A recent New Jersey case was called upon to determine whether investor’s who purchase condominiums through a Limited Liability Company (LLC) retain their voting rights. The recent case, 275 Prospect Equities, LLC v. Prospect Towers Association, Inc., in which the New Jersey Superior Court Chancery Division was called upon to interpret the New Jersey Condominium Act.
Many people purchase condominium units with the intention of renting the unit. On occasion, sophisticated investors will purchase, either individually or more typically through a LLC, blocks of units in a condominium, and subsequently rent those units to tenants in the ordinary course of business. Do investor owners who rent units to tenants in in this manner lose the right to vote for members of the board of trustees of the condominium association?
The condominium association in this case announced its decision to preclude the LLCs from voting for members of the board of trustees at the annual election. The association based its decision on the definition of the word “developer” in the Condominium Act, and on the language of another provision therein restricting the right of “developers” to vote in a board election after transition.
Developer is defined in the Condominium Act to include any person or persons who “lease, sell or offer to lease or sell … units of a condominium in the ordinary course of business.” Once 75% of the units in a condominium are sold to the public, the unit owners “other than the developer” are entitled to elect all of the members of the board of trustees of the condominium association.
In September 2016, the Court ruled that the legislature did not intend the four LLCs to be deemed a “developer” as defined in the Condominium Act, or to be precluded from voting in board elections. The Court reviewed the legislative history and found that the legislature only intended to bar the original sponsor or developer (or its assignees who obtained the rights of the original sponsor or developer) from voting after transition.
The Court reasoned that were it otherwise, there could be multiple developers at any given time in a single condominium, and that each developer would be entitled to an automatic board seat if they offered units for sale pursuant to the Condominium Act. Such a result would increase exponentially the number of non-developer unit owners required to serve on the board to ensure that the board was not dominated by a “developer.”
This ruling is instructive for investors concerned about losing the right to have a voice in the governance of any condominium association in which a significant investment has been made.