Friday, April 8, 2011

What Does the Recent Florida Supreme Court Cohn v. Grand Ruling Mean for Your Association?

The Florida Supreme Court’s recent holding in the Cohn v. Grand case has generated much ado. That’s not to say that this case isn’t significant: it is. Commentary that the legislature is now powerless in the arena of association policy, however, misconstrues the decision in this case.

Remember, this two-page decision yielded a two sentence ruling: The Constitution prohibits the impairment of contracts; and the statute regulating mixed-use condominiums (F.S. 718.404(2)) impaired the Grand’s unit owner’s contractual rights, which are established in the Grand’s declaration.

Impair or not to impair?

The Constitution’s prohibition against contract impairments is not a black-and-white, absolute rule. Contracts are not sacrosanct items that the government can never touch. Contractual impairments can and do occur. They key is whether or not such impairments are unreasonable!

So what can the government change and when?

Florida courts look to the Pomponio case when deciding cases like Grand. What does Pomponio say? Everyone’s favorite legal response, “it depends.” Although Pomponio outlines a formula for courts to use when determining whether government action changing the terms and conditions of a contract is constitutional, the underlying premise is that the decision will be determined by the facts and circumstances of each case.

The formula used to determine whether a state action impairing a contract is constitutional looks at three factors:

1) To what extent are the contractual rights impaired;
2) Does the state have a good reason for enacting policy that changes contractual rights; and
3) Are the means the state will use to achieve this policy reasonable?

The courts then “balance” these factors, measuring the extent to which rights are changed against the necessity of the policy and the means the state employs. This has been the court’s approach in Florida since 1979. Its use by the court in Grand should be of no surprise to anyone.

Dust off your Declaration

What is significant is the court’s ruling with regard to determining the contractual rights of the Grand’s unit owners under their declaration (the contract among the members of the Association). The Grand’s Declaration stated that unit owners would governed by the “the Condominium Act of the State of Florida in effect as of the date of recording this Declaration.” The Declaration did not include the phrase, “as amended from time to time.” As a result, Grand unit owners’ contractual rights are defined by the terms of the Florida Condominium Act at a fixed point in time and do not vary when changes to the Act are made. Every association (Condominium, Cooperative, HOA and Timeshare) should review their declarations to see if these "magic" words are included.

So, what does the Grand decision mean for your association?

Is any legislative change that contradicts our Declaration invalid? NO. In light of the balancing test, it is not difficult to see why the Florida Supreme Court ruled as it did pertaining to a change in the Grand’s voting rights. The critical right to vote would have been dramatically and significantly altered by the subsequent statutory change to 718.404(2), F.S. This does not mean every association contractual impairment case will follow suit. Issues such as collecting rent, enforcing board member eligibility standards, etc. may not be viewed by the court as carrying the same weight as voting rights nor would their impairment by subsequent legislative change necessarily be seen as unreasonable. Additionally, the court would have to factor in the state’s reason for changing these rules and the way it goes about achieving these changes.

Check your documents: While the Grand case pertains to a condo hotel, it is conceivable that attempts could be made to apply the same reasoning to other types of association coverants as well. Do you reference the Condominium, Cooperative Act in your Declaration or Cooperative Bylaws? If so, do these documents contain the words, “as amended from time to time” when referring to the particular statute to which your association is governed?

It is highly recommended that you discuss the impact of this recent Florida Supreme Court with your association attorney.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

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