Homeowner associations are fairly common throughout Michigan and the United States. They are typically private associations formed by a developer who plats a subdivision to manage the development, and to enforce the restrictive covenants recorded to benefit and burden the land. They are also used in condominium projects and formed to manage the properties once the development is completed. When attempting to clarify what rules actually bind the homeowners, one should look to articles of incorporation, bylaws, deeds, and restrictive covenants. These documents each tell a story, and are intertwined with one another, to provide the rules and regulations of both the homeowners, and the association board.
A recent case out of the Michigan Court of Appeals helped clarify what role homeowner association bylaws have and who they are binding upon. MJ Development Company, Inc. v Inn at Bay Harbor Assoc., unpublished opinion of the Court of Appeals, decided Feb 23, 2017, (Docket No. 330496), addressed whether a homeowner association’s bylaws created a contractual right that bound the board and restricted its powers. In MJ Development, the plaintiff brought a breach of contract claim against the Association claiming that it violated the terms of its bylaws when it initiated work on various projects, and on the handling of a special assessment.
The court reaffirmed that bylaws constitute a binding contract in stating “when validly promulgated, an entity’s bylaws or similar governing instrument will constitute a binding contractual agreement between the entity and its members.” Citation omitted.
Next the court agreed in the application of the business judgment rule to review the decision made by the association’s board. The review of the association’s board was limited to whether the board’s actions were authorized, and whether the actions were taken in good faith and in furtherance of the legitimate interests of the condominium. So, long as the board acts within the scope of its authority and in good faith, the courts will not substitute their judgment for that of the board’s.
In this particular case, the relevant bylaws provided the Association in its sole discretion could “provide additions to the Common Elements not exceeding $10,000 annually for the entire Condominium Project.” The Court found the Association was authorized to fund and replace an old fireplace, though the new fireplace exceeded the cost of $10,000. The court parsed the language and determined the replacement of the fireplace did not constitute an addition, but was maintenance authorized by the bylaws. It also determined work in excess of $38,000 to the gutters and downspouts was maintenance of the common elements under the bylaws.
Finally, the court analyzed a special assessment project for which the association requested approval but not funding. The members disapproved of the project, and the funds were used for other approved projects. The Court found this was in compliance of the bylaws because the funds were not used for the failed assessment project, but for other authorized projects.
This case illustrates the importance of properly adopting governing documents such as bylaws, and going back to them to ensure that they are being properly implemented and subsequently applied.
Dalton & Tomich, PLC has successfully represented homeowners associations. Should your association need assistance interpreting their governing documents, contact one of our attorneys.