SCREENING, REJECTING APPROVING AND THE RIGHT OF FIRST REFUSAL

There’s no question that one of the subjects I get most often asked about is whether or not the Board has the right to reject an applicant for either a rental or a purchase in the community.  It would be great if there was some guidance, some statute, some rule that I can point them to that tells them what criteria can be used when determining whether or not to approve an applicant, but there really is nothing to point to at all; another good example of just how poorly drafted some of our community association statutes are.

The only real mention of screening in the Florida Condominium Act says:

No charge shall be made by the association or any body thereof in connection with the sale, mortgage, lease, sublease, or other transfer of a unit unless the association is required to approve such transfer and a fee for such approval is provided for in the declaration, articles, or bylaws. Any such fee may be preset, but in no event may such fee exceed $100 per applicant other than husband/wife or parent/dependent child, which are considered one applicant.

So the first step is to determine if your governing documents allow the association to approve the transfer.  This is crucial.  Many associations incorrectly believe that they either inherently possess the right to approve sales and leases or that they have the right because the governing documents specifically state it.  Often times, the association only has a “right of first refusal” which only allows the association the opportunity to purchase or lease a unit on the same terms that the owner is offering to a new buyer or lessee.  It does not equate to the association having the right to screen and/or reject an applicant for purchase or lease.

Even if the governing documents allow the association the opportunity to screen and reject proposed purchasers and lessees, the documents may still be invalid as an illegal restraint on the owner’s ability to sell or alienate his or her property.  For example, in Aquarian Foundation, Inc. v. Sholom House, 448 So.2d 1166 (3rd DCA, 1984) the court held that since the declaration of condominium permitted the association to reject perpetually any unit owner’s prospective purchaser for any or no reason, it is an obvious an absolute restraint on alienation, and can be saved from invalidity only if the association has a corresponding obligation to purchase or procure a purchaser for the property from the unit owner at its fair market value. Otherwise stated, if the association is empowered to act arbitrarily, capriciously, and unreasonably in rejecting a unit owner’s prospective purchaser, it must in turn be accountable to the unit owner by offering payment or a substitute market for the property.

Interestingly enough, the court still reiterated the fact that restrictions on a unit owner’s right to transfer his property are recognized as a valid means of insuring the association’s ability to control the composition of the condominium as a whole.  So, assuming your documents give the association the ability to screen and reject, in order for the Board to avoid the requirement that it procure a purchaser should the Board reject the transfer, the Board better have reasonable criteria in place which they will use to prove that they are rejecting an applicant for cause.

Here are the four basic criteria the Board should use when determining whether or not to approve an applicant:

  1. credit score: have strict guidelines.  For example, applicants must have a minimum score or they are rejected;
  2. criminal history: again, have strict guidelines.  For example, rejection is required if an owner has been convicted of a felony;
  3. applicant’s prior history of foreclosures or evictions;
  4. The applicant would automatically violate the governing documents: for example, in a 55 and over community, the applicant makes it clear that the unit will not be occupied by at least one person age 55 or older.

Boards take note.  Failure to apply criteria even handedly across the Board can get the association sued for tortuous interference with contract and also face claims for discrimination.  Have strict procedures and guidelines in place, properly adopt and publish the criteria and document your decisions.

Here’s another question though…………..some people don’t want their Board having the power to screen and reject.  What’s your take on the subject?

Leave a reply

Your email address will not be published.