Or, “The Board Could Have Avoided This Litigation by Reading the Bylaws, At Least Once”
In the case of Alliance Property Management Ltd. v. Forest Villa of Countryside Condominium Association, the property management company sought to have a contract for management services for a three-year term declared voidable, not void, a small derivation of a single word, but substantively polar opposites.
Forest Villa of Countryside Condominium Association is an Illinois condominium association organized as a not-for-profit corporation. The bylaws of Forest Villa authorized the Board of Managers to engage the services of a manager who was to manage and operate the condominium property and its common elements for such compensation and such authority as the Forest Villa Board may approve, provided “that no management agreement may run for a period beyond two years.”
Alliance Property Management was a licensed established property management company. On May 27, 2008, Forest Villa entered into a 36-month “Condominium Association Agreement” with Alliance. In the Agreement, the Board expressly stated that it had full authority to act on behalf of the Association in the engagement of Alliance. The Agreement provided that in addition to the day-to-day management of the condominium building and common areas which Alliance undertook, Alliance would “guide and assist the Board Members in [the discharge of] their fiduciary duties and obligations” and “assist in the administration of the provisions of the Declaration, Articles of Incorporation, Bylaws, Rules and Regulations, and policies of the Association.”
If the establishment of at least some sort of fiduciary undertaking wasn’t clear enough by the foregoing language, the Agreement further provided that Alliance “accepts the relationship of the trust and confidence established between itself, the Board of Directors, and the Association by virtue of entering in this Agreement.” Continuing, “[Alliance] covenants to furnish its best skill and judgment and to cooperate in furthering the interests of the Association.”
Moreover, Alliance agreed to provide the foregoing services “in the best and soundest [sic] manner consistent with the best interests of the Association Members and the direction of the Board for the Association.”
The Agreement included an automatic renewal provision whereby the Agreement would be renewed “for identical periods of time unless on or before sixty (60) days prior to the expiration of the initial term or any renewal period either party shall notify the other in writing that it elects to terminate this agreement.”
The Agreement contained a material default provision whereby, upon an Alliance material default, Forest Villa could terminate the Agreement if the material breach was not cured within sixty (60) days following Alliance’s receipt of written notice.
If Forest Villa failed to follow such a procedure, it would be liable to Alliance for liquidated damages equal in amount to the management fees remaining under the balance of the Agreement, which would be immediately due.
On March 2, 2010, over a year prior to the expiration of the May 27, 2008 Agreement, Forest Villa renewed the Agreement and extended its expiration to July 14, 2014.
On July 27, 2011, just 13 days into the extended term, Forest Villa notified Alliance by letter informing it of material breaches under the Agreement. Alliance first responded on September 19, 2011, to the notice by requesting a bill of particulars.
Forest Villa did not send additional evidence of the breaches to Alliance, instead informing Alliance that the Agreement would terminate on October 31, 2011, because Alliance did not make any efforts to cure the breaches.
Alliance then filed a complaint against Forest Villa, alleging that Forest Villa failed to follow the procedure set forth in the Agreement for termination. Forest Villa answered the complaint and raised five affirmative defenses, including that the Agreement was void ab initio, based on misrepresentation and that the Agreement was unconscionable.
At trial, evidence was presented including that at the time the original (2008) Agreement was executed, the officers of the Board were unaware that the bylaws restricted such management agreements to two (2) years in duration, though at least one officer testified that he “was familiar with [the by-law] terms.”
Alliance’s president testified that he used a standard form of agreement for 20 years, offering durations of 24, 36 and 48 months, with the longer durations having lower costs versus shorter duration options.
The Appellate Court of Illinois affirmed the trial court’s decision that the Agreement was void because the Agreement exceeded the Board’s authority, which was limited to only property management contracts for durations of two years or less. The appellate court noted that “condominiums are creatures of statute, and action taken on behalf of the condominium must be authorized by statute.” A unit owner’s rights are to be determined by reference to the Condominium Act, the declaration and the bylaws, construed as a whole. The same concept, the court held, applied in determining the scope of a condominium Board’s authority because the same rights and obligations are implicated.
The court noted that the members of a condominium board owe a fiduciary duty to the unit owners. That duty requires board members to act in a manner reasonably related to the exercise of that duty, and the failure to do so results in liability for the board and its individual members.
Noting that while the Illinois Condominium Act (the same as in Missouri) does not limit the duration of property management agreements, an association may limit such duration in its declaration and bylaws. And such a restrictive provision, even if arguably in the best interests of the condominium association or the condominium owners, cannot be waived nor the tenor of its force avoided. Reliance upon the business judgment rule does not apply where there is an overt violation of the declaration or bylaws.
Reciting a tenet of law that “a contract executed by a party that does not have authority is void ab initio,” the court held that neither could a party ratify a void contract by waiving its right to assert a defect nor would equitable relief be appropriate in a case such as this where a party, Alliance, expressly undertook a fiduciary duty to be knowledgeable of Forest Villa’s bylaws and to assist the Board to be in compliance with those terms.
The Forest Villa case turns on the ability to waive provisions of a condominium’s declaration or bylaws. The resounding answer is “no.” Even if the board of managers of a condominium association believes such a variance is in the best interest of the association, variance is not authorized, and even the business judgment rule won’t be of either assistance or cover.
A question might be as to how or why did the board enter into a three-year property management agreement, when the bylaws restricted such an agreement to a duration of two years or less? The answer is obvious: The members of the board either had not read the bylaws (and presumably did not read the declaration) or did not recall the provisions set forth. A board member has certain fiduciary duties, and to properly exercise such obligations, it is a necessity that a board member be familiar with the governing documents. The first step is to read the declaration, articles of incorporation, bylaws, and rules and regulations. The second step is to repeat, as often as necessary, the first step.