United States: Court Applies Reasonableness Standard To Amendments To By-Laws

A recent New Jersey appellate decision has set new standards for judicial review of amendments to association governing documents. In a case involving Panther Valley, a large-scale common interest residential community in Warren County, the Appellate Division of New Jersey's Superior Court held that a standard of "reasonableness" applied to judicial review of certain amendments approved by the membership of the Panther Valley Property Owners Association (Association). Mulligan v. Panther Valley Property Owners Association, 337 N.J. Super 293 (App. Div. 2001). In so doing, the court rejected a more deferential standard of review and refused to accord a presumption of validity to amendments approved by a vote of the unit owners.

Of additional significance is the fact that one of the amendments under review was a so-called "Megan's Law Amendment," which prohibited residency in the community by the most serious Megan's Law offenders. Although the court dismissed the challenge by the plaintiff to this amendment, it did not do so on the merits, and consequently left open the question whether such amendments are legally permissible still remains.

The lawsuit involved five amendments to the Association's declaration which were adopted by the owners in 1998. One amendment prohibited Tier 3 Megan's Law offenders from residing within Panther Valley. A second amendment authorized the Association to file a "Notice of Continuing Violation" in the county clerk's office if a member persisted in violating the Association's governing documents. Another amendment provided that a unit owner could be held liable for the Association's counsel fees and costs if the Association was required to file suit to enforce the governing documents. A fourth provision established a procedure governing members' inspections of the books and records of the Association. The fifth amendment established minimum qualifications for membership on the board of trustees.

From the perspective of community association law, the standard of review issue is the most significant. As the Panther Valley court pointed out, different jurisdictions have taken different approaches to the issue. New York follows the "business judgment rule," which accords a presumption of validity to association governing documents. Levindusky v. One Fifth Avenue Apartment Corp., 553 N.E. 2d 1317 (N.Y. Ct. App. 1990). Similarly, both the Florida and Massachusetts courts have held that restrictions in the declaration or master deed should receive a strong presumption of validity and should be upheld even if they exhibit some degree of unreasonableness.

In these jurisdictions, those restrictions would be invalidated only if they are arbitrary or in violation of some public policy or fundamental constitutional right. Hidden Harbour Estates v. Basso, 393 So. 2d 637 (Fla. App. 1981) ; Noble v. Murphy, 612 N.E. 2d 266 (Mass App. 1993).

In Nahrstedt v. Lakeside Village Condominium Association, 878 P. 2d 1275 (Cal. 1994), the California Court, on the other hand, largely relying upon a statutory provision, follows the "reasonableness test". This standard provides no presumption in favor of the document provision or amendment. The basis for affording the presumption of validity to provisions of a declaration or master deed is the concept that all of the unit owners took title subject to these basic governing documents. In other words, they consented to being governed by the recorded constituent documents. The reasonableness test is grounded in a concept of fundamental fairness and what is referred to as the law of equitable servitudes. Under the common law, courts will not enforce a restriction on the use of property if the harm caused by the restriction is disproportionate to the benefit produced. Thus, said the court in Nahrstedt, "when a use restriction bears no relationship to the land it burdens or violates a fundamental policy inuring to the public at large, the resulting harm will always be disproportionate to any benefit."

The New Jersey appellate court's ruling appears to apply only to amendments and not to the original provisions of the declaration or master deed. In determining that the reasonableness test should apply, the court first observed that the presumption of validity should not attach to terms which were not in the original declaration and by-laws to which the plaintiff assented when she purchased her unit within Panther Valley. Moreover, the court seemed bothered by the provision in Panther Valley's declaration authorizing an amendment by a simple majority vote of the Association's members, whereas many declarations or master deeds require a super-majority of two-thirds or more for amendment. The court concluded: Because these amendments all reflect changes adopted substantially after plaintiff took up residence at Panther Valley, and because the governing documents require no more than a simple majority vote, we are unwilling to afford them the presumption of validity for which defendants contend. We are satisfied that plaintiff is entitled in the context of this case to have these amendments judged on their reasonableness [emphasis added]. 337 N.J. Super at 302.

Thus, this decision implies that a presumption of validity would apply in a review of the original governing documents. Such a presumption may also arguably exist with respect to amendments that are approved by two-thirds or three-quarters of the membership. The Appellate Division seems to have created a sliding scale.

With respect to the merits of the amendments, clearly, the most important and controversial related to Megan's Law. Tier 3 offenders under Megan's Law are the individuals possessing the highest risk of repetitive and compulsive behavior. Since these individuals possess such a substantial degree of risk, the law provides for notification to the community that the offender is present. The trial court had concluded that the amendment was valid. However, that ruling was based on a summary judgment motion, not on the results of a fact-finding proceeding. The Appellate Division refused to rule on the reasonableness of the amendment because there was an insufficient record in the matter to permit a decision that would take into account the various competing policy considerations.

The court appeared to be concerned not merely with the impact of the amendment on Panther Valley but rather the greater impact on society should other communities adopt similar amendments. The court expressed its concern that if private communities could exclude Tier 3 Megan's Law offenders, then neighborhoods that were not part of planned residential communities could be left with the burden of housing these offenders. Therefore, while declining to rule expressly on the issue, it is clear that at least this panel of the Appellate Division would examine the merits in the context of the larger "community" rather than simply deal with a particular community association's authority to adopt such an amendment. Nevertheless, the ruling does leave Panther Valley's amendment intact as the plaintiff failed to meet the burden of overturning it.

Next, the court found that the amendment authorizing the filing of a Notice of Continuing Violation was not reasonable because it did not provide notice to the unit owner prior to filing. The court upheld the other amendments concerning access to books and records, attorney's fees and qualifications for the board, stating that the amendments were fair and reasonable.

Interestingly, the plaintiff had asserted that because she did not agree with the amendments, and because the original declaration constituted a contract, the by-laws could not be amended without her consent. The court easily disposed of that issue, holding that the original declaration contained the amendment provision, so it was clear that the ability to amend was part of the contract for which the plaintiff had bargained.

It is probable that this case will not be the last word either on the standard of review issue or the Megan's Law question. The court's thought process, however, will likely be the focus of commentary as well as future judicial opinions.