affiliates were to retain at least a twenty per cent ownership interest in the units for more than six years, they could effectively prevent any suit from being brought against them for design or construction defects in the common areas or facilities because the statute of repose would bar any subsequent suit.

It is notable that Chief Justice Ralph D. Gants, who authored the Cambridge Point decision, previously considered a similar issue – when he served as a Trial Court judge – in the matter of Harris v. McIntyre, 2000 WL 942559 (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.

From the perspective of condominium associations across the Commonwealth, the trustees in Cambridge Point could not have asked for a better jurist than Chief Justice Gants, in light of the prior Harris decision. At oral argument, Chief Justice Gants peppered the developer’s counsel with pointed questions, noting 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.”

Anti-Litigation Provisions Are Not Per Se Violative of the Condominium Act

The Trustees had argued that the anti-litigation provision should be declared void because it circumscribed the power of the Trustees to conduct litigation, in violation of the Condominium Act. 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). Poison pill provisions seemingly 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, the provision at issue in Cambridge Point effectively allowed 21% of the unit owners to veto any proposed litigation concerning the condominium’s common areas, and further subjected any such proposed litigation to additional restrictions imposed by individual unit owners.

The SJC concluded, however, “that a bylaw provision requiring unit owner consent to initiate litigation is not per se void because it is inconsistent with the act”. The SJC was “not persuaded that every bylaw that requires unit owner consent before the trustees may initiate litigation is in violation of the act.” The SJC recognized that the condominium act is an “enabling statute” and that “the act does not grant unbridled authority to the trust with respect to every management decision that affects common areas and facilities.” The SJC, which noted the “wide latitude and flexibility” provided by the Condominium Act, did not foreclose the possibility of an anti-litigation provision that could pass muster (although such a provision would presumably have to be considerably less egregious than the one at issue in Cambridge Point).

Although not mentioned in the Cambridge Point decision, 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 is 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.

SJC’s Decision Decidedly Pro-Association

Chief Justice Gants seemingly went out of his way to underscore the obligations of a condominium developer – noting that “[a] developer of a condominium not only is subject to the implied warranty of habitability but also must comply with the minimum standards prescribed by the building code.” The Chief Justice emphasized that, under certain circumstances, a developer’s failure to adhere to the building code may give rise to liability under the consumer protection statute – G.L. c. 93A – which can subject a developer to multiple damages and attorneys’ fees.

As noted above, the SJC did not rule that anti-litigation provisions are per se violations of the Condominium Act. Developers – latching onto that language – may attempt to cleverly craft slightly less heavy-handed anti-litigation provisions for any forthcoming condominium documents (e.g., a 51% consent provision). It is clear, however, that the SJC will not look favorably upon any overt efforts by developers to shirk their obligations to an organization of unit owners. Accordingly, a condominium association would be well advised to not let a poison pill provision – even one less egregious than the subject provision in Cambridge Point – stand in the way of a meritorious lawsuit against a developer. It is highly unlikely that any Superior Court judge will dismiss an association’s lawsuit against a developer based upon an association’s failure to comply with any anti-litigation provision in light of the SJC’s ruling in Cambridge Point.

The Supreme Judicial Court’s decision in Cambridge Point has dramatically altered the ability of condominium associations to pursue claims against developers for defective construction. Developers can no longer hide behind these provisions when threatened with litigation. The Supreme Judicial Court has indicated that these anti-litigation provisions, at least insofar as they are invoked by developers, are 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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Should you have any questions, please do not hesitate to contact David Rogers at 781-817-4900 or email drogers@lawmtm.com.

David Rogers