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Category Archives: General Corporate

Show Me The Money – Collecting From Debtors

Posted on Author By Francis J. McGovern, Jr., Esquire

Chances are your Association doesn’t have spare money lying around.  Chances are your Association has five or more “regular debtors” – the ones who are on the arrearage list year-in and year-out.  Chances are that, since the recent recession, 10% of your budget and/or 10% of your homes are in arrears. Chances also are that some debtors have abandoned their units and the Board has had to deal with frozen pipes, mold, vandalism or all three.

Our job is to get non-payers out, get vacant units occupied and get cash flowing.  We do this in one or more of the following ways.  Unless you want to increase the bad debt expense line item in your budget year after year, you should be pursuing one or more of these methods:

  • Payment Plans/Settlement Agreements.
  • Amnesty Programs.
  • Membership Privilege Suspension (Pools and Parking Too!)
  • Money Judgment Lawsuits.
  • Bank Account Levies.
  • Wage Executions.
  • Rent Levies.
  • Lien Filing.
  • Foreclosure Lawsuits.
  • Receivers in Aid of Execution.
  • Rent Receivership.
  • Rent Sharing Agreements.
  • Mortgagee In Possession Lawsuits.
  • Quit Claim Deeds.
  • Sheriff’s Sales Based on Foreclosure or Money Judgment Suits.

We give presentations, throughout New Jersey, on various collection techniques, including those listed above.  Please contact us if you would like to schedule a free collection presentation for your New Jersey Home Owners Association, Condominium Association or Co-Op.

Lipstick On A Pig

Posted on Author By Francis J. McGovern, Jr., Esquire

Putting lipstick on a pig makes the animal no less a pig.  Cladding the lobby in marble and installing fancy fixtures makes an old building no younger.  Converting old buildings, especially high rise buildings, to condominiums raises unique due diligence, developer-transition, construction defect, financing and litigation issues.  Although the refinished lobby may look great there is much more there than meets the eye.

What due diligence process has the converting developer/sponsor gone through in acquiring the building?  Has the unit owner-controlled board obtained the developer/sponsor’s due diligence documentation?  Was there/is there a fuel storage tank on the property?  Was there/is there asbestos on the property?  Was there/is there lead paint on the property?

What about the water supply – where does it come from?  Is there a water tank on the property?  Is the water supply plumbing system serviceable?  What about sanitary plumbing?  What about airshafts and other conduit?  Has the elevator been maintained, renovated or replaced?  What about the fire suppression and fire/smoke alarm systems?  How old is the roof?  What is the roof made of?

What’s under that fancy new façade and how long will the fancy new façade last?  Is there a parking deck?  Does the parking deck comport with what was described in the public offering statement?  Is the building subject to other contracts – billboards, cell phone towers, laundry rooms?  What are their terms?  Who gets the money?  Has there been any “pre-payment” to the developer/sponsor?

How old are the windows? Who owns the windows?  If the unit owners own the windows, is the Association being stuck with a water infiltration problem anyway?  How old is the HVAC equipment?  Are there detailed maintenance records?  How old is the boiler system?  What about the electrical system?

Is the Association inheriting a staff such as maintenance employees, managers, black seal building engineers etc.?  Do any of these employees live on site?  Are there employee leases in place?  Are there employment agreements in place?  Are the employees unionized?  Are the staff members adequately experienced and trained?  Are they loyal to the association rather than the developer?

The questions go on and on.  The point is that, although purchasers may be dazzled by cosmetic enhancements, unit-owner board members must not be.  Especially in the condominium conversion context, the unit-owner board members must hire the right professionals to evaluate the Associations position from the physical to the financial to the personnel standpoints.  We assist unit owner board members in forming the professional teams necessary to evaluate the Association’s position and, where necessary, we litigate on behalf of Associations to compel the developer/sponsor to make things right.

Crime Pays

Posted on Author By Francis J. McGovern, Jr., Esquire

Crime pays and crime in community, condominium and co-op associations can pay handsomely – hundreds of thousands of dollars, if not more.  Board members must take steps to minimize the opportunity to steal.   The ultimate responsibility for safekeeping an Association’s money lies with the board members; not a single board member, not the manager, the Attorney General, the County Prosecutor or even the Association’s auditor.

As a board member, ask yourself:  “Who has check signing authority?”, “Who opens the bank statements?”, “Is there a credit card?”, “Who reviews the credit card statement?”, “When was the last time we reviewed our financial controls with the auditor?”, “What does our crime policy and related insurance cover?” etc.

Crime happens in community, condominium and co-op associations, there is no bulletproof solution but board members must do what they can to prevent it.

Legislation to Benefit Age Restricted Communities

Posted on Author By Francis J. McGovern, Jr., Esquire

There is a pending bill that may provide much needed assistance for age restricted communities that are suffering with abandoned units in their communities. The bill requires mortgage companies to maintain vacant, age-restricted units during its foreclosure process and also requires the mortgage companies to pay the ongoing monthly assessments to the Association throughout the foreclosure process.

The bill was introduced into the Assembly on June 6, 2013 as A4169 and is sponsored by Assemblyman Gregory P. McGuckin and Assemblyman David W. Wolfe. An identical bill was introduced into the Senate on May 30, 2013 and is sponsored by Senator James W. Holzapfel.

Pursuant to the bill, all mortgage companies that are foreclosing on any residential unit will be required to notify the municipality in which the unit is located within ten days of filing a mortgage foreclosure complaint (or within thirty days if the mortgage company already instituted a foreclosure action). The notice must provide the municipality with the contact information for the mortgage company’’ s representative that is responsible for receiving complaints of property maintenance and code violations.

If the unit owner abandons the unit that is being foreclosed upon and the property is found to be a nuisance or in violation of any state or local code, then the local public officer may notify the mortgage company and the mortgage company shall then be liable to abate the nuisance or correct the violation. If the mortgage company does not correct the nuisance or violation, then the municipality may do so and charge back the mortgage company for the costs incurred.

If the abandoned unit is located within an age-restricted community, then the mortgage company will be liable to pay the ongoing monthly assessments to the Association as well as maintain the property while the unit is in foreclosure. The mortgage company will be held jointly and severally liable along with the owner to pay the ongoing monthly assessments to the Association. Therefore, in the event that the monthly assessments are not paid, the Association will be able to pursue the mortgage company as well as the owner in a collection action. As a result, this bill will greatly assist age restricted communities with collecting assessments on abandoned units. However, this bill has only recently been introduced and we will continue to monitor its progress.

How Is Your Association’s Immune System?

Posted on Author By Francis J. McGovern, Jr., Esquire

Around this time each year many people get vaccinated against the common but debilitating illness, the flu. If you ask these people why they get their annual flu shot, they may respond with that common expression, “an ounce of prevention is worth a pound of cure.” Since prevention is at the forefront of so many people’s minds this time of year it is also a good time to determine whether your association is properly immunized against a common but debilitating condition affecting so many communities, the slip-and-fall or trip-and-fall personal injury lawsuit.

One of the most powerful tools an association can use to protect itself against these claims is the tort immunity afforded to community associations pursuant to N.J.S.A. 2A:62A-12. et seq. According to these statutes, as long as the necessary language is included within the Association’s bylaws, the association will not be liable in any personal injury lawsuit brought by a unit owner for bodily injury occurring on the association’s property. See, N.J.S.A. 2A:62A-13(a). However, the immunity afforded under these statutes will not apply if the association’s willful, wanton or grossly negligent conduct causes the unit owner’s injury. See, N.J.S.A. 2A:62A-13(b).

The power of this statutory immunity to insulate an association from liability was recognized by our State Judiciary as recently as September 25, 2013. In the Unpublished Decision in Marion Costa v. Shadow Lake Village Condominium Association, Inc., et al., 2013 N.J. Super. Unpub. LEXIS 2342 (App. Div. 2013) the Appellate Division of the New Jersey Superior Court affirmed the trial court’s decision to dismiss a unit owner’s claims against the association, and the association’s property manager, for injuries arising out of a slip-and-fall on the common property, because a tort immunity provision was included within that association’s bylaws. In Shadow Lake, both the Appellate Division and the trial court concluded that the circumstances leading up to the unit owner’s injuries may, at worst, be characterized as simple negligence. Fortunately for the association in Shadow Lake, the language within the association’s bylaws rendered it immune to such claims.

Although the tort immunity afforded by N.J.S.A. 2A:62A-12. et seq, is a powerful tool against personal injury claims, the overwhelming majority of bylaws implemented by developers during original construction do not include the language that is necessary to secure this protection. If that is the case in your community, tort immunity is only one simple amendment away. According to N.J.S.A. 2A:62A-14(a) tort immunity can be added to any set of bylaws by an amendment approved by a two-thirds vote of the association’s membership. Once adopted, the immunity will then apply to any actions for injuries sustained after the date the new bylaw provision becomes operative. See, N.J.S.A. 2A:62A-14(s). Please give us a call if you would like to discuss implementing tort immunity in your association.

Lessons From Storm Sandy

Posted on Author By Patricia McGlone

1. FEMA has again extended the deadline to file a proof of loss

If you want to contest the amount of payment from a flood insurance policy or you need to supplement a prior claim with additional information, the new deadline is April 28, 2014.

FEMA waived the proof of loss requirement to expedite the claims process for payment of Storm Sandy claims. This applies to Standard Flood Insurance Policies and losses related to Storm Sandy only. Insurance adjusters were permitted to issue payment based on the “evaluation of damages contained in the adjusters report” instead of a proof of loss signed by the insured or an insured-signed adjusters report.

FEMA has stated that if a policyholder wishes to submit a supplemental claim or disputes the amount paid, it may request additional payment by submitting a signed and sworn poof of loss statement as required by the terms of the insurance policy. Initially this paperwork had to be submitted by October 28, 2013. There was concern that additional damage may be discovered during the rebuilding process or there was not sufficient time to gather and submit all of the supporting documentation.

 

2. It may be time to revise the Association’s governing documents

This is a good opportunity for the Association to review its governing documents. Many Associations were surprised to learn that their documents did not contain a provision for destruction of the property and the procedure for deciding whether to rebuild. If rebuilding involves the common areas, the Association may want to provide that it will retain one contractor to do all of the work.

The sections regarding distribution of insurance proceeds should be reviewed to make sure they meet the needs and desires of the community. The Association should review and understand whether the Association’s policy includes coverage for the individual units. Will the restoration after a loss be full replacement, i.e., which would include upgrades that existed prior to the loss or will the unit be restored to builders grade only? The board may want to add a provision regarding payment of the insurance deductible in various situations.

 

3. Keep good records

Storm Sandy reminded us that good records lead to good claims. The insurance company requires documentation or proof to establish the damage or loss being claimed by the Association. Keep records with the date of purchase or installation, receipts or contracts for the work and photographs of the items. If these records are detailed and easily accessed a claim for payment for the insurance company will be proceeded faster and with a better result. The Association’s inventory should be updated annually as well.

Storm Sandy also reminded us that it is a good idea to keep a back up of all important records off site in the event that original records or computers are destroyed.

Contracts for Insurance – Covered Repairs

Posted on Author By The Association Lawyers

 

When natural disasters or fires cause massive destruction to association property, it is not only important to find the right contractor to conduct the repair work, but it is also critical to negotiate a well-worded contract with that contractor.  Specifically, an association needs to protect itself from unexpected bills that are not covered by insurance.

In order to protect an association from the nasty surprise of a bill for uncovered repair work, the following provisions for any insurance-covered repair or remediation project should be included in the contract:

The Contractor Should Agree to Accept the Price Approved by the Insurance Carrier.

Many times, the costs associated with cleanup and repairs from a natural disaster, fire or other major loss are not fully-known when the cleanup or repair work is ready to start.  Rather than waiting for the insurance carrier’s coverage decision or – worse yet – signing an agreement at the price quoted by the contractor, an association should require the contractor to accept, as payment in full, the insurance proceeds for the work performed – and nothing more.  In this scenario, a specific dollar figure is not included in the contract, unless as coverage decision has already been made.

The Association Should Not Have to Pay Until Insurance Proceeds are Received.

In addition to requiring contractors to accept payment in the amount approved by the insurance carrier, contractors should not be permitted to demand payment for work until insurance proceeds are received from the carrier.  Otherwise, an association may find itself fronting the money for the insurance carrier – money the association may not have.  Late payments could then result in otherwise unnecessary interest charges that will not be covered by insurance.  In some instances the insurance proceeds may not be received for several weeks or even months after the remediation and repair work is completed – especially when the damage was caused by a widespread natural disaster, like Superstorm Sandy, and the insurance carriers are handling numerous claims at once.

Additional Work Must Be Approved by a Change Order.

Contractors are experts at finding additional work that needs to be performed once they are onsite for insurance-covered damages, but they should never be given open-ended authority to make “necessary” repairs.  If the issue requiring repair was not related to the covered loss, the association will usually end up being responsible for the cost of the repair.  In order to avoid this problem, contracts should specify that all repairs not covered by insurance proceeds must be pre-authorized by a signed written change order.

Most contractors will not perform additional work without at least speaking to the association first; however, when repairs are related to insurance-covered losses new potential problems arise.  As already discussed the scope of work and approved repair costs may not be known before remediation and repair work start.  This creates a risk for contractors to guess wrong about what work will be covered.  The contractor may believe that an item needs to be completely replaced, but the insurance carrier’s final determination may be that the item was repairable – or not covered at all.  Recently, this problem was exacerbated in flood zone areas after Superstorm Sandy when many contractors performed work on damaged property that was below the “base flood elevation” (BFE), and that work was not covered by insurance.  Had the work been performed above the BFE, it would have been covered by insurance.  By structuring the contract to protect the association, the risk of these types of repair costs being shifted to the association is minimized.

New Jersey – Manager Licensing Bill

Posted on Author By Francis J. McGovern, Jr., Esquire

Today, January 9th 2014, the New Jersey State Senate passed the “Manager Licensing Bill”.

The bill will now go to the Governor for his signature.

The bill is available for viewing and downloading here.

This bill was first introduced in 2012 and has been working its way through the system.

We will keep you updated on any progress with regard to the actual signing of the bill by the Governor.

 

 

History of the bill:

3/8/2012 Introduced, Referred to Assembly Regulated Professions Committee
6/18/2012 Reported out of Assembly Comm. with Amendments, 2nd Reading
6/25/2012 Passed by the Assembly (51-26-1)
6/28/2012 Received in the Senate, Referred to Senate Commerce Committee
6/13/2013 Reported from Senate Committee with Amendments, 2nd Reading
6/13/2013 Referred to Senate Budget and Appropriations Committee
12/5/2013 Reported from Senate Committee, 2nd Reading
1/9/2014 Substituted for S2578 (1R)
1/9/2014 Passed by the Senate (29-7)
1/9/2014 Received in the Assembly, 2nd Reading on Concurrence

Bill
Manager Licensing Bill

Health Care Providers – Compliance Issues

Posted on Author By Francis J. McGovern, Jr., Esquire

Health care providers are increasingly scrutinized for compliance with health care and insurance laws.  In light of this, health care providers must be proactive in creating and implementing a compliance program.

A compliance program is a framework, voluntarily implemented by the health care provider, to help insure compliance with laws, reveal breaches of law and provide a mechanism for addressing any improper conduct uncovered.  Through increased budgets and a large array of enforcement tools, State and Federal agencies as well as third party payers have pursued enforcement of health care and insurance laws with increased tenacity.  The increased enforcement budgets result from Governments’ acknowledgment of the tremendous amount of money spent on Health Care (especially Medicare and Medicaid), a perception that past spending practices have made the health care field fertile ground for fraud and a recognition that health care fraud negatively impacts the quality of care.

Though health care providers cannot do much about the increased funds spent on enforcement, health care providers should carefully note the consequences of a failure to comply with applicable laws.  These consequences include: loss of professional licenses, criminal conviction with jail time, substantial fines, ineligibility to receive payments from government programs (i.e. Medicare), disgorgement of payments, fines, interest, attorneys fees and punitive damages (i.e. double and treble damages).

In light of the well funded and aggressive compliance initiatives and the onerous nature of the consequences for failure to comply, a provider compliance program is a must.  Not only will a health care compliance program help ensure compliance with law, reveal problems and provide a mechanism for addressing improper conduct, if a compliance program is in place, it may also avoid implementation of a more burdensome governmentally imposed program.  Further, if a compliance program is in place and a violation is found the penalty may be substantially less than the penalty that would have otherwise been imposed.

The Department of Health, Office of the Inspector General (‘OIG’) promotes voluntary compliance programs for health care providers.  The OIG maintains a website at http://www.dhhs.gov/progorg/oig which provides information on compliance with health care laws and, though much of this information relates to hospitals and other entities rather than providers, there is substantial information for providers.  For example, a fraud alert addressing physician certification for home health services.

The OIG and others have used the United States Sentencing Commission Guidelines as a reference point for the minimum requirements of a compliance program.  The compliance program should include the following:

  1. The development and distribution of written standards of conduct as well as written policies and procedures that promote the health care provider’s commitment to compliance and that address specific areas of potential fraud such as self referral, unbundling of services, up coding and improper claims submission.
  2. The designation of a compliance officer charged with operating and monitoring the compliance program.
  3. The development and implementation of regular, effective education and training programs for all relevant employees.
  4. The maintenance of a process, such as a hotline, to receive complaints and to protect whisleblowers from retaliation.
  5. The development of a system to respond to allegations of improper/illegal activities and the enforcement of appropriate discipline with respect to employees who have violated compliance policies or requirements of federal, state or private health care programs.
  6. The use of audits and/or other evaluation techniques to monitor compliance and assist in the reduction of identified problem areas.
  7. The investigation and remediation of problems and the development of program modifications to address future offenses.

The scope of each portion of the compliance program will depend upon the size and complexity of the health care provider.  The larger and more complex the provider, the broader the scope and the more formal the development and implementation.

In March of 1999 the Office of Inspector General and the Health Care Compliance Association co-sponsored a government-industry roundtable discussion so that the Health Care compliance industry could inform the OIG of issues surrounding the implementation and maintenance of compliance programs.  This meeting was also an opportunity for the OIG to present policy objectives underlying compliance program guidelines.  The report on this roundtable meeting, which is posted on the OIG’s website, highlighted some of the comments and suggestions raised.  These are summarized below:

Developing a Compliance Program

  1. Providers were concerned that the OIG’s compliance guidance appears to focus on compliance to the exclusion of medical ethics and this may discourage some providers from implementing a compliance program.  Further, some providers expressed concern over the cost of compliance programs.
  2. It was noted that emphasis on federal health care programs, especially Medicare, detracted from the need to scrutinize the same issues when dealing with private payees.  Risk areas are generally identifiable through OIG information including fraud alerts, OIG work plans and fraud settlements.  However, self analysis should be a source of risk identification and prioritization especially if there has been a particular history of violation
  3. Smaller providers which may not have a designated compliance committee, can form a task force to address compliance concerns as they arise.
  4. Close collaboration between personnel and compliance personnel is required especially in areas of training, hiring, discipline, establishment of a hotline and complaint follow-up.
  5. Conflicts for compliance officers might be minimized by establishing a strong and active compliance steering  committee on assigning compliance to a well respected manager.
  6. Compliance officers can be more effective if they have an open door policy and are pro-active rather than reactive.
  7. Compliance efforts may be outsourced but cost in an issue, especially when many providers found the concerns raised were often personnel rather than compliance issues.
  8. Compliance training in the areas of billing and coding was perceived as imperative.

Evaluating Compliance Program Effectiveness

  1. Continuous Review is necessary.  Further three types of audits were recommended:

a) Baseline audits (initial audits)
b) Proactive audits based on identified risk areas (i.e. OIG fraud alerts etc.).
c) Issue based audits (where a provider knows there is a problem and is attempting to determine the depth of the problem.)

Thorough interviewing of potential auditors was suggested and an annual forensic audit of major risk areas was recommended.  Compliance personnel noted that audits had a chilling effect on individual physicians and some compliance auditors noted physician downcoding and have directed attention to proper documentation rather than fraud and abuse concerns.

In demonstrating effectiveness of the compliance plan, documentation is very important.  The following must be documented: audit results, logs of hotline calls and their resolution, corrective action plans, due diligence efforts regarding business transactions, disciplinary action and modification of plans and procedures.  Further documentation of billing irregularities and disclosures of refunds of overpayments was encouraged.  Documentation of employee training was also strongly endorsed.  Additionally providers should document all communications with the Health Care Financing Administration.  Even with thorough documentation however, the OIG evaluates the effectiveness of a compliance program based on how it works in day to day practice, not merely what it is on paper.

Internal investigation and self disclosure requires that the provider ask itself the following questions:

—        What is the origin of the issue being investigated

—        When did the issue under investigation originate

—        How far back should an investigation go  (i.e. inquiry should be expanded if the results of an initial review suggest a broader problem.)

The following may be used by the compliance officer in prioritizing issues:

—        Has the OIG required the compliance officer to focus on certain issues

—        Does the problem pertain to a discontinued practice or a current practice with prospective exposure

—        Can deficient billing be suspended or ceased until a review can be completed

—        Can the issue under investigation have a significant impact on providers Medicare cost reports or interim payments

—        Does an issue present evidence of ongoing misconduct that may violate criminal, civil or administrative law and does it require immediate disclosure to a government authority

—        Has the provider established a standard of time required to address incoming billing concerns.

The attorney-client privilege and the attorney work product doctrine should also be properly used to withhold results of an investigation if appropriate but abuse of these doctrines may result in their waiver.

Upon discovery of billing mistakes, the provider should return the funds to the affected provider and add the issue to its list of topics to be reviewed during internal monitoring. The obligation to disclose to the government may depend on the size of the error and whether the error represents a pattern.  For example, a small isolated error may merely require return of an improper payment while a large overpayment or a pattern of over payment may require proceeding through the OIG’s provider self disclosure protocol.

In sum, governmental agencies are looking for conscientious and consistent implementation of comprehensive compliance programs combined with prompt, effective remedial action if problems are discovered.  Providers should consult with their counsel and auditor regarding design and implementation of a compliance program and/or addressing any known problems.  If a provider does not have an attorney or accountant/consultant that is familiar with compliance issues, this does not mean that the provider must replace its counsel or accountant.  Many practitioners who focus on compliance programs will partner with the current counsel and/or accountant as part of the compliance initiative.

Sources:  OIG ‘Building a Partnership for Effective Compliance’ – A report on Government -Industry Roundtable, April 2, 1999 available at http://www.dhhs.gov/progorg/oig/modcomp/roundtable.htm.  Health Care Fraud and Abuse, New Jersey Institute for Legal Education, New Brunswick, N.J. pub # S526.98 Bograd, Bonney, DiPasquale, Frey, McFadden, Kearney, Levy, Nittoly & Zoubek 1998; 1999 Health and Hospital Law Symposium, New Jersey Institute for Continuing Legal Education, New Brunswick, N.J. pub # S025a.99 Schaff, Benesch, Dobro, Faulk, Friedman & Lubic 1999.

Francis J. McGovern, Jr. is a 1988 graduate of Rutgers School of Business and a 1992 graduate of Rutgers Law – Camden.  Mr. McGovern has his practice, McGovern Legal Services, LLC, in New Brunswick where his practice focuses on corporate affairs and creditors’ rights.

Business Use Of Home Or Lot

Posted on Author By Francis J. McGovern, Jr., Esquire

Absolute Standard Versus Association Impact

May a Home and/or Unit within an Association be used for a business purpose and, if not, what would constitute a prohibited business use. Many Associations’ Master Deeds or Declarations contain provisions that purport to prohibit Association residents from conducting any business in their homes.

Twenty years ago conducting business at home was not as hot an issue as it is now.  Further, disputes regarding conducting business out of the home often involved activities that were easily identifiable as businesses for example, music schools and dentist’s offices.  However, the proliferation of personal computers, modems and fax machines combined with early retirements, corporate downsizing and alternative working arrangements for women and men with children increase the probability that residents will attempt to conduct some sort of business out of their homes.

As the following case examples demonstrate, covenants restricting use of units and/or homes to residential use are upheld almost without exception.

In The Four Hundred Condominium Association v. Gatto the court held that a restrictive covenant prohibited doctors from maintaining offices in certain areas of a condominium complex; in Diefenthal v. Longue Vue Management Corporation the court held that restrictive covenants banning commercial activities would be enforced although some commercial activities were acquiesced to by the adjacent property owners; in Greater Middleton Association v. Homes Lumber Co. the court held that a Covenant included in the majority of the deeds to lots in a subdivision over a period of forty-five years restricted the use of the lots to “residential purposes exclusively”; in Walton v. Carnigan the court found that when the restrictive covenant language is clear and unambiguous it will be enforced; therefore, operation of a day care center violated the restriction on commercial activity; in Fick v. Weedon the court found that Deed restrictions were not ambiguous in restricting use of the property to a private dwelling for one family, therefore, use of the property as a bed and breakfast violated the restriction and was enjoined; in Fox v. Smidt the court found that phrase “residential lot” in a subdivision indenture precluded the use of a building for commercial purposes, even though the building sought to be used as a warehouse had the exterior appearance of a residence; in Metzner v. Wojdyla the court found that a “bright line” rule should be applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that the property may be used for residential purposes only; in Gerber v. Hamilton the court found that enforcement of a restrictive covenant regarding home business depends on whether the residential character of subdivision is compromised.  In Gerber a beauty salon was prohibited; in Robbins v. Walter  the court found that the use of a residence as a bed and breakfast violated a covenant restricting use of lots to noncommercial use.

The above decisions do not involve decisions by New Jersey Courts.  However, New Jersey has long recognized and upheld restrictions limiting use to residential purposes.  This is demonstrated by the 1924 case of Dottsloff v. Hockstetter where the limitation of use to residential purposes was upheld and a corner grocery store was prohibited.

Though the above cases upheld restrictions against conducting business activity, they did not provide a framework for determining what constituted use of property for a non-residential or business purposes.  Instead, they applied a “we’ll know it when we see it” analysis.  However, two of the above courts did supply some guidance.  In the Metzner case a “bright line” rule was applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that property may be used for residential purposes only.  The Metzner Court tackled the analysis by evaluating the home owner’s actions.  For example, a major factor considered in determining whether the defendants were “conducting a business” was whether they accepted money for services. Since accepting money for services constituted “conducting a business” the home owners’ activity was banned.

However, through a more subtle analysis, largely arising because of specific governing document language, the Gerber Court analyzed restricted action by reviewing the impact the home owners’ activity had on the community.  Here, factors that the Court found should be considered when determining whether a resident was conducting a professional or prohibited commercial activity included:

  1. Whether the residential character of the subdivision is compromised
  2. Whether client visitation is required
  3. Whether the activity produced additional traffic, noise and activity

The way many documents are written, it appears that Courts could apply a “bright line” test and hold that any activity that is not strictly residential is prohibited as in the Metzner case.  This would eliminate the home/office fax/computer arrangement, even if it had no impact on the community.

However, New Jersey courts have read a reasonableness requirement into restrictive covenants and their enforcement.  See, Billig v. Buckingham Towers Condom Association I, Inc., 287 N.J.Super. 551 (1996).  It is likely that application of this “reasonableness factor” will cause courts to evaluate “doing business,” not by a “bright line” test but by more of a case by case “community impact” test using factors such as the three listed above.  This is even more likely in light of the growth of the internet, fax machines and computers.  Further, this “impact” standard frees the Association and its manager from the virtually impossible task of enforcing a “bright line” standard.  Rather than having to ferret out every home/office, the Association will likely only have to intervene where a community impact is created.

In conclusion, in enforcing ‘residential purposes only’ restrictions, board members should be aware that Courts may evaluate ‘conducting business’ by varied standards.  Until a clear decision is made regarding ‘conducting business’, associations must weigh the value of enforcing a ‘bright line’ standard for ‘conducting business’ and risk losing an action to enjoin the business activity against the value of enforcing a ‘community impact’ standard and risk being sued for failing to enforce the provisions of the governing documents.  In light of the technological progress and societal changes noted above, it is likely that courts will turn to a ‘community impact’ standard to determine what activities are prohibited in communities that restrict activity to residential purposes.

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