Broader Understanding of Condominium Fees Hasn’t Ended Disputes over Offsets

Published on: March 26, 2014

Court decisions usually attract our attention because they break original legal ground by creating new precedents or overturning existing ones. But sometimes a decision stands out because it demonstrates that a legal principle established at the appellate level is gaining acceptance and traction closer to ground level in the courts below.

A recent Massachusetts Superior Court decision, Donna Diggs, et. al. v. Wilmington Whispering Pines, deserves attention for that reason. The principle involved ─ the obligation of all owners to pay common area fees – is fundamental to the health of community associations. It is also reasonably well-established and generally well-understood, sometimes ignored, and often complicated by the fact that the delinquent owner claiming entitlement to an offset is the original declarant. That was the situation in this dispute between a community association, seeking to recover unpaid condominium fees, and a condominium developer, who contended that he really didn’t have to pay them.

The developer created the condominium in July of 2007 and sold the last unit five years later, failing to pay accumulated fees totaling more than $42,000 on the units he owned during that period. The developer offered two arguments in his defense:

  • The condominium-related expenses he paid should offset the fees; and
  • He had amended the master deed to make the date on which the units were created the same as the date on which they were sold and so had not incurred any obligation to pay common fees on them.

The court rejected both arguments. On the first, the court pointed to the language of the Massachusetts condominium statute, which states clearly that all owners are required to pay common areas fees based on their percentage interest in the condominium. Recognizing that condominium fees represent the lifeblood of a community association, the courts have also treated them as the equivalent of municipal taxes, subject to challenge, but only after they have been paid. “Absent bad faith or illegality, common monthly charges are not subject to set-off,” the court noted.

Not New but Reassuring

That isn’t a new idea, but it is an important one, and it is reassuring to see it affirmed so emphatically by the court. A finding that developers could use expenses to offset fees would open the door to all kinds of potential mischief by developers, who might ways to justify offsetting expenses. Even lax record-keeping by otherwise well-meaning developers could saddle associations with thousands and possibly tens of thousands of dollars in unpaid fees after the transition to owner control.

The court also dealt swiftly with the second issue ─ the developer’s creative (to say the least) attempt to erase his obligation to pay common fees by retroactively altering the date on which the units were created.

The court had two problems with this approach. First, the condominium’s master deed specifies that 80 percent of the beneficial interests must approve any changes in its provisions. When the developer attempted to amend the language in the master deed, he no longer owned any of the units and so could not even vote on the revisions, let alone dictate them, the court noted.

The court found even more troubling what it called the developer’s “failed attempt at legal revisionism” ― amending the documents to state that the units would be treated as if they had been created when they were sold. While the developer had, in fact, reserved to himself the right to amend the documents to create additional units, the court agreed, that did not allow him to erase units created previously. In other words, the court suggested, you can change covenants by amending the master deed, but you can’t change history.

Victory in Illinois

The Massachusetts decision has a recent counterpart in Illinois, where the CAI Amicus Committee just won a significant victory in a case dealing with the right of owners to withhold their common area fees.

IL Supreme Court Pic

Illinois Supreme Court

Lisa Carlson, the owner in this case (Spanish Court Two Condominium Association v. Lisa Carlson), refused to pay thousands of dollars in common area fees, arguing that the community association’s failure to properly maintain the common areas had resulted in damage to her unit, allowing her to withhold her fees to offset the repair costs she had incurred. The association countered with the standard industry argument ─ that condominium fees, like taxes, are not subject to offset. Carlson could sue the association to recover her costs and she could challenge her fees, the association argued, but she could not withhold them.

A trial court sided with the association but an Appellate Court overturned that decision, ruling that Carlson could use the association’s breach of its obligation to maintain and repair common areas as a defense against the collection action against her. Spanish Court appealed to the state Supreme Court, which allowed CAI to submit an amicus brief in support of the association.

Although this case raised the same question as the Massachusetts case – whether common area fees are subject to offset – the arguments were complicated somewhat by a unique feature in the Illinois condominium statute, allowing association’s to use the “forcible action” process landlords use in dealing with non-paying tenants to evict an owner for non-payment of fees.

Landlord-Tenant Analogy

In siding with Carlson, the Appeals Court found the relationship between a condominium owner and the association to be similar to that between a landlord and a tenant; if the association breached its obligation to repair the property, the court reasoned, owners, like tenants, should have the right to withhold their payments.

But the state’s Supreme Court rejected the landlord-tenant analogy. The landlord-tenant relationship is a contractual one, the court noted, defined by the terms of the lease. While the association’s duties may be outlined contractually in the governing documents, they are dictated by the state condominium statute “and exist independent[ly] of the…governing documents. Accordingly, the unit owner’s obligation to pay assessments is not akin to a tenant’s purely contractual obligation to pay rent,” the court noted, and an association’s use of the ‘forcible action” process does not in itself create a landlord-tenant-like relationship.

While landlords can use that process to terminate a tenancy, the court noted, associations can simply evict an owner from the property; they can’t terminate the ownership of the unit. “That distinction underscores that the landlord-tenant relationship and the association-unit owner relationship are not analogous, and that the defenses available to a tenant are not necessarily available to a unit owner,” the court said.

The key question —whether condominium fees are subject to offset – depends on the nature of the owner’s obligation to pay those assessments, the court said. And on that central point, the court fully embraced the industry’s argument, advanced in CAI’s amicus brief: Condominium ownership is unique and community associations must be able to collect fees expeditiously in order to maintain the revenue flow that is essential to their existence.

“Not a Viable Defense”

The wording of the state condominium statute makes it clear, the court said, that “a unit owner’s liability for unpaid assessments is not contingent on the association’s performance” and the association’s failure to make common area repairs “is not a viable defense” against a collection action.

Permitting a nullification defense, the court added, would contradict the legislative intent reflected in both the state condominium statute and in the measure allowing associations to use “forcible action” ─ ensuring a speedy collection process.

“A nullification defense would inject a myriad of fact-based inquiries into the forcible action, unduly prolonging what was intended to be an expeditious proceeding, “ the court said, and the result would be to “threaten the financial stability of condominium associations throughout the state.”

Interestingly, the Illinois court cited a 1992 Massachusetts decision (Trustees of the Prince Condominium Trust v. Prosser) to make its point:

“Whatever grievance a unit owner may have against the condominium trustees must not be permitted to affect the collection of lawfully assessed common area expense charges. A system that would tolerate a unit owner’s refusal to pay an assessment because the unit owner asserts a grievance, even a seemingly meritorious one, would threaten the financial integrity of the entire condominium operation. For the same reason that taxpayers may not lawfully decline to pay lawfully assessed taxes because of some grievance or claim against the taxing governmental unit, a condominium unit owner may not decline to pay lawful assessments,” the Massachusetts court said, concluding: “There is no right to set-off against a lawfully imposed condominium charge.”

Dissenting Opinion

A majority of the justices on Illinois’ high court embraced that position, but 3 jurists dissented in this 4-3 decision. Their primary arguments:

  • The relationship between associations and owners is governed by contract as well as by statute, supporting a landlord-tenant-type right of offset for association owners; and
  • Concern that an offset right would threaten the financial viability of condominium communities is overblown. The threat of eviction under the forcible action process is a “very powerful tool” encouraging owners to make their payments, the dissenting justices argued. “It is true that the form of condominium ownership only works if each unit owner faithfully pays his or her share of the common expenses,” they agreed. “[But] it is equally true that condominium ownership only works if the association likewise fulfills its obligations. Not permitting a unit owner to raise a nullification defense in a forcible action denies a voice to an ever growing segment of the population who purchase condominium property,” the dissenting opinion asserts.

Some industry observers have suggested that the divided opinion is somehow cause for concern. But that’s not true with this court or any other. Just consider the number of major Supreme Court cases that have been decided by a 5-4 majority.

The close vote doesn’t make the Illinois decision any less final, any less binding or any less significant. What this decision does do is add Illinois to the long list of jurisdictions that have accepted the special status of condominium fees and the need to protect them from offsets.

It is true that, as with any narrow decision, this one might have gone the other way. And the unique feature of the Illinois condominium statute, allowing associations to use forcible action against non-paying owners, might well have tipped the balance. That it did not underscores the strength of the arguments used to defend the sanctity of common area fees.

On the other hand, the dissenting opinion demonstrates that there are still some jurists who do not accept that widely accepted view. This does not in any way detract from the significance of the Illinois victory, but it does suggest that this may not be the last battle the industry will have to fight on the fee-offset front.

By Thomas O. Moriarty