The Business Judgment Rule is a powerful shield for co-op and condo boards. It precludes the courts from reviewing board actions so long as the board has acted in good faith, within the scope of its authority, and in the best interest of the co-op corporation or the condo association. That’s a broad protection, but it is not a license for boards to do as they please. That lesson came home in a Manhattan condominium where a dispute arose over a fine for a sublet.
This condominium’s bylaws strictly prohibited transient occupancy of apartments – a fancy way of saying that subletting was forbidden. Yet a unit-owner rented out her apartment for 119 days at a daily rate of $700. How does the board penalize this breach of the bylaws? The board decided to fine the unit-owner $1,000 per day – a total of $119,000. Was the fine permissible, as the board argued? Or was it illegal and confiscatory, as the unit-owner alleged? Now things got interesting.
When a condominium’s bylaws authorize the board to impose fines for violations, the board’s determination to do so usually falls within its inherent power. As such, the imposition of a fine will be protected from review by a court by the Business Judgment Rule – so long as the fine is not in an unreasonable amount or otherwise excessive. Yet in recent cases, the courts did not attempt to analyze the amount of fines or late fees under the Business Judgment Rule, which has had the effect of taking the burden of proof from the unit-owner and placing it squarely on the condo board. The courts have stated that the condo board must demonstrate authority for imposing a “hefty” fine.
In one case, an appellate court declared invalid a $500-per-day fine for violation of a condominium’s guest policy. In another decision, the trial court upheld the imposition of two $1,000 fines based on the illegal transient use of a unit for a period of more than a year.
So – what did the trial court hold with respect to the $119,000 fine based on $1,000 for each day the apartment in the Manhattan condominium was illegally used? The board argued that the $1,000-per-day fine was intended as a deterrent, and was based upon the $700-per- day charge for the unit, plus an additional $300 charge. The unit-owner argued that basing a fine on the amount that the unit owner earned was a classic example of confiscation. The court agreed with the unit-owner and annulled the fine as unreasonable and confiscatory.
Lesson learned: the Business Judgment Rule may not protect a board if a court determines, after the fact, that a fine was unreasonable or irrational. So a board imposing a fine should be prepared to defend the amount with a fact-based rationale.