Thursday, December 14, 2017

Supreme Judicial Court to Decide Enforceability of Condominium Poison Pills

In last October, the Massachusetts Supreme Judicial Court heard oral argument in the case of Trustees of the Cambridge Point Condominium Trust v. Cambridge Point, LLC, et al.  In this case, the trustees of a condominium association sought damages against the developer/declarant for a variety of
construction defects.  The case never made it to trial because a Superior Court Judge dismissed the claims of the plaintiffs, the condominium trustees.  The trial court did so in reliance on so-called “poison pill” provisions that the developer had placed into the condominium documents to shield itself against just such litigation.  REBA filed an amicus brief with the SJC in support of the plaintiffs.  I had the privilege of co-authoring REBA’s amicus brief, with Tom Moriarty, who currently co-chairs REBA’s Condominium Law and Practice Section.

As a condominium practitioner regularly involved in advising both developers and trustees of new condominium associations at the time of turnover to unit owner control, I have noticed that these poison pill provisions seem to have proliferated of late – appearing almost routinely and also appearing in a variety of forms.  In Cambridge Point, those procedural hurdles included:  requiring an 80 percent vote of the unit owners prior to commence litigation except lawsuits to enforce condominium liens, requiring that the trustees present a litigation budget and draft complaint to the unit owners prior to this vote and requiring the vote to be successfully concluded within sixty (60) days of the call to vote.  Notably, in Cambridge Point, there was a factual dispute about whether the developer, and its affiliates, had retained units with 20 percent or greater of the beneficial interest so as to be able to block such a vote.

The Plaintiffs argued that Chapter 183A confers on the Trustees the exclusive power to conduct litigation as to common areas and the poison pills and further argued that the poison pills constituted overreaching under the seminal case of Barclay v. Deveau, and interfered with Trusts’ relationship with its attorney.

REBA and the Abstract Club filed an amicus brief asking the SJC to strike the poison pill provisions as violating public policy and being contrary to both the spirit and the terms of the provisions of Chapter 183A.  In addition, and more specifically, because of the exclusive, unrestricted power of the Trustees to conduct litigation under Chapter 183A involving the common areas and facilities.  REBA’s brief also argued that poison pills prevent recovery for breach of the judicially established implied warranty of habitability and I looked to the Uniform Acts (the Uniform Condominium Act and Uniform Condominium Interest Ownership Act).  The latter expressly prohibits a unit owner vote as a precedent to institution of legal proceedings.

I attended the SJC oral argument in October and share some of the questions from the Bench.  Not surprisingly, counsel for the Condominium Association was asked at the outset to address the fact that the disputed provisions were contained in the recorded Condominium Documents, such that buyers would have knowledge of the provisions and could choose to buy units in the Cambridge Point Condominium, or not.  In this and other questions, the Bench cautioned that in only very limited circumstances a warrant judicial intervention to set aside recorded terms in Condominium Documents. 

Further questions from the Bench probed both counsel as whether any sort of pre-litigation vote might be lawful.  For instance, in a question to the Trustees’ counsel: Would it be less problematic if the threshold vote was a 51 percent beneficial interest?  A similar question was posed to counsel for the Declarant, but at the other end of the spectrum:  Would a 99 percent vote violate public policy?  Another question reflected concern about the Unit Owners: “What remedy would the Unit Owners have if a Condominium Board entered into litigation that cost millions of dollars?”  Plaintiffs’ counsel responded by explaining that Condominiums are the purest form of democracy, such that unhappy Unit Owners always have the ability to vote to remove and replace the governing Board.  Ultimately, questions from the Bench reflected the difficult decisions which potentially face a new Association at turnover:  “If a lawsuit is not pursued by the Board, then wouldn’t the Unit Owners would bear 100 percent of the repair cost without contribution from the Declarant and the Unit Owners would be assessed for that?”  And, the final question from the Bench to Developer’s counsel, reflecting the ultimate dilemma facing a prospective purchaser: “So if I’m a prospective purchaser and I read everything recorded at the registry of deeds as a diligent buyer and I notice the 80 percent vote requirement, how am I supposed to know that the developer holds a 20 percent controlling interest and that I’ve effectively given up the right to sue?”  And further, “What about if I’m an early buyer so I have no reasonable way of knowing the developer’s plans to hold onto a controlling interest?” 

The SJC is expected to issue its decision in approximately 120 days from the date of the oral argument.

A partner at Prince Lobel Tye LLP and a founding chair of the Association’s condominium law and practice section, Diane Rubin currently serves as REBA’s president and is also a member of REBA Dispute Resolution’s panel of neutrals. She has extensive experience as construction and real estate counsel to private, public, and nonprofit clients including property developers and other owners, notably colleges, universities, awarding authorities, and condominium associations.  Diane can be contacted at