January, 2005 |
S-2016; The "Common Interest Community and Homeowners' Association Act"

What the Bill Does
The "Common Interest Community and Homeowners' Association Act" ("CICHAA") expands and retitles the "Condominium Act," P.L.1969, c.257 (C.46:8B-1 et seq.). The "Condominium Act" currently applies only to condominiums; the CICHAA would expand the Condominium Act to include all types of common interest communities, residential and commercial, including, but not limited to, condominiums, planned real estate developments and cooperatives. Common interest communities contain property which has shared ownership by all owners in the community, known as "common elements," and which are managed by homeowners' associations. These revisions are necessary to provide a comprehensive and uniform body of law for these associations to follow.

The CICHAA is based, in part, on a national model act of the Uniform Law Commissioners known as the "Uniform Common Interest Ownership Act," but because New Jersey already has significant statutory law regulating certain homeowners' associations, not all provisions of the national model legislation is adaptable or necessary. For example, many of its provisions regulating developers duplicate provisions already incorporated into the "Planned Real Estate Development Full Disclosure Act," P.L.1977, c.419 (C.45:22A-21 et seq.). In addition, the New Jersey "Condominium Act," (which also was based on a uniform legislative model), provides a readily workable framework for incorporating new requirements regulating homeowners' associations and expanding those requirements to all types of homeowners' associations. The bill also contains many revisions to address the need for owners in these communities to have democracy in the self-governance of their respective communities.

In many ways, a common interest community governing board functions as a mini-local government. Condominium associations are permitted to have a statutory lien on an owners' home for unpaid common expenses, similar to a municipal tax lien for unpaid property taxes. These associations have also been granted the power by the Legislature to impose fines on owners, and to have a statutory lien for those fines, similar to the lien for unpaid common expenses. Insufficient safeguards exist under current law, however, to ensure that principles of fairness and democracy are being followed by a homeowners' association board in the imposition of fines and the filing of a lien unreviewed by a judicial body. The bill therefore eliminates the ability of an association to unilaterally file a statutory lien for fines; an association may still file such liens through a judicial process. In addition, the bill creates a new special process which will permit, under certain circumstances, the garnishment of an owner's personal income or other assets in satisfaction of unpaid common expenses or fines.

New Jersey's statutes have chiefly permitted regulation of homeowners' associations during the developer-controlled stage of building the community through the Department of Community Affairs (DCA). Although current statutes provide for some limited oversight for the time period subsequent to developer control, in the areas of access to records, meetings open to members, and alternative dispute resolution of an association, these protections are not clearly delineated and are often misinterpreted by boards. Many associations claim to pre-date or to not fall under the jurisdiction of the statutes. Some boards believe that their actions are circumscribed only by whatever limits, if any, are contained in their bylaws or whatever is prohibited by general corporate law. Some board members have used the protections offered by non-profit corporation law, and the lack of State oversight to obtain unfair advantage and personal gain over other member-owners. More than a few association boards have ignored orders from the Department of Community Affairs requiring access by members to the business records of the association, the holding of meetings open to members, or the submission of an owners' complaint to an alternative dispute resolution (ADR) proceeding as required by the statutes. In some instances, unfair or corrupt election practices have been documented. The DCA currently has limited power to intervene in such cases and needs better enforcement tools to deter such behavior. Without such tools, in order to enforce the statutes and regulations, homeowners must obtain private counsel and litigate against their board, while continuing to pay the board's attorney through the common monthly maintenance fees. In a recent law suit filed by owners, it cost approximately one million dollars in attorneys fees and court costs in order to have the court approve access by members to the financial records of the association, despite the fact that such access is statutorily required.

Historically, the courts have treated a homeowners' association board as just another type of corporate entity, and the owners of the property as distantly involved shareholders or as some type of tenants of the association. Recently, however, the Appellate Division of the Superior Court, in Verna v. The Links at Valleybrook Neighborhood Association, Inc., A-5438-01T1, recognized the governmental nature of a homeowners' association governing board. In other recent litigation, Twin Rivers v. Twin Rivers Homeowners' Association, MER-C-121-00, the court held in an unreported opinion that certain constitutional rights under the New Jersey and United States Constitution may not apply to persons residing in common interest communities. It is the intent of the sponsor to unequivocally override this latter holding. For these types of governing boards, the law must be clear that: (1) these associations are quasi-governmental entities, subject to transparent government models, not merely the corporate business model; and (2) a homeowners' association is subject to the political jurisdiction and ordinances of a municipality, regardless of any bylaws to the contrary.

In order to impart the governmental model upon these associations under the law, the bill creates a new type of corporation. The bill specifically delineates the powers and limitations of a governing board of a homeowners' which acts for all of the members of a common interest community in a democratic fashion. All such boards would be required to be organized as this special corporation type, including cooperatives, which will be permitted to issue shares under this corporate form. Refiling will not be required under the act, as all homeowners' associations will be deemed to exist as this form of corporate entity. To the extent that the previously adopted bylaws under a different corporate form conflict with the new corporate law, the new law will preempt those bylaws.

To address the statutory shortcomings described above, and to eliminate potential conflict of interests arising from the relationship of the department with developers, the bill enhances the DCA regulatory powers over owner-controlled governing boards of homeowners' associations. The bill also creates a new entity within the department known as the Ombudsman for Homeowners and Associations. This office will assist homeowners in understanding their rights and responsibilities and the remedies available to them, as well as assist governing board members and officers of associations in receiving appropriate training to allow them to properly discharge their functions and duties.

The bill also creates an Advisory Council on Common Interest Communities to assist the department in formulating and revising its regulations and policies regarding homeowners' associations. The Advisory Council will consist of nine members appointed by the Governor, and will contain representative members for owners, board members, governmental entities and a nonpartisan voting rights group. The bill also creates a new certification requirement for common interest community property managers, and establishes the Community Association Manager Certification Standards Board to assist the department in the establishment of standards and sanctions regarding certification. The board will consist of owners, property managers and representatives from the Institute of Real Estate Managers, and the Community Associations Institute.

The bill will allow homeowner associations more flexibility to maintain customized rules, as many do now, provided that a majority of the owners affirmatively authorize retaining or creating such rules. This will help address the fact that developer-created bylaws and rules are often difficult for owner-controlled associations to change, due to the number of votes necessary under the bylaws.

The bill expands the requirement for alternative dispute resolution (ADR) by establishing a uniform and low-cost method of ADR that must be utilized by all homeowners' associations. This system would utilize certain arbitrators and volunteers trained by the State to act as mediators to disputes arising in common interest communities.

The Ombudsman in the Department of Community Affairs would have very specific powers to monitor the elections of these special corporations, which will be required to be conducted by a panel of non-candidate homeowners, or a special election monitor, such as the New Jersey League of Women Voters. A property manager, who is hired by the incumbent board, would no longer be permitted to run the elections, and would required to obtain certification in order to continue employment.

The bill would also provide funding for grants and loans to homeowner associations maintaining common property in inclusionary common interest communities containing units reserved for low and moderate income families.

The costs of the Office of the Ombudsman, dispute resolution and the increased enforcement and regulatory duties for the department under the bill would be met by a registration fee required to be paid annually by each unit owner living in a common interest community.

Other highlights of the bill include:

Members that sue the board and win on the major issues litigated will be entitled to reimbursement of reasonable costs and attorneys' fees.

Expenditures for capital improvements or other costs beyond a certain percentage of an association budget would require the approval of a majority of the members.

Certain contracts would be subject to bidding; conflict of interest rules for board members would be established pursuant to the bill.

Regular audits would be required to be performed. Budget and other assistance would be provided through the Division of Local Government Services in the Department of Community Affairs.

Specific guidelines for open meetings and minutes are established.

Specific requirements for access to records by owners are established.

Homeowners' associations will be required to register and file an annual report with the Department of Community Affairs; the report shall divulge income, assets and expenses, as well as salaries and compensation paid to all individuals, and the report will also be required to be distributed to members of the community.

The bill eliminates the requirement to form a homeowners' association, at the option of the developer and the municipality, when the common elements or limited common elements consist only of open space, including walking trails thereon, and sewerage or drainage basins; a trust fund would be established and maintained by the municipality to maintain the minimal common elements in such a case.

While liens for unpaid common expenses are granted to all types of homeowners' associations under the bill, liens for fines imposed would no longer be permitted. However, a new collection power is granted to the common interest community association in the form of an expedited method of obtaining a writ of attachment for garnishment or levy on the personal assets of a delinquent owner who has the financial ability to pay, but continues to fail to pay duly owed and assessed commons fees, fines, special assessments or late fees. This power would be granted through arbitration processes outlined in the bill.

Read the Official Bill Synopsis