Contracts Clause Application in an Ever Changing Legislative Landscape
When representing a Florida condominium association, one interacts with many laws and other sources of authority. These include Chapter 718 of the Florida Statutes (Florida’s Condominium Act) and Chapter 617 of the Florida Statutes (the Florida Not-For-Profit Corporation Act). Counsel must also consult the governing documents of an association, which include the Declaration of Condominium, the Bylaws, the Articles of Incorporation and the Rules and Regulations. Arbitration decisions involving associations are routinely entered by arbitrators employed by The Department of Business and Professional Regulation. There are even requirements and guidance provided in the Florida Administrative Code. Decisions are handed down by our Circuit Courts of Appeal each Wednesday and occasionally, on a Thursday, the Supreme Court of Florida will decide a condominium law issue.
A few years ago, our firm argued the Cohn v. Grand Condominium Association case before The Florida Supreme Court. It was an interesting issue. The Grand is truly a unique condominium. It consists of approximately 1,200 units. 800 units are owned by the residents who live there. The other 400 units are commercial units consisting of hotel rooms and commercial stores. Even though the residents outnumber the non-residents two to one, the bylaws of The Grand Condominium allowed the commercial unit owners the right to elect a majority of the association’s board of directors. Needless to say, that seemed unfair to the residential unit owners. In an attempt to address the perceived problem of voting disparity raised by mixed-use projects such as Grand Condominium, in 2007, The Florida Legislature enacted Florida Statute 718.404. The statute -provides that, regardless of the terms of the governing documents, in a mixed-use condominium in which the number of residential units exceeds the number of commercial units, the owners of the residential units must be entitled to vote for a majority of the members of the Board of Directors of a condominium association.
In the Grand Condominium case, the commercial unit owners challenged this new statute on the grounds that it violated the Contracts Clause of the Florida Constitution. They argued that they have a vested right, pursuant to their declaration and by-laws, to elect a majority of the board and that no law can impair those vested rights. They were right. The Supreme Court of Florida struck down this new law as it applied at The Grand Condominium for one very specific reason. The declaration of condominium of The Grand adopts the Condominium Act as it existed when the condominium was built in 1986, and does not contain any provisions that incorporate any future legislative enactments. So, according to the Contracts Clause, the new law law could not affect the voting rights provisions of The Grand’s declaration.
That would not have been the case, however, if The Grand’s declaration incorporated not only the Condominium Act as it existed when its Declaration was recorded, but also “as it may be amended from time to time” or words of similar import. Had these magic words been included in The Grand’s declaration of condominium, the newly enacted provisions of § 718.404 would have applied and the residential unit owners would now be electing a majority of the Board of Directors annually.
There remains confusion, however, regarding how to determine which new statutes apply to a given condominium. Declarations of condominium, cooperative documents and declarations of covenants and restrictions are contracts between community associations and their members that govern the relationships between them, and are not just covenants running with the land. Accordingly, a certain degree of contract interpretation must be utilized when reviewing such governing documents, to determine what is required by applicable law and how such laws affect the rights of all parties involved.
Community associations generally have two types of rights: statutory rights (e.g. the right to inspect records) and vested rights found in the governing documents (e.g. the right to vote for directors). A vested right must be more than a mere expectation based on an anticipation of the continuance of an existing law; it must have become an entitlement, legal or equitable.
The Contracts Clause of the Constitution of the State of Florida establishes the general rule that the legislature is prohibited from enacting any law that impairs the vested rights under a declaration. Simply stated, as a general rule when applied to a community association, if a newly enacted (or amended) statute impairs a vested right guaranteed by a declaration, the Contracts Clause prevents it from being applied to the declaration.. A statute impairs a declaration if it creates a new obligation, imposes a new penalty, or diminishes a vested right.
While the Contracts Clause creates a general rule against new statutes impairing existing declarations, there are, of course, exceptions to the rule. First, if the declaration at issue actually incorporates future legislative enactments, new laws actually become part of the declaration and therefore, do not impair it. Again, to accomplish this, the declaration must contain language in substantially the following form: ”This declaration [or association] shall be governed by the Condominium Act, as amended from time-to-time”). The phrase “as amended from time-to-time” what incorporates future legislative enactments applicable to the association, and is commonly referred to as “Kaufman Language.”
Without Kaufman Language, newly enacted statutes apply only to existing declaration and other governing documents under very limited circumstances. A statute must survive three separate tests to determine its constitutionality, as applied to an existing declaration: (a) the Procedural vs. Substantive Test; (b) the Retroactive/Remedial Intent Test; and (c) the Degree of Impairment Test.
The Procedural vs Substantive Test
In determining whether or not a statute may be applied retroactively to an existing declaration, the first determination must be whether the statute is purely procedural in nature, or rather, it creates, alters or impairs substantive rights. Procedural statutes apply retroactively without offending the constitution and apply to existing declarations in all instances. Substantive statutes, on the other hand, may not be constitutional and must pass the remaining analyses in order to determine their validity. A statute is purely procedural if it merely establishes how some right or obligation under the declaration is to be performed. For example, if the declaration says that all election ballots must be printed on green paper and a new statutes requires that the ballots be printed on pink paper, that statute would be purely procedural and, therefore, permissive. If, on the other hand, the new statute requires that the ballots be printed on pink paper and provides that unit owners who are delinquent in payment of their assessments cannon vote on an issue before the membership, the statute would be considered substantive, rather than purely procedural, and would face further scrutiny.
The Retroactive Intent/Remedial Test
If the subject legislation is determined to be substantive and does not contain language that clearly expresses the legislature’s intent that it either is (a) to apply retroactively; or (b) remedial in nature and designed to clarify law already in existence, the statute cannot be applied retroactively. In that case, the legislation would not apply to an existing declaration that does not have Kaufman Language.
In Florida, all laws are presumed to apply prospectively, unless they are remedial in nature, or designed to clarify law already in effect, and the legislature clearly expresses its intention that the law is to apply retroactively. If a statute is purely remedial in nature, then it may be applied retroactively,because the law established by the statute was already in existence and is merely being clarified.
If the statute contains language establishing that it is to apply retroactively or that it is remedial in nature and designed to clarify existing law, the statute may be constitutional, but only after further constitutional considerations are resolved. To accomplish this, the statute must be subject to the three-prong test established by the Supreme Court of Florida in the Pomponio case.
For a substantive statutethat expresses the legislature’s intent that it apply retroactively to be constitutional, the Court must determine three things. First, is the source of the state’s authority in enacting the statute (e.g. its Police Powers, the Constitution, etc.) more important than the party’s right not to have his or her contract impaired? If that question is answered in the negative, the statute is unconstitutional. If the question is answered in the affirmative, the statute moves on to the second prong of the test.
The second questions asks: “Is the evil the statute is designed to eradicate more significant than the party’s right to have his or her contract left unimpaired?” If that question is answered in the negative, the statute is unconstitutional. If the question is answered in the affirmative, the statute moves on to the third and last prong.
The last question is: “Does the statute act as a severe impairment of the contract at issue or does it only impair the contract minimally?” Statutes that impair contracts minimally are constitutional under Pomponio, whereas statutes that severely impair contracts are not. But what constitutes minimal versus severe impairment? When addressing how much impairment will be tolerated, the Courts have often been guided by the principal, espoused in the case of Yamaha Parts Distributors Inc. v. Ehrman, that virtually no degree of contract impairment is or will be tolerable. Therefore, withstanding constitutional scrutiny under the Pomponio standard is often very difficult, regardless of the reason the legislature statute enacted the legislature. Ultimately, this is why the 2007 legislation adopted as Florida Statute § 718.404 of the Florida Statutes was deemed unconstitutional.
What This Means to Us and Our Clients
Most association officers believe that they are required to comply with whatever statutes are enacted by the legislature, and when the law changes, the obligations imposed on them change as well. This is sometimes, but not always,true. If we do not properly advise our association clients concerning which statutes apply to their associations and, more importantly, which statutes do not, we may do them serious harm. An ill-informed association may attempt to exercise rights it does not have, which could result in attorneys’ fee awards being entered against the association.
Whenever a firm engages a new association client, one of the first things that should be performed is a review of its declaration to determine whether it contains Kaufman Language. If it does, the client should be made aware of the fact that all statutes currently on the books (and to be enacted in the future) will apply to the Association (whether the board wants them to or not).
If the client’s declaration does not contain Kaufman Language, the board should be advised of the fact that new substantive statutes do not apply to the association and why. Then, the version of the Condominium Act or Chapters 617or 720 that was in effect when the declaration was recorded should be obtained and reviewed to determine and correctly explain the client’s rights and obligations.
See Woodside Vill. Condo. Ass’n v. Jahren, 806 So.2d 452, 456 (Fla.2002) (quoting Pepe v. Whispering Sands Condo. Ass’n, 351 So.2d 755, 757 (Fla. 2d DCA 1977))
See R.A.M. of South Florida, Inc. v. WCI Communities, Inc., 869 So.2d 1210 (Fla. 2d DCA 2004) quoting Div. of Workers’ Comp. v. Brevada, 420 So.2d 887, 891 (Fla. 1st DCA 1982)
Florida Constitution, Art. I, § X
See Cohn v Grand Condo. Ass’n, Inc., 63 So.3d 1120 (Fla. 2011); see also Pomponio v. Claridge of Pompano Condo, Inc., 378 So.2d 774, 776 (Fla. 1979); see also Dewberry v. Auto-Owners Ins. Co., 363 So.2d 1077, 1080 (Fla. 1978)
See R.A.M. of South Florida at 1217; see also Metro. Dade County v. Chase Fed. Hous. Corp., 737 So.2d 494, 499 (Fla. 1999)
See Kaufman v Shere, 347 So.2d 627 (Fla. 3d DCA 1977)(“Kaufman”); see also Angora Enterprises, Inc. v. Cole, 439 So.2d 832 (Fla. 1983)
Kaufman, at _____.
See State v Smiley, 966 So.2d 330, 334 (Fla. 2007)
See Florida Ins. Guar. Ass’n, Inc. v Devon Neighborhood Ass’n, Inc., 67 So.3d 187, 195 (Fla. 2011)
[Citation to Pomponia needed]
316 So.2d 557 (Fla. 1975)
[Cite to relevant page of holding of The Grand Condominium]