NJ Superior Court Permits Leasing Ban

December 2011Newsletters In the Zone

The Superior Court of New Jersey has offered some guidance on a question that recurs regularly in representing condominium and homeowners associations: whether an association may ban leasing of units in the community without a unanimous vote. In Cape May Harbor Village v. Sbraga (421 N.J. Super. 56), the court considered the appeal of a unit owner from a lower court decision that upheld the right of an association, with a super-majority but not unanimous vote, to prohibit leasing of units in a luxury seaside community. Cape May Harbor Village and Yacht Club is, in the words of the court, “small and exclusive,” with just 24 single-family homes (valued above $2.5 million each) and a marina. Although the community had no history of any member leasing out a unit, the Declaration of Covenants and Restrictions expressly permitted leasing when it was adopted in 1995. A unit owner, unable to sell her unit in the current economic climate, began leasing it to tenants. The association promptly proposed and passed, by 20 votes to three, an amendment to the Declaration prohibiting leasing. Litigation ensued, the association prevailed at trial, and Superior Court faced two fundamental issues.

First, the court decided to apply to the case the “reasonableness” standard rather than the more board-friendly “business judgment standard,” based on the amendment having been passed after the appellant purchased her unit and on the fact that the leasing ban impacts a basic and valuable property right. However, even applying this more balanced standard, the court ultimately agreed with the lower court that the association’s decision was reasonable, given that the ban serves a worthwhile purpose by preserving “the stable residential character of the community” and was not adopted out of spite or malice. In further rejecting the appellant’s argument that the amendment should not apply to her because it was adopted after she purchased her unit, the court noted that any purchaser of a unit subject to a Declaration was on notice that the Declaration could be amended by an appropriate majority vote. In its analysis of the reasonableness of the amendment, the court focused in particular on the absence of any prior leasing activity in the history of the community and the admission by the appellant that she was only planning to lease her unit until she could sell it. These unusual factors, together with the small size and elite nature of the community, may limit is applicability to other communities seeking to ban leasing.

For more information, please contact Gregory J. Kleiber at 215.299.2874 or [email protected].

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