Condos Face Limits on Fines and Fees and an Additional Burden of Proof
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Condos Face Limitations on Fines and Fees and an Additional Burden of Proof

2/11/2016 | By: Marc J. Luxemburg, Esq. | Winter 2016 Newsletter

The courts have recently started placing the onus on the condominiums to demonstrate the validity of the amount of fines and late fees that the unit owners are charged, as well as limiting the amount that can be collected.

Although there is no specific law dealing with the maximum amount of fines and fees that a condominium may impose, in a new development, the courts have started analyzing this issue under the Criminal Usury Statute, Penal Law Section 190.40.

The bylaws of many condominiums authorize the board of managers to impose fines for violations of the rules and regula­tions, and also authorize the collection of late fees for failure to pay the common charges on time. However, recent cases have set limits on the amount of the fines and late fees that a board may impose, even refusing to enforce such a penalty if it is “confiscatory in nature.” Although there is no explicit law that defines the limits of what a board may charge, the board’s authority to determine the extent of the fines and late fees would seem to be governed by the Business Judgment Rule and not by a “reasonableness” standard.

Yet in the most recent decisions, courts have looked to Penal Law Section 190.40, which makes an interest charge of more than 25% per annum a criminal offense. Accordingly, a fine of $500 per day for a violation of a guest policy was held confis­catory, and a late fee ranging from $200 to $800 per month for not paying common charges of about $1,280 per month was held unreasonable and confiscatory as well.

Unfortunately, courts have not provided precise guidance on how to apply this standard. It is possible to determine a com­parable interest rate for a late charge by measuring it against the amount of common charges that remain unpaid. Nevertheless, it is unclear, and the court did not explain, what amount was to be used for a basis in determining whether a fine imposed for the violation of a guest policy exceeded 25% per annum. The cases leave one to speculate as to whether the court intended to use the amount of common charges as a basis for comparison, or whether it had some other number in mind.

Most notably, in neither of the recent cas­es did the court attempt to analyze the amount of the fine or late fee under the Business Judgment Rule, thus taking the burden of proof from the unit owner and placing it squarely on the condominium board. The Business Judgment Rule requires only a finding that the board in enacting the penalty amount was acting in the best interest of the condominium and was not acting punitively against the par­ticular unit owner or singling out the unit owner for disparate treatment. An analysis under the Business Judgment Rule would have placed the burden on the unit owner to show that the board was acting improp­erly. Instead, the court stated that the burden was on the condominium to dem­onstrate authority for the imposition of “such a hefty fine.”
The court did not discuss factors such as the location of the condominium, the wealth of the unit owners involved in the condominium, and the amount of a fine that would be necessary to deter people of the income class in the condominium from doing what the rules prohibit. The court did however comment that the board had an opportunity to cite authority to support the imposition of a “hefty fine.” This might leave the door open to an argu­ment that small fines might not have any substantial impact in a condominium where the unit owners are affluent.