Greenbaum Rowe Smith & Davis Newsletter

Does The New Jersey Constitution Apply to Decisions of Homeowners' Associations?

By Barry S. Goodman, Esq.



In Committee For A Better Twin Rivers v. Twin Rivers Homeowners' Association, the New Jersey Supreme Court was faced with the issue of whether or not the New Jersey Constitution should apply to expressional activities, such as free speech rights, of members of homeowners' associations. If the Constitution were to apply, then a court easily could second guess an association's decision if, in its opinion, the decision was unreasonable. On the other hand, if the business judgment rule were to apply, a court would not interfere with an association's rules absent a showing of fraud, self-dealing or unconscionable conduct, as long as the rule was authorized by statute or the association's master deed or the bylaws.



Partner Barry S. Goodman and associate Jane J. Felton, representing the Twin Rivers Homeowners' Association (the "Association"), argued that the Supreme Court should reverse the Appellate Division's decision that the New Jersey Constitution applies to the governance of all homeowners' associations. The Supreme Court agreed with their argument, holding that the Constitution does not apply to the Association's rules that were being challenged, while affirming prior case law under which the Constitution may be applied to homeowners' associations in certain circumstances. This landmark decision has wide-ranging implications for the governance of homeowners' associations in New Jersey and, indeed, nationwide.



Prior New Jersey Case Law

Prior to the Appellate Division's decision in this case, New Jersey courts uniformly had applied the business judgment rule to the decisions of homeowners' associations concerning their own members. However, the New Jersey Supreme Court has held that the New Jersey Constitution may apply to private property owners where the public is invited to use that property for expressional activities and, in fact, has applied the Constitution to a private university and large private shopping malls. In addition, in one Appellate Division case, the New Jersey Constitution was applied to a homeowners' association that injected itself into a public municipal election by campaigning for a candidate but then refusing to allow any opposing candidates to campaign within the development.



Twin Rivers

Twin Rivers is a planned-unit development consisting of privately owned condominium duplexes, townhouses, single-family homes, apartments and commercial premises located in East Windsor, New Jersey. It covers about one square mile and has a population of approximately 10,000 people. The Association provides certain community facilities, such as a community room, swimming pools, tennis courts and ball fields, all of which are for the exclusive use of Twin Rivers' residents and their guests and are not open to the general public. Twin Rivers is not a gated community and the public therefore can drive into Twin Rivers, which actually has a highway that runs through it.



The Lower Courts' Decisions

Three members of the Association, who are known as the Committee for a Better Twin Rivers, filed suit. They challenged several of the Association's rules, arguing that the New Jersey Constitution should apply to the governance of all homeowners' associations, including the Association, because they so closely resemble municipalities and provide many services that municipalities historically had provided.



The trial court initially rejected plaintiffs' argument that Twin Rivers should be treated as a quasi-municipal entity and therefore should be governed by the New Jersey Constitution. The court ruled that the Association is a private entity whose actions are governed by the Planned Real Estate Development Full Disclosure Act ("PREDFDA"), the Nonprofit Corporation Act and the business judgment rule. In addition, the court held that PREDFDA applies to Twin Rivers, even though Twin Rivers was built before PREDFDA was enacted in 1977.



The trial court then dealt with the following specific issues raised by plaintiffs:

  • Sign Policy - The court upheld the Association's content neutral sign policy, under which political and all other signs are permitted to be placed in flower beds and unit windows throughout Twin Rivers all year long, but not on commonly owned lawns for maintenance and aesthetic reasons.





  • Community Room - The Association's policy of requiring the payment of a $165 cleaning and maintenance fee and a certificate of insurance to use the room was found to be reasonable. The court also instructed the Association to specify the standards for allowing or denying the use of the community room.





  • Community Newsletter - The court held plaintiffs did not have any right to have "equal access" with the Association's President in the Twin Rivers' newsletter where all the plaintiffs' articles have been published, except one that was defamatory, and plaintiffs have been provided with the same access to the newsletter as all other residents.





  • Access To Association Documents - The Association's document policy was upheld because it provides reasonable guidelines concerning what constitutes "good cause" for denying access to documents.





  • Board Confidentiality - The court decided that PREDFDA governed what information Board members should maintain as confidential and homeowners' associations cannot classify any other information as confidential.





  • Alternate Dispute Resolution ("ADR") - Applying PREDFDA, the court found that ADR is not required for every dispute. As a result, the court upheld the Association's exclusion of disputes involving assessments, elections and alleged non-compliance with governing documents, as well as its $150 fee for a resident to submit a matter to ADR. The court also upheld the Association's rule that a member must be in good standing to vote in Board elections, including the payment of duly assessed fees, even though the issue could not be submitted to ADR.





  • Access to Association Voting List - The Association's requirement that a member who wants the voting list must sign a confidentiality agreement to ensure the list is not used for improper purposes, such as for commercial solicitations, was affirmed by the court. However, it voided a provision that the member would have to pay liquidated damages of $1,000 for violating the agreement since that amount might not bear any relationship to the damages suffered by the Association.





  • Weighted Voting for Board Elections - The court rejected plaintiffs' attempt to invalidate the Association's weighted voting system (under which votes are weighted according to the size of the member's unit, which is akin to weighted votes of corporate shareholders) and impose a one-person/one-vote or some similar system because the governing documents properly provide for weighted voting.




Plaintiffs appealed the trial court's decision. The Appellate Division upheld the trial court on all of these issues, except with regard to signs, the community room and the newsletter, holding for the first time in the country that such expressional activities in homeowners' associations involve "fundamental rights" that have to be analyzed under the Constitution. As a result, the Association petitioned the New Jersey Supreme Court to review this unprecedented application of the Constitution to all homeowners' associations and the Supreme Court agreed to review the decision. The remaining issues decided by the lower courts were not before the Supreme Court and therefore now are binding precedent in New Jersey.



The New Jersey Supreme Court's Decision

In a unanimous 7-0 decision, the Supreme Court reversed the Appellate Division, holding that homeowners' associations should not uniformly be held to the same constitutional standards as governmental entities. It specifically rejected the notion that the expressional activities in Twin Rivers, which included posting signs, access to the Association's newsletter and use of the community room, merited constitutional scrutiny in this case. After explaining that such expressional activities were solely for Twin Rivers' residents and their guests, not the public, the Court held that the Association's rules regarding these issues were reasonable minor restrictions on expressional activity. The Court also noted that members of common interest communities already have many protections, including the business judgment rule, PREDFDA and the contractual relationship between associations and their members.



However, since the New Jersey Constitution can be applied to private property owners in New Jersey, the Court noted that its holding does not imply "that residents of a homeowners' associations may never successfully seek constitutional redress against a governing association that unreasonably infringes on their free speech rights." The Court therefore reaffirmed prior case law in which it applied the New Jersey Constitution to private universities and large shopping malls.



Conclusion

The Supreme Court's decision is significant for all homeowners' associations because it clarified that an association's decisions typically are to be governed by the business judgment rule, which requires that there be fraud, self-dealing or unconscionable conduct for the Court to interfere in an association's decision, rather than the reasonableness test that the Court indicated would be applied if the New Jersey Constitution were applicable. The key for the Court's decision in this case was that the Association does not allow the public to use its community room, have access to its newsletter, or post signs. Only its residents can do so.



As a result, homeowners' associations must decide whether to open up the use of their property to the public for public purposes, such as for candidates running for public office to hold rallies and the like. Similarly, they must decide whether to limit posting signs and access to their newsletters. The more that facilities are open to the public or used for public purposes, and the less opportunity that residents have to express themselves, the more likely an association may be held to constitutional standards.



Barry S. Goodman is as partner in the firm's Litigation Department. He is admitted to practice in New Jersey, the United States Supreme Court and the United States Court of Appeals, Third Circuit.