Allocating Common Charges

May the board of managers of a mixed-use condominium revise the method of allocating common changes between different classes of condominium owners? In Lesal Associates v. Board of Managers, Downing Court Condominium, the answer was that the documents govern the allocation and the board is without power to change the methodology.

Plaintiff Lesal Associates was a New York limited partnership that, under Article 9-B of the Real Property Law, sponsored the conversion to a condo of a building located on Downing Street in Manhattan. The condominium consists of 32 residential units, a commercial unit, and a professional unit. As provided for in the condominium's offering plan, Lesal sold its shares in the residential units, but retained ownership and control over the commercial and professional units. Under its declaration and bylaws, the condominium's board of managers consists of five residential managers and one commercial manager. The defendants in the action were the residential managers and the board itself.

This dispute concerned the proper method for assessing and allocating common charges for the various units in the condominium. Under Real Property Law Section 339-m, common charges in a condominium may be apportioned based on the respective individual interests (common interests) of each unit in the commonly owned areas of the land and building (common elements). Under this method, the common charges assessed on a particular unit will reflect the percentage of the total space in the building which it occupies, if this method were used, Lesal would be responsible for 21.31 percent of the common charges.

However, section 339-m also provides that, if authorized by the declaration and the bylaws, a unit's common charges may be calculated under an alternative method "based on special or exclusive use or availability or exclusive control of particular units or common areas by particular unit owners." Under this method, the common charges assessed on a particular unit would reflect the unit's use of the common elements.

Here, it appears that prior to 1999, the method used by the condominium to calculate the common charges was based on the exclusive use or control of common elements by the respective residential, commercial and professional units so as to reflect the expenses attributable to each such unit. However, at a meeting of the board of managers on November 22, 1999, the residential managers approved a proposal under which each of the unit-owners would be responsible for a fixed percentage of the budget for operating the condominium allocated in a manner based solely upon each owner's common interest and not upon the actual expenses attributable to the unit.

Lesal then began this action, seeking a declaratory judgment that the board could not allocate residential common expenses to Lesal, but, rather, were limited to allocating to Lesal only common charges for the portions of the condominium that it uses. Lesal also sought a judgment declaring that the board may not change the allocation of common charges to the commercial and professional units without the vote of the commercial manager. In their answer, the board asserted a counterclaim for $361,264.33, the amount of outstanding common charges that Lesal had allegedly refused to pay since 1999.

The board also sought a declaratory judgment that the condominium's annual expense requirements should be assessed as a single sum against all units and prorated against each unit according to their respective common interests. Lesal moved for summary judgment on its request for a declaratory judgment. The board cross-moved for summary judgment on their two counterclaims.

Lesal argued that by attempting to change the method of allocating common charges from one based on actual use to one based solely on the unit-owner's common interest in the condominium as a whole, the residential managers were improperly forcing the commercial and professional units to subsidize the residential operations. In support of its argument, Lesal pointed out that the declaration and the bylaws specifically provided for the allocation and apportionment of the expenses of the condominium to the professional unit, the commercial unit and the residential units in a manner that is different from the respective common interests of these units.

In fact, the declaration and the bylaws contained a number of seemingly contradictory provisions. Paragraph nine of the declaration provided that all expenses of the condominium shall be "common expenses" which shall be "apportioned among all the Unit Owners according to the method set forth in the By-Laws." Article VI, Section 2 of the bylaws provides that all of the assessments shall be deemed to be common charges and that "the total annual requirements shall be assessed as a single sum against all Units and prorated against each of said Units according to the respective Common Interests appurtenant to such Units."

These provisions supported the board's present method of calculating the common charges. However, there were other, more specific provisions in the declaration and bylaws which provided that certain expenses were to be allocated exclusively to the residential units, certain expenses exclusively to the commercial and professional units, and other expenses allocated to all of the units. The declaration defines certain charges or assessments as commercial common charges, professional common charges and residential common charges and provides that these charges will be assessed against the specific units to which they apply.

Thus, Definition 26 of the declaration provides that: "'Residential Common Charges' shall mean the charges allocated and assessed by the Condominium Board from time to time against the Residential Unit Owners, pro-rata in accordance with their respective Common Interests (except as otherwise provided in the Declaration or the Bylaws), to meet the Residential portion of the Common Expenses."

Analogous definitions are given for commercial common charges and professional common charges. In addition, Definition 9 of the declaration breaks down the common elements of the condominium into general common elements, limited common elements, residential limited common elements and commercial limited common elements. These definitions demonstrate that the declaration's intent is to segregate certain common charges and assess them only against the unit that incurred them.

As even more detailed provision for the allocation of expenses can be found in Article III, Section 6 of the bylaws, which breaks down the expenses incurred by the condominium for maintenance, repairs and/or improvements, and, consistent with Real Property Law Section 339-m, specifically allocates those expenses to unit-owners based on their particular use or control of the subject areas. It does this by creating four categories of expenses: (1) expenses to be borne exclusively by an individual residential unit-owner; (2) expenses to be borne exclusively by the commercial unit-owner for the commercial limited common elements; (3) common expenses to be borne by all unit-owners; and (4) residential common expenses to be borne only by the owners of the residential units for the residential limited common elements.

The court said it was well-settled that when resolving a conflict between provisions of a contract, a court should adopt an interpretation that attempts to give meaning to every provision of the agreement. To the extent that there are inconsistencies between a general provision and a specific provision of a contract, the specific provision controls. Here, the provisions of the declaration and the bylaws that segregate expenses according to a unit's category are far more detailed and comprehensive than the provisions upon which defendants rely in arguing that all expenses are common charges to be divided according to the unit owners' respective common interests.

The board's interpretation ignores or misconstrues key portions of the declaration and the bylaws. It was also significant that for the 12 years before November 1999, the resident managers approved common charge assessments that were consistent with Lesal's interpretation of the declaration and the bylaws. In this respect, the parties' course of performance under the contract is considered to be the "most persuasive evidence of [their] agreed intention." The board's assertion that the residential managers were misled or deceived by the commercial manager was conclusory and without any evidentiary support.

Finally, the court agreed with Lesal that the offering plan was valuable in helping to interpret the declaration and the bylaws even if the plan itself was not a contract that binds subsequent purchasers of the residential units. The offering plan here clearly provided that the commercial unit would be required to pay only for the services it directly received and the portion of the common elements that it utilized. Since they were all part of the same transaction, it is entirely appropriate to read the offering plan, the declaration, and the bylaws together and conclude that the commercial and professional units are only obligated to pay common charges and expenses fairly attributable to those units.

Lesal was therefore entitled to summary judgment on its first cause of action or a judgment declaring that defendants could not allocate residential common expenses to Lesal and are limited to allocating to Lesal common charges that reflect its use of the common elements of the condominium.

As to Lesal's second cause of action for a judgment declaring that the defendants improperly changed the allocation of common charges to the commercial and professional units without the approval of the commercial manager at the November 22, 1999 board meeting, the parties had not adequately addressed the issue and, in any event, the court decided not to resolve the matter since it had already ruled that the change was otherwise improper.

Concerning the board's first counterclaim for the common charges which Lesal had allegedly refused to pay since 1999, the court was unable to determine the amount that was actually due in light of the declaratory relief granted. The board's cross-motion for summary judgment on the first counterclaim was therefore denied.

Comment: This is not an unusual case where a board of managers, dominated by the interests of residential unit-owners and controlling a substantial majority on the board, seeks to reallocate common charges to lessen the burden on the residential unit-owners. Here, the effort failed and the court refused to sanction the reallocation. The question is can efforts to achieve this goal elsewhere succeed because the non-residential unit-owners are loathe to challenge the board?