Courts Say Condo Boards Can't Levy "Confiscatory" Penalties

Accordingly, a fine of $500 per day for a violation of a guest policy was held confis­catory, and a late fee ranging from $200 to $800 per month for not paying common charges of about $1,280 per month was held unreasonable and confiscatory as well.

Unfortunately, courts have not provided precise guidance on how to apply this standard. It is possible to determine a com­parable interest rate for a late charge by measuring it against the amount of common charges that remain unpaid. Nevertheless, it is unclear, and the court did not explain, what amount was to be used for a basis in determining whether a fine imposed for the violation of a guest policy exceeded 25% per annum. The cases leave one to speculate as to whether the court intended to use the amount of common charges as a basis for comparison, or whether it had some other number in mind.

Most notably, in recent cas­es the court did not attempt to analyze the amount of the fine or late fee under the Business Judgment Rule, thus taking the burden of proof from the unit owner and placing it squarely on the condo board. The Business Judgment Rule requires only a finding that the board, in setting the penalty amount, was acting in the best interest of the condominium and was not acting punitively against the par­ticular unit-owner or singling out the unit-owner. An analysis under the Business Judgment Rule would have placed the burden on the unit-owner to show that the board was acting improp­erly. Instead, the court stated that the burden was on the condominium to dem­onstrate authority for the imposition of “such a hefty fine.”
 
The court did not discuss factors such as the location of the condominium, the wealth of the unit owners involved in the condominium, and the amount of a fine that would be necessary to deter people of the income class in the condominium from doing what the rules prohibit. The court did however comment that the board had an opportunity to cite authority to support the imposition of a “hefty fine.” This might leave the door open to an argu­ment that small fines might not have any substantial impact in a condominium where the unit owners are affluent.

(Marc Luxemburg is a partner in the law firm Gallet Dreyer & Berkey, and president of the Council of New York Cooperatives & Condominiums.)