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Condo | HOA Lawyers

Claims for When Developers Have TOO Much Control of Association

Facts

Montana Developer of three condominium-hotels at Big Sky Ski Resort sold units subject to Declarations that required “all unit owners to use [Developer], or an agent designated by [Developer], as their exclusive rental agents,” when renting out their condominiums.  The Declarations also provided that “Unit owners may decline to renew the rental management contract with [Developer] after three years, but only if 75% of unit owners vote to end the contract with [Developer].”  Of course, Developer also owned all of the commercial units, which constituted 22% of the voting units, and several residential units, practically making it impossible for 75% of the unit owners to do anything that the Developer didn’t want.

Developer also drafted the rental-management agreements (“RMAs”).  “The RMAs require unit owners to employ [Developer] as their exclusive agent for the purposes of renting, managing, and operating the unit.  The RMAs require unit owners to pay [Developer] 50% of gross rental revenue ‘after the payment of costs.’  [Developer] charges unit owners for several services, per the RMAs, including resort fees, credit card process fees, wholesalers and travel agent commissions. [Developer] also controls the central reservation center through which guests of the Condos make their reservations.  [Developer] can use this system to control pricing for each of the units and the order in which units are booked.”

Plaintiffs, the owners of condominiums in the three condominium hotels, sued the Developer for:

  1. Breach of fiduciary duty;
  2. Constructive fraud;
  3. Breach of contract;
  4. Breach of the implied covenant of good faith and fair dealing;
  5. Unjust enrichment;
  6. Antitrust claims;
  7. Accounting; and
  8. Declaratory relief claims.

Developer immediately sought to have the claims dismissed.

Decision of the District Court

The District Court went through each of the claims and in the end only dismissed the accounting claim because the Plaintiffs had failed to meet one of the required elements: a showing that they had previously requested an accounting and that request had been denied.  As to the seven other claims, the Court held that the facts pled were sufficient for the claims to move forward.  Of note was the Court’s decision relating to the antitrust claims, where the Court held:

“A tying arrangement is ‘an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.  Tying arrangements violate both the Sherman Antitrust Act and represent an unlawful restraint of trade under Montana law. See 15 U.S.C. §§ 1,2, 14 … A plaintiff must prove three elements to prevail on an illegal tying claim: (1) that there exist two distinct products or services in different markets whose sales are tied together; (2) that the seller possesses appreciable economic power in the tying product market sufficient to coerce acceptance of the tied product; and (3) that the tying arrangement affects a ‘not insubstantial volume of commerce’ in the tied product market. Plaintiffs allege that [Developer] leverages ownership of the “tying product,” in this case the Condos, to force Plaintiffs to use [Developer’s] rental management services—the “tied product.”  …  The essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms…. The Declarations may not force Condo owners to enter into an RMA if the owner ‘did not want [to rent] at all,’ but they force Condo owners who might have sought to ‘purchase [rental management services] elsewhere on different terms’ to enter into an agreement with [Developer] instead. Id. The Declarations grant [Developer] market power in ‘reduc[ing] competition in the market for the tied product,’ in this case rental management services…. Plaintiffs have pleaded that the 50% gross rental income payable to [Developer] under the RMA exceeds the fair market rate for rental managers.  Plaintiffs contend that other rental management companies in the Big Sky area provide similar services for a comparable 25% to 30% of gross rental revenues. Plaintiffs’ allegations permit the Court to draw the reasonable inference that Plaintiffs could have retained rental management services for half of [Developer’s] cost, had they not been limited by the Declarations. These allegations prove sufficient for Plaintiffs’ antitrust claims to survive [Developer’s] motion to dismiss.”  

In addition, the Court did NOT dismiss the Plaintiffs class action claims finding that such a decision should be made when class certification is sought. 

LESSONS LEARNED:  

  1. If Developers really believe that their product is so good that it competes fairly in the market, why would it write into the condominium documents provisions that prevent open competition.  The answer seems to be to obtain a competitive advantage.
  2. Charging more than your competition charges (in this case 50% of the gross rents after deduction for certain expenses v. 25-30% charged by competitors) will generically encourage people to take a strong second look and potentially file a suit.
  3. If you are on the Board or a unit owner in an association where you have little choice over your rental management agent, you should carefully read this decision, potentially review the pleadings from this case and determine whether it is worth talking to a knowledgeable attorney about the options available.
  4. It should not be missed that although the Plaintiffs won essentially every aspect of the motions, they would have undoubtedly spent a fair amount of money to reach that result which might have been one of the goals of the Defendant (to drain the Plaintiffs of their resources).  This is because the only thing the Plaintiffs won was the right to proceed with their case.

Anderson v. Boyne USA, Inc., Montana District Court Slip Opinion, 2022 WL 2528242, (7/7/2022)

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