The other day, board member Earl P. asked if a clause in his association’s declaration was enforceable. The clause provided that “before an owner can sell their unit, the association, in its sole unfettered discretion, must approve the transaction.” Well Earl, if that is the entirety of the clause, then it is very likely this type of approval clause does not pass muster. For reasons more fully explained below, the clause will not withstand judicial challenge.
There is a long standing legal concept that prohibits “unreasonable restraints on alienation”. In an overly simplistic sense, it means that restrictions on the transfer of property must be reasonable. Absolute restrictions on the transfer of real property are not considered reasonable and are disdained by the courts. The term “alienation” is nothing more than a fancy legal word that means “transfer.” Whenever the term or a variation of it appears, just substitute the word “transfer” in its place.
In 1984, the 3rd District Court of Appeal held in Aquarian Foundation v. Sholom House, “a condominium association’s board of directors may have considerable latitude in withholding its consent to a unit owner’s transfer, [however] the resulting restraint on alienation (transfer) must be reasonable.” In this manner, the court continued, “the balance between the right of the association to maintain its homogeneity and the right of the individual to alienate (transfer) his property is struck.” The association argued its right to deny the purchase was balanced by a different provision in the declaration known as a “reverter”. (A “reverter clause” means the deed reverts back to a specific party upon the occurrence of specific events.) However, the court did not agree and found that the reverter clause only created a veiled obligation of the association to purchase the unit upon its denial. But, the court reasoned, if upon denial, it was mandatory for the association to provide a substitute buyer, then the restriction could have been valid.
In 1993, in Camino Gardens Ass’n Inc. v. McKim, the 4th District Court of Appeal reviewed a case where the association’s declaration was amended to provide that the prohibition on the sale, lease, or occupancy of any lot in the subdivision to anyone OTHER THAN a duly admitted member in good standing of the association was prohibited. The court held that, “in its purest sense, this provision is a condition to alien (transfer) only to particular persons, was perpetual in duration, and effects every type of alienation. When viewed in combination with the association bylaws defining membership, the provision becomes a condition prohibiting conveyance without the consent of the Association.” In other words, the owner was absolutely and fully prohibited from selling their property to anyone except other existing owners.
As a result, the court found the restriction invalid.
In 1977, in Coquina Club v. Mantz, the Second District Court of Appeal reviewed an association’s declaration that contained a certain age restriction (that was otherwise lawful at the time), and that also required the association to provide a substitute buyer upon its denial of a purchaser. In this case, the applicant did not meet the age requirement and was therefore “facially” disqualified. Therefore, the court reasoned that, in light of the “facial disqualification”, the association did not have to provide the otherwise required substitute buyer.
To re-cap, if a restriction is absolute, applies to all sales and is perpetual in duration, then it is invalid. In other words, limitless power of denial is rendered judicially improper and unlawful. If the association has the right to deny a purchaser, but the declaration is void of any standards by which such decisions should be made, the restriction is most likely invalid.
If the declaration requires a substitute buyer be provided by the association when it denies a proposed transaction, then the restriction likely has validity. If the applicant is “facially” disqualified, the association need not provide the otherwise required substitute buyer.
If the association has the right to deny an applicant “for-cause”, then to withstand judicial scrutiny, the declaration needs to minimally provide for standards as to what “for-cause” means. For example, if the declaration provides that “for-cause” meant “felons who committed crimes of moral turpitude”, then based on the existing cases, the restriction is, more than likely, valid. Another “for-cause” standard could be as simple as requiring the applicant to be truthful. If a lie is later discovered, then the above line of cases suggests that a “for-cause” denial based on a facial disqualification would be justified. There is another important lesson to be learned. Legislation to set parameters regarding an association’s approval rights is long overdue.
Leshana tova to all those celebrating Rosh Hashanah. May you and your families be inscribed for a good year!