Transition of Control in a Condominium

October 2012Articles In the Zone

Gurriere v. Brookdale Condominium Associates, Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-143-00 (2012) involves the interpretation of the portion of the Condominium Act that governs the transition of control over a condominium from the sponsor to the other unit owners.

In Brookdale, the sponsor sold approximately 20 percent of the units in a condominium in 1989 and then stopped selling units. Since N.J.S.A. 46:8B-12.1 provides that the sponsor retains control of the condominium association until conveyance of 75 percent or more of the units in a condominium, the sponsor retained control of the condominium for more than 20 years since no additional sponsor units were sold after 1989. Instead, the sponsor leased its units, treating the condominium as an apartment house.

The non-sponsor condominium unit owners claimed that the sponsor had mismanaged the property, not performing maintenance until emergencies occurred, and alleged this was because the sponsor did not want to pay 80 percent of maintenance costs.

N.J.S.A. 46:8B-12.1.a. provides that notwithstanding the 75 percent requirement, if units have been conveyed to purchasers and none of the other units are being offered for sale by the sponsor “in the ordinary course of business,” the unit owners other than the sponsor shall be entitled to elect all of the members of the board of the association.

Thus, the issue in this case was whether the sponsor had been trying to sell units in the ordinary course of business for the more than 20 years that it had not been selling units. The court concluded that the sponsor “intentionally took action that prevented the sale of additional units in the ordinary course of business.” Therefore, the court held that the non-sponsor unit owners were entitled to elect all of the members of the governing board.

The court reached its conclusion that the sponsor had not been trying to sell units in the ordinary course of business by examining the blanket mortgage encumbering all of the sponsor’s condominium units.

The court concluded that the blanket mortgage that encumbered the sponsor’s units was not capable of being paid upon sale of individual units, but instead, because of the way it was structured, effectively required the entire mortgage to be paid off in order to release the lien on the sponsor’s units. This is contrary to N.J.S.A. 46:8B-23, which provides that a blanket mortgage may not be given unless any unit owner can obtain a release of his unit from the lien of the mortgage. The blanket mortgage must allow individual units to be discharged upon payment to the mortgagee of “a sum equal to the proportionate share attributable to his unit of the then outstanding balance of unpaid principal and accrued interest and any other charges then due and unpaid” N.J.S.A. 46:8B-23.

The blanket mortgage in question did not provide a release mechanism. This prevented the sale of the units in the ordinary course of business. In 2008, the sponsor replaced the offending mortgage with a new mortgage. The court noted that this change would not be sufficient to cure the earlier deficiency in the prior mortgage. However, the court went on to point out that the substitute mortgage was also defective, since it did not provide for release of individual units upon payment of a “proportionate share” since the release payment provided for in the replacement mortgage was the same fixed amount for the release of each unit. Additionally, if that fixed amount were multiplied by the number of sponsor units, that amount exceeded the amount of the mortgage by a significant margin, thus further violating the requirement that each unit bear its own proportionate share.

Thus, since it was impossible to pay off the mortgage, the court concluded that it was also impossible to sell units “in the ordinary course of business,” and thus control of the association had to be turned over to the unit owners other than the sponsor.

There are a couple of interesting issues raised by this decision.

First, the Master Deed provided that the sponsor “may, with unanimous written approval of all unit owners, encumber …some or all of the units therein with a single or blanket permanent mortgage.” Although this provision otherwise tracks the language in N.J.S.A. 46:8B-23, the statutory language does not require “unanimous written approval” of the unit owners, but instead requires that each unit owner whose unit is encumbered by the mortgage shall be a grantor under the mortgage. The court seized on this difference to hold that even if the blanket mortgage had otherwise provided for the release of units, the imposition of the blanket mortgage violated the Master Deed since it was not approved by all of the unit owners and, without such approval, constituted a violation of the Master Deed by the sponsor.

However, it should be noted that this violation of the Master Deed did not provide specifically for a change of control of the condominium association as the remedy for its violation, although an equity court would have the power to fashion that remedy. In any event, the provision in the Master Deed was oddly drafted. Presumably, the intent was to provide that unit owners who were affected by the blanket mortgage would have to unanimously approve the imposition of the blanket mortgage. However, the overbroad way in which the provision was drafted gave the court the opportunity to find a default under the Master Deed.

Second, the court’s interpretation of the “proportionate share” required for release of the lien of a blanket mortgage for a particular unit, was particularly stringent. For example, there are often mortgage release provisions that provide, essentially, for front-ended release prices, thus permitting the lender to be paid off sooner than if each unit’s release amount were exactly proportional to the outstanding balance of the mortgage. For example, many blanket mortgages require that all of the net proceeds of sale be applied to the mortgage regardless of the unit’s proportionate amount of the outstanding debt. Although this is a commercially-common practice, the analysis in this case draws it into question. However, it would require odd circumstances for the question to be raised, because the maker of a blanket mortgage would generally not object to such a release provision, since it would have negotiated that provision. It came up in Brookdale only because a third party was trying to show that it was impossible to obtain unit releases from the blanket mortgage.