Published on: February 13, 2018
OR, IF YOU PREFER A SHORTER HEAD:
SJC Rejects Developers’ “Poison Pills”
By Edmund Allcock
The Massachusetts Supreme Judicial Court (SJC) has ruled that condominium developers can’t unreasonably restrict the ability of owners to file suits against them. The court rejected the “poison pill” provisions developers often use to insulate themselves from liability for construction defects, design flaws and other claims condominium owners might pursue against the developers of their communities.
I represented the plaintiffs, the trustees of Cambridge Point Condominium Trust, who challenged a provision in the community’s governing documents that required 80 percent of the owners to approve litigation against the developer. It is hard enough to persuade 80 percent of a community’s owners to agree on anything, but it is, as the SJC noted, “a practical impossibility,” when, as in this case, the developer controls 20 percent of the votes, and, as the court also noted, they “are unlikely to agree to sue themselves.” (Trustees of the Cambridge Point Condominium Trust vs. Cambridge Point, LLC, et als.)
The trustees were trying to file a $2 million construction defect suit against the developer, which the developer sought to block, arguing that 80 percent of the owners had not authorized it.
A Superior Court sided with the developer, rejecting both of our major arguments: That the owner-approval provision violated the Massachusetts condominium statute and that it was contrary to public policy. This court found the provision to be consistent with both. The SJC agreed with the lower court that the provision didn’t violate the condo statute (more about that later), but fortunately (and correctly, we think), the SJC concluded that it was “overreaching” and “contrary to public policy” for a developer to impose a provision that “for all practical purposes, makes it extraordinarily difficult or even impossible for the trustees to initiate any litigation against the developers regarding the common areas and facilities of a condominium.”
The state’s highest court identified several problems with the voter approval provision, primary among them:
- Developers could forever prohibit owners from pursuing construction defect claims against them simply by retaining control of 20 percent or more of the units for six years, when the statute of limitations would expire.
- Even if developers owned fewer than 20 percent of the units, the board would still need the approval of 80 percent of the unaffiliated owners ─ a difficult bar to clear, made more difficult by the narrow time frame (60 days) the board would have to complete that process.
- Owners who did not provide the required written consent, for whatever reason, would be counted as no votes, adding another obstacle to reaching the 80 percent mark.
- Although the legal costs would be incurred and paid gradually over the life of the litigation, the bylaw requires boards to estimate the costs and assess them up front, which would no doubt discourage many owners from approving the litigation.
Against Public Policy
The cumulative effect of these requirements, the SJC said, is to create “a formidable hurdle” developers must overcome in order to file a construction defect suit. Contracts often establish procedural hurdles of various kinds for one party or the other, or for both. The key question the SJC had to resolve: Was this particular hurdle contrary to public policy? The court concluded that it was. The public policy at issue is the “warranty of habitability” – the right of all home owners to ensure the safety and habitability of their residences.
“Massachusetts has a well-established public policy in favor of the safety and habitability of homes,” reflected, the court said, in state and local building codes and in the “implied warranty of habitability” the Massachusetts courts have consistently affirmed. “We have emphasized that ‘[the implied warranty] cannot be waived or disclaimed,” the SJC noted, “because to permit the disclaimer of a warranty protecting a purchaser from the consequences of latent defects would defeat the very purpose of the warranty. The public policy of Massachusetts strongly favors the safety and habitability of homes,” the court continued, adding, “In order to effectuate this public policy, we have consistently recognized the rights of individuals to obtain legal redress when their homes fail to meet minimum standards.”
A provision that makes it impossible for condominium owners to hold developers accountable for construction and design defects clearly violates this policy, the court concluded.
The courts have accepted some contractual provisions that strongly favored developers and disfavored owners, finding that buyers knew about those provisions or should have known about them. But that argument didn’t fly here, the SJC said, because even had owners diligently reviewed the bylaws and the declaration before purchasing, they would have known only that they “would have no legal recourse against the developers” for construction and design defects. They could not have assessed the impact of that restriction, the SJC said, because they could not have determined how many units the developer would retain or for how long. “[And] without this information, prospective purchasers could not know that the 80 percent owner approval requirement could have the effect of “shield[ing] the developers from any and all legal claims by the trustees.”
A Step Too Far
Although the SJC embraced our argument that the bylaw was contrary to public policy, it did not agree that the provision also violated the state condominium statute. We argued that because the statute grants condominium trustees the exclusive authority to seek compensation for construction flaws affecting common areas, a provision that requires owners to approve litigation violates the law. The fact that the statute does not specifically require owner consent for litigation, as it does for other decisions, we suggested, indicates that the legislature did not intend to dilute the authority of trustees in this area. The court wasn’t willing to go that far.
“We cannot reasonably infer that, because the act requires unit owner consent for some management decisions, the Legislature intended to prohibit any bylaw requiring unit owner consent for other management decisions, including the decision to commence litigation concerning common areas or facilities…, “the court said. “Such an inference would require a clearer indication of legislative intent than mere negative implication…”
We’re hoping the Legislature will provide that “clearer indication,” by approving pending legislation clarifying that trustees can initiate construction defect litigation on their own authority, without obtaining the approval of owners. The argument in favor of this interpretation of board authority seems clear to me and consistent with the statute. Condominiums represent one of the last, pure forms of representative government. Owners elect a board to govern their community; the authority to sue a developer who breaches a contract should be among the board’s inherent powers.
Even with the SJC’s demurer on this point, the decision represents a huge victory for condominium associations and condominium owners, and not just in Massachusetts. Developers in many other states are inserting poison pill provisions like the one the SJC rejected here. Recognizing the national implications, and the possibility that courts in other jurisdictions might adopt the logic the SJC used in this decision, the Community Associations Institute submitted an amicus brief supporting the trustees.
But the victory, while significant, is incomplete. The court left open the possibility that while this bylaw requiring owners to approve litigation violated public policy, others, drafted more narrowly, more equitably, with less toxic impacts on owners, might be acceptable.
There is no question that developers will begin drafting alternative language that they hope the courts will accept. Although it is impossible to predict how the courts will respond to any specific bylaw, a more reasonable owner approval ratio ─ closer to 50 percent than to 80 percent ─ applied to all litigation and not just to that involving developers or applied to any litigation involving more than a specified dollar amount, might address the objections the SJC cites in this decision. But provisions designed solely to protect the interests of developers, while ignoring the interests of owners, won’t come anywhere close.