In a recent Superior Court case, a plaintiff unit owner challenged the Windgate at Salisbury Condominium Trust’s annual budget, as the new budget changed how certain expense categories were allocated between the condominium phases and master budget. The Condominium Trust asserted a counterclaim for breach of fiduciary duty against the plaintiff, who was also one of the Trustees, for his use of common funds to pay his personal legal fees associated with filing the lawsuit. Principal Kate Brady of Moriarty Bielan & Malloy LLC represented the Condominium Trust.

Based on the Superior Court’s finding in this case, as long as an organization of unit owners makes a reasonable determination regarding the budget using a reasonable methodology, and its determination is not in conflict with the condominium documents, it should be permitted to change the budget as appropriate.

Superior Court Signs off on Condominium Trust’s Budget Changes

The Windgate at Salisbury Condominium is split into two Phases, with each Phase having their own separate Trustees and budget. Decisions that impact both Phases are decided by a majority of the Trustees of both Phases. Phase 1 consists of town-house style units, and Phase 2 consists of a large building, which contains units as well as several common area amenities that are accessible and open to both Phase 1 and Phase 2 unit owners. For years, the common expenses related to the amenities in the Phase 2 building, which all owners can use, were allocated solely to the Phase 2 owners.

After the Condominium Trust hired a new property management company, and the budget was reviewed in depth, they discovered that the fees related to amenities located in the Phase 2 building had been allocated to the Phase 2 unit owners only. A majority of the Trustees determined, in conjunction with their property manager and counsel, that such fees should properly be allocated among all unit owners, since all unit owners have access to and enjoy the amenities located in the Phase 2 building. As such, a majority of the Trustees approved a new budget that reallocated those common expenses to all unit owners.

The new budget was challenged by a unit owner, arguing that the budget conflicts with the Condominium Documents. The Superior Court disagreed, finding it reasonable for the Condominium Trust to allocate expenses related to the shared amenities to all unit owners, based on the Trustees’ good faith judgment and lack of conflicting language in the Condominium Documents. Of the nine different budget items that were revised, only one was found by the court to be unreasonable – the fees related to the elevator in the Phase 2 building. The finding related to the elevator was based on the express language of the Condominium Documents, which lists the elevator as exclusively part of Phase 2. As such, the Superior Court determined that it was inappropriate for the Board to include elevator costs as part of the shared budget.

While the Windgate at Salisbury Condominium is unique in that it has separate budgets for each of its Phases, and the analysis regarding multiple budgets may not be applicable to the majority of condominiums, the Court’s decision is instructive for all condominiums in that it shows the importance for a Condominium Trust or its property manager to perform an in-depth analysis of the condominium’s budget, based on both the particulars of the condominium and the language in the condominium documents. Based on the Superior Court’s finding in this case, as long as an organization of unit owners makes a reasonable determination regarding the budget using a reasonable methodology, and its determination is not in conflict with the condominium documents, it should be permitted to change the budget as appropriate. The Superior Court’s decision may be relied upon to support an argument that this is the case even if the budget had previously been in place without change for many years.

Trustee Found to Have Breached Fiduciary Duty Where He Used Condominium Trust Funds to Pay His Personal Legal Fees to File the Lawsuit

A more cautionary tale for Trustees from this case comes from the Superior Court’s finding on the Condominium Trust’s counterclaim for breach of fiduciary duty. While the dispute in the case centered around the budget changes, the complaint was filed by a Phase 1 Trustee in his capacity as a unit owner, and not on behalf of the Condominium Trust. The Condominium Trust thus challenged the plaintiff’s use of Condominium Trust funds to pay for his personal legal fees associated with the lawsuit, asserting that it was a breach of fiduciary duty.

The court found that because the plaintiff initiated the lawsuit in his individual capacity, and because he did not have permission from the Board to withdraw the funds, there was a breach of fiduciary duty for which he was required to reimburse the Board for the withdrawn funds.

The main takeaway from this aspect of the decision is twofold. For one, it is important for any Trustee to ensure they are following proper procedures and protocols anytime they are planning to use common funds. The governing documents of a condominium will typically set forth the expenses common funds may be used for and what vote/controls exist to access those funds. At a minimum, the Trustee should have written permission before accessing the funds and strictly follow what the governing documents require for access and use. Second, it is important for a Trustee to always consider whether they are acting (or should be acting) as a Trustee or a unit owner. Just because a unit owner happens to be a Trustee, does not mean he or she is entitled to benefit from his or her status as a Trustee when acting in their individual capacity. If there is any question about accessing common funds, or acting as Trustee versus individually, it is advisable to contact a lawyer to avoid potential issues.