News & Media

PA Courts Create Uncertainty in Decision Making Powers of Association Board

By: STEFAN RICHTER, ESQ.

In this June 4, 2012 decision River Park House Owners Association v. William Crumley 2012 Pa. Commw. LEXIS 166, the Pennsylvania Commonwealth Court held that a condominium association board exceeded its authority when it entered into a bulk-rate cable television contract with Comcast. As a result, the Court has created uncertainty in the decision making powers of condominium boards, and fashioned a distinction between mandatory and optional services. The facts and holdings of this case are as follows:

River Park House is a 354 unit condominium development located in Philadelphia (Association). Prior to 2007, cable television was provided by Comcast to owners within the Association individually, at a discounted rate. Upon expiration of this agreement, Comcast no longer offered individual rate contracts, and instead insisted upon a bulk-rate arrangement (Bulk Rate Agreement). While the Bulk Rate Agreement still offered a substantial discount over individual retail rates, it required direct payment by the Association to Comcast of a flat fee, per unit, per month – regardless of actual unit owner use or participation. Before entering into the Bulk Rate Agreement, the condominium board (Council) obtained an opinion from the Association’s attorney, and utilized a consultant to negotiate its terms. The Bulk Rate Agreement was consummated by the Council (quoting from the lower court’s opinion) during a “closed meeting without notice to or consent of the unit owners”, and was followed by an increase (reflecting the per unit cable bill) in the monthly assessment of approximately $47.00 per unit.

Mr. Crumley, a Comcast subscriber at the time the Association entered into the Bulk Rate Agreement, refused to pay the assessment increase. He argued that the Council had exceeded its authority when it contracted for cable television, and bound each unit owner to participate (at least financially) in a service they might choose not to utilize.

This case started as an assessment collection matter initially brought by the Association in the Municipal Court of Philadelphia, and resulted in a ruling in favor of the River Park House. After review by a board of arbitrators which reversed the Municipal Court, the Association appealed the matter to the Court of Common Pleas of Philadelphia.

The case was heard before Judge Glazer, who in his opinion dated January 14, 2011, acknowledged that the Association had complied with the business judgment rule, by “making an informed decision, in good faith, appropriate under the circumstances, and in the best interests of the Association.” However, in prefacing his ruling against the association, Judge Glazer wrote;

…the issue is not whether the Council could enter into the Bulk Services Contract on behalf of the Association, it is whether it was proper for the Council to enter into the contract without the prior approval of unit owners. (emphasis added)

Bylaws for River Park House state that the association’s budget shall include “Common Expenses … “including, by way of illustration and not limitation, … services, maintenance, repairs, replacements, landscaping … and all other Common Expenses) deemed necessary by the Council”. Despite this broad definition, Judge Glazer found a distinction between expenses for “general, common matters that affect the common areas and elements of the building”, from those that do not – including cable television:

Cable television is in a class apart from these other examples. There is a unique nature to the individualized conception of what a resident does, or does not, want to watch on television in his/her home. Thisis a personal decision which in no way impacts other owners in the use and enjoyment of their condominiums and the common areas… Compulsory cable television begs the question of whether a condominium association, such as plaintiff, could mandate other similar services, including internet, satellite radio, or NetFlix.

Accordingly, Judge Glazer held that the Council was not authorized to enter into the Bulk Rate Agreement – that such a decision must first be approved by majority vote of the unit owners. Although Mr. Crumley was not deemed liable for assessments related to the Bulk Rate Agreement, Judge Glazer held that if the agreement were ratified and approved by majority vote of the unit owners, that Mr. Crumley would then be bound to pay the assessment increase, retroactively.

Both parties appealed to the Commonwealth Court of Pennsylvania, which formulated the issue as follows:

At issue in this case is whether cable television can be a common fee within the meaning of the Pennsylvania Uniform Condominium Act (Act) … and the Association’s by-laws. … the issue is not whether the Council entered into the Contract with the best interests of the Association in mind, but whether it had the authority under the Act and/or by-laws to determine that a contract that did not benefit all residents and was a “luxury” fell within the type of contract that could be added to the common expenses.(emphasis added)

The Commonwealth Court compared the definition of “Common Expense” in the Act to the definition contained in the Association’s bylaws:

Section 3103 of the Act: Expenditures made or liabilities incurred by or on behalf of the association together with any allocations to reserves, including general common expenses and limited common expenses.

River House bylaws: Common Expenses (including by way of illustration and not limitation, … services, maintenance, repairs, replacements, landscaping.. and all other Common Expenses) as deemed necessary by the Council. (emphasis added)

The Commonwealth Court conceded that a Bulk Rate Agreement would be a proper common expense under the Act; however, it surprisingly held that the definition of common expense in River Park House’s bylaws was narrower. Accordingly, it agreed with the lower court’s distinction between expenses that were necessary to operate a building, from those that “did not affect other unit owners in their use and enjoyment of units or common areas”. In finding that cable television fell into the latter category, the Court held that the Council had exceeded its authority, and could not bind Mr. Crumley to pay for bulk rate cable. While the Commonwealth Court acknowledged that the bylaws could be amended (by vote of the unit owners) to provide for cable television as a common expense, it also stated that Mr. Crumley could not be bound to pay for such services until after an amendment was properly adopted.

The Commonwealth Court’s opinion included the following dissent:

I dissent. I believe that the decision concerning the purchase of bulk rate cable service for all of the units in the building clearly is an “operational” decision which affects all of the units in the building. Therefore, it would qualify as a common expense that may be levied by the Association.

Therefore, by implication, I would reverse the trial court’s decision regarding the retroactive liability for cable fees.

The implications of this case could be far reaching and run contrary to established tenets of condominium association governance; more specifically, that

1) management of the affairs of associations is vested in an elected board;

2) boards are vested with broad powers and duties, and are authorized to act on behalf of associations in all matters except those which expressly require unit owner vote;

3) boards act with due diligence in a manner they reasonably believe to be in the best interests of the Association, and its decisions are protected by the business judgment rule.

The effects of this case may not be limited to a specific exception for cable television services. Argument could be made that it judicially alters the business judgment rule, and creates a mandate for boards to consider whether each association expense is for a necessity or a luxury. Most condominium associations offer services and enter into contracts for expenses that do not benefit everyone equally. Not everyone uses the pool or the fitness room. Some unit owners may not have cars or use the parking lot. Spring flowers are perhaps not “necessary”. However, associations are not run by town-hall meetings. These decisions are made by an elected board of directors, given broad powers to perform its obligations.

The Pennsylvania Uniform Condominium Act devotes an entire chapter to association management (Sections 3301 through 3320). Most if not all of these provisions are reflected in governing documents of associations. In this case, the lower court conditioned validity of the Bulk Rate Agreement upon approval by majority vote of the unit owners. Nothing contained in the Act or the bylaws for River Park House requires such a vote, or sets forth any such mechanism. Similar to Section 3303 (b) of the Act which expressly vests unit owners with the right to reject expenditure decisions, River Park House’s bylaws provide that the Council must abide by instructions given to it by a vote of more than fifty percent of the unit owners. These provisions do not, however, establish an affirmative obligation on boards to seek approval for expenditure decisions –to the contrary, they vest in the owners the right and option to reject such a decision.

The lower court’s creation of an entirely new mechanism for approval or ratification of board decisions (by a vote of the unit owners) runs contrary to the Act and the bylaws. The Commonwealth Court did not specifically address this issue. Instead, it held that the bylaws could be amended (by a vote of the unit owners) to include the cost of cable television in the definition of common expense. Arguably, while this result likewise places certain judicially created limitations on the power of boards, it negates the lower court’s “majority vote approval” requirement. The Commonwealth Court’s holding should therefore be narrowly interpreted as follows: For luxury and non-essential expenditures (particularly those which do not benefit the owners equally), which were not previously treated as such in the association’s budget, the definition of “common expense” will be narrowly construed.

While the impact of this decision is yet to unfold, boards should not find it necessary to drastically alter the manner in which decisions are made. Few decisions will be analogous to these specific facts. At River Park House, cable television became a common expense after decades of individually billed service. The Bulk Rate Agreement constituted a substantial change in the way cable services were charged. While the agreement provided every unit owner with an equal discount, only those who chose to subscribe received an “actual benefit”. This is distinguishable from non-use of the pool or fitness room. These amenities exist prior to a unit owners’ purchase. Owners thus have full knowledge that regardless of whether they intend to use the pool and fitness room, they will be paying assessments necessary to operate and maintain them. The same is true for common element maintenance, such as landscaping.

As a precautionary measure, boards may wish to review their association’s governing documents and seek assurances that particularly new or unusual expenditures are “authorized”. In most cases, this will confirm that the board has properly carried out its duties and obligations, and acted within the bounds of its documents and the Act. While amendments to revise definitions or alter board authority may be considered, high voting burdens and unit owner apathy (or opposition), often make such procedures impracticable or unfeasible. However, based on the foregoing analysis, such amendments are generally not necessary.

This article is not legal advice and is provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction.