STATE OF FLORIDA DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION DIVISION OF FLORIDA LAND SALES, CONDOMINIUMS, AND MOBILE HOMES

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1 STATE OF FLORIDA DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION DIVISION OF FLORIDA LAND SALES, CONDOMINIUMS, AND MOBILE HOMES IN RE: PETITION FOR ARBITRATION Richard Kosse and E.W. Ellis, Petitioners, v. Case No Shorewalk Condominium Association, Inc., Respondent. / follows: SUMMARY FINAL ORDER Comes now, the undersigned arbitrator, and issues this summary final order as Petitioners filed their original petition in this matter on January 5, The petition alleged: (1) that the association s conduct of the April 2004 election; (2) that the association was allowing short term rentals in violation of the documents; (3) that the association adopted rental rules that are in conflict with the declaration; (4) that the association is permitting an owner/developer to operate a hotel in violation of local zoning ordinances; (5) that certain directors on the board of the association have a conflict of interest and are not abstaining in votes; (6) that the association was allowing a developer/owner to operate a business in the condominium; and that (7) that all votes taken by the board be declared void. In the order requiring answer, the arbitrator directed the association to file an answer or motion directed only to counts 1, 3, 5, and 7, and found the remainder of the 1

2 issues to be outside the jurisdiction of the arbitrator. The association filed its answer on February 3, The association indicated that the board had declared the 2004 election to be void and voted to conduct a new election to be held in April, With reference to the short term rental issue, the association explained that it had not adopted a rule, as alleged, but had repealed a rule that prohibited unrelated persons from living together in a unit. The association argues that the declaration requires that a unit be used as a single family residence, and that it is under no obligation to define single family residence by rule: By repealing the restrictive Rule, the Board of Directors has properly chosen to construe the Declaration, consistent with applicable law, as including unrelated persons who reside together in a single housekeeping unit. As to the conflict of interest count, the association argued that there is no legal authority for requiring a board member to abstain on board action on a rental rule simply because the board member rents his unit. Further, the association argues that state law does not actually prohibit a board member from voting where such a conflict exists. The arbitrator by order entered on February 8, 2005, held that the election challenge would become moot upon the conduct of the April 2005 election. The arbitrator also stated: Another dispute involves whether the board acted appropriately in deleting a rule restricting rentals in the condominium to members of the family as defined by the prior rule to include only blood relations. This definition of family is long outdated and is perhaps violative of various state and federal laws or constitutions. If the petitioners desire to formally adjudicate this issue, they should show cause within 14 days hereof why the petition should not be dismissed, which good cause must be accompanied by a legal memorandum demonstrating the validity of the old rule along with case law invalidating board action based on a similar conflict of interest, as alleged to exist in the petition. 2

3 Otherwise, or in the absence of such a showing, the arbitrator will dismiss the petition. Petitioners filed a memorandum of law on March 7, 2005, to which the association responded. On March 9, 2005, petitioners filed a motion to amend their petition, and attached an amended petition. The arbitrator conducted a telephone motion hearing, and on April 14, 2005, entered an order granting the motion to amend. According to the background information provided in the amended petition: [Petitioners ] complaint revolves around the use of the condominium units as a hotel. Petitioners are not objecting to the lease of condominium units to a family unit made up of a traditional family, unrelated adults, or adults with children, all of whom permanently live together. The petitioners do object to the lease of a condominium unit to sports teams. The members of these sports teams are individuals who are not part of a family unit The impact of this hotel on the residents of Shorewalk is unacceptable. The sports teams range from professional athletes to adolescents. Particularly with the adolescents, there is a use of the condominium facilities that is inconsistent with a residential condominium. Team members overwhelmed the facilities normally used by the residents such as the spa and pool. Specifically, the amended petition alleges that the board has adopted a rule that allows 6 individuals who are not a family to rent a unit. The rule is said to be in conflict with the declaration requiring the units to be used for single family residences. The amended petition also alleges that the board repealed a rule to allow short term rentals to persons who are not family members. Next, the amended petition alleges that directors who have a conflict of interest are not disclosing their personal interest in matters upon which the board votes. Petitioners also challenge a 1993 amendment to the declaration which allows one day rentals. Petitioners allege that the amendment did not pass with the requisite vote. 3

4 The association filed its motion to dismiss on May 5, 2005, disputing that the petitioners have shown that the board acted improperly in repealing the rule; that the petitioners have failed to demonstrate that board action taken with a conflict of interest is invalid; that the challenge to the 1993 amendment to the declaration is barred by the statute of limitations; and arguing that the challenge to the 2004 election is moot. The arbitrator heard arguments on the motion to dismiss and by order entered on July 8, 2005, allowed the parties a period of time to file any additional legal argument. Upon motion, the time was expanded, and the last written legal argument was filed on August 18, The first issue to be addressed is whether the election dispute is moot. Here, the board concluded that the challenged election, conducted in 2004, was invalid, and proceeded to conduct an additional election in April of The conduct of the election in 2005 clearly mooted out the dispute regarding the 2004 election, and this count is dismissed. See, Cottone v. Bay Plaza Owners Association, Inc., Arb. Case No , Final Order (July 22, 1992). The membership was able to vote in the 2005 election for the entire slate of board members of their choosing, and the dispute regarding the 2004 election became moot. Next, petitioners contend that certain board members, in adopting permissive rental rules, voted, despite a conflict of interest. According to the petitioners, several board members lease out their units to sports teams using the same rental agent as other owners in the condominium use to rent to sports teams on a short-term, hotel-like basis. The rental agent, Shorewalk Vacation Villas, Inc., is licensed under Chapter 509, Florida Statutes. According to petitioners, when these board members voted in favor of 4

5 relaxed rental rules, they had a direct financial interest in the outcome and were required to abstain. It must be recalled, however, that claims of breach of fiduciary duty fall outside the jurisdiction of the arbitrator under section , Florida Statutes. See, Bridgewater Condominium Association v. The Kennedy Group, Ltd., Arb. Case No , Final Order Determining Jurisdiction (December 7, 1993), and section (1)(a), Florida Statutes. In claiming that certain board members are voting in a manner that places their personal financial interests above the best interests of the association, petitioners are in essence arguing that these board members have breached their fiduciary duty. Compare, the arbitration case of Abraham v. Sara-Sea Owners Association, Inc., Arb. Case No , Final Order Dismissing Amended Petition (September 14, 1998) where the unit owners argued that certain directors had voted on association business despite a conflict of interest. The arbitrator noted: The petitioner further alleges that the April 6 meeting took place after petitioner filed her original petition and put the directors on notice of their potential individual liability. Despite this, the directors still participated in the vote to remove the tree even though they had a clear conflict of interest. She alleges that at least one of the directors who had voted "no" at the February 11 meeting told petitioner's husband that he was changing his vote to avoid the possibility of personal liability. Petitioner's additional requests for relief suggest some ulterior motive or selfserving action on the part of certain unnamed directors or officers and request that they reimburse monies paid to remove the tree and do work in the courtyard; petitioner also requests indemnification by responsible officers and directors for unpaid bills for such removal and work. Any claim that the directors acted other than in the best interests of the association is a claim that such persons acted in breach of their fiduciary duties. Such disputes are specifically excluded from those the arbitrator has authority to hear by Section (1)(b), Florida Statutes. Accordingly, based on the foregoing, this count is dismissed. 5

6 Even if the conflict of interest count was within the jurisdiction of the arbitrator, petitioners have not demonstrated a prima facia case for the relief requested. Section , Florida Statutes, provides as follows: Director conflicts of interest.-- (1) No contract or other transaction between a corporation and one or more of its directors or any other corporation, firm, association, or entity in which one or more of its directors are directors or officers or are financially interested shall be either void or voidable because of such relationship or interest, because such director or directors are present at the meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction, or because his or her or their votes are counted for such purpose, if: (a) The fact of such relationship or interest is disclosed or known to the board of directors or committee which authorizes, approves, or ratifies the contract or transaction by a vote or consent sufficient for the purpose without counting the votes or consents of such interested directors; (b) The fact of such relationship or interest is disclosed or known to the members entitled to vote on such contract or transaction, if any, and they authorize, approve, or ratify it by vote or written consent; or (c) The contract or transaction is fair and reasonable as to the corporation at the time it is authorized by the board, a committee, or the members. (2) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction. [emphasis added.] Here, it is not alleged that the board members voted to enter into a contract with the rental company or voted to have a business transaction with the company, or that the directors had any financial ownership interest in the rental company. The allegations of 6

7 the complaint simply do not rise to the level required for the application of section , Florida Statutes, or the corresponding section 10 of the bylaws. 1 Any board member who does or does not offer his or her unit for rent has an interest in any rule regarding rental restrictions, and an order requiring those board members to abstain would ensure that no rules regarding rental restrictions will ever be considered again; the ordinary functioning of the board would cease. Those board members who reside year long in the community may fear that permitting transient occupancy would decrease the market value of their unit, which, under petitioners theory, would give them a financial interest in the rental rules requiring them to abstain. Those board members who offer their units for rent whether through a rental company or not would also, under petitioners theory, have a financial interest in liberal rental rules and must abstain as well. 2 No one would be left to vote. 3 Petitioners have cited no comparable cases in support of their theory. In Preyser v. Johnson, 185 So. 2d 516 (Fla. 2nd DCA 1966), the court indicated that officers and directors are bound to act in good faith in selling or purchasing property of or for a corporation, and that an officer cannot acquire title to corporate property for his own benefit. Obviously, in the current case, petitioners have not alleged that the directors have engaged in any of these odious practices. In short, petitioners have not demonstrated that the directors acted with a conflict of 1 It should also be noted that section (1)(b), Florida Statutes, does not require that a director with a conflict of interest abstain from a given vote. 2 Contrast this situation with a different situation whereby a board member votes in favor of requiring the owners to rent their units through a company in which he has an ownership interest, a situation where manifest conflict of interest would abound. 3 Almost any day-to-day business conducted by the board could be caught in the petitioners wide net requiring abstinence. For example, a board member with a washer and dryer in his unit could be precluded from voting on a rule banning washers and dryers in the units, or voting on a contract whereby a laundry company would install public washers on the common elements. A board member with tile floors could be banned from voting on a rule requiring area carpets. A board member who enjoyed golf could be banned from voting on a contract to acquire a use interest in a neighboring golf club. 7

8 interest, or that any such conflict requires that the votes taken on rental restrictions be set aside on this basis. Next, petitioners claim a 1993 amendment to the declaration is invalid. The 1993 amendment to the declaration, which is quoted nowhere and which is not included in the file, apparently permits one day rentals. Petitioners seek to challenge the vote taken to amend the declaration in Petitioners have not proposed how to avoid the statute of limitations which is four or five years and which would bar a challenge to an amendment passed 13 years ago. It must be concluded that petitioners are time barred from challenging this amendment. Next, petitioners allege 4 that the board acted improperly when it repealed the following rule 5 : No unit shall be occupied at the same time by more than one (1) family, its servants and guests, or two (2) unrelated persons. A family shall be defined herein as that collective body of persons living together including a father, mother, children, and immediate blood relatives dependent upon the head of the household for support. According to the petitioners, the repeal of the above rule has the effect of permitting rentals to unrelated persons. The rule defined family very narrowly and it is undoubtedly true that the repeal of the rule liberalized the rental practices in the condominium. Petitioners have not shown that the association had the obligation to perpetuate prior rental practices or rules, and it cannot be said that the petitioners had 4 Petitioners have filed at least three separate petitions in this case and have somehow resisted identifying or quoting the rules and amendments to the declaration or bylaws sought to be challenged in each incarnation of the petition, despite continuous admonitions by the arbitrator. This makes the role of the arbitrator doubly difficult and time intensive. In this instance, petitioners are alleging that the board adopted a rule permitting persons who are not a family to occupy the unit, and it appears instead that the board has rescinded the old rule defining family as requiring consanguinity among the occupants. 5 The text of the rule, absent from the various petitions filed by petitioners, was contributed by the association. 8

9 any vested property right in the prior restrictive rental rules and practices. 6 Nor have the petitioners shown that the repeal 7 of the rule was inconsistent with the declaration or the bylaws. 8 The bylaws provide that the members shall not use the units for any purpose other than as a single family residence. Section 4, Bylaws. The bylaws do not define the phrase single family residence. In Cammack v. Ocean Beach Association, Inc., Arb. Case No , Final Order (March 25, 1995), the arbitrator ruled that in a condominium in which the manager occupied a unit and was employed as rental agent for unit owners in the association, where over half of the units in the condominium were rented out, the declaration was not violated where it required the units to be occupied only by a family, its servants and guests, as a residence and for no other purpose. The arbitrator stated that the conduct of a rental program does not, per se, detract from the residential nature of the community. First, the condominium documents specifically contemplate that units may be rented. The fact presented in Cammack are quite similar to the facts of the instant case. The documents contemplate that units will be leased, and the residential nature of the community is not offended thereby. As observed in Cammack, the definition of residential condominium provided by section (23), Florida Statutes, means a condominium consisting of two or more units, any of which are intended for use as a private temporary or permanent residence. (Emphasis added.) Here, the documents have always permitted leasing of the units, and in this context it cannot be concluded that the leasing of units violates the 6 See, Woodside Village Condominium Association, Inc. v. Jahren, 806 So. 2d 452 (Fla. 2002). 7 It is unknown and certainly has not been demonstrated in this case how the repeal of a rule, as opposed to the adoption or an amendment to a rule, could be regarded as inconsistent with the declaration, especially here where the declaration does not require the rules to address rental restrictions. 8 It is likely that the prior definition of family in restricting occupancy to related individuals, constituted unlawful discrimination. Compare, Maitland House Management, Inc. v. Martin, Arb. Case No , Summary Final Order (May 27, 1994). 9

10 residential nature of the 10

11 property. So, too, the prohibition against unit owners performing any act that will cause the association s insurance costs to increase, must be understood in the context of the documents which specifically contemplate and permit the leasing of units. The insurance provision certainly is not tantamount to a ban on short-term leasing, as petitioners appear to urge. Moreover, while it is not clear, if the board adopted a rule restricting rentals to 6 persons, such a rule applies whether the tenants constitute a traditional family or are part of a sports team, and in this respect the rule is neutral, favoring neither short-term nor long-term tenants, and it cannot be said that the occupancy limit affects the residential or nonresidential nature of the community. In sum, petitioners have not shown that short-term rentals in the community violate the residential character of the condominium or violate any provision in the documents. While the petitioners would like to ban short-term leasing to sports teams, the documents do not ban this practice but instead permit leasing. The board has violated nothing in undertaking efforts to liberalize the restrictions applicable to renting. 9 The Woodside case, previously cited, charges purchasers and owners alike with the knowledge that the rental provisions contained in the documents are subject to lawful amendment; there is no legitimate expectation of the status quo ante with reference to these provisions. The current rules or the fact that one rule was repealed offends no right expressed or implied in the declaration to be free from short-term rentals. WHEREFORE, no relief is awarded on the petition, and the petition is dismissed. DONE AND ORDERED this 30th day of January, 2006, at Tallahassee, Leon County, Florida. 9 If the board instead sought to place increasing restrictions on the right to rent, the new section (13), Florida Statutes, would prohibit new restrictions except as to consenting owners. 11

12 Karl M. Scheuerman, Arbitrator Department of Business and Professional Regulation Arbitration Section Northwood Centre 1940 North Monroe Street Tallahassee, Florida Certificate of Service I hereby certify that a true and correct copy of the foregoing final order has been sent by U.S. Mail to the following persons on this 30th day of January, 2006: Charles H. Webb, Esquire Webb, Wells & Williams, P.A. P.O. Box 1849 Anna Maria, Florida Daniel J. Lobeck, Esquire Lobeck, Hanson & Wells, P.A Main Street, Ste. 403 Sarasota, Florida Karl M. Scheuerman, Arbitrator Right to Appeal As provided by s , F.S., this final order may be appealed by filing a complaint for trial de novo with a court of competent jurisdiction in the circuit in which the condominium is located, within 30 days of the entry and mailing of this final order. This order does not constitute final agency action and is not appealable to the district courts of appeal. If this final order is not timely appealed, it will become binding on the parties and may be enforced in the courts. Attorney s Fees As provided by s , F.S., the prevailing party in this proceeding is entitled to have the other party pay its reasonable costs and attorney s fees. Rule 61B , 12

13 F.A.C. requires that a party seeking an award of costs and attorney s fees must file a motion seeking the award not later than 45 days after rendition of this final order. The motion must be actually received by the Division within this 45 day period and must conform to the requirements of rule 61B , F.A.C. The filing of an appeal by trial de novo of this final order tolls the time for the filing of a motion seeking prevailing party costs and attorney s fees until 45 days following the conclusion of the de novo appeal proceeding and any subsequent appeal. 13