Court: Condo Must Stop ‘Unreasonable’ Financial Screenings
By Laura Layden
A condo buyer cancelled a transaction because the board required two years’ worth of tax returns. A Fla. judge called that blanket requirement “patently unreasonable.”
NAPLES, Fla. – A Collier County Court judge has ordered the Crescent Beach Condominium Association on Marco Island to get rid of its “unreasonable” financial screening practices for new buyers. The unusual ruling follows a bench trial a few weeks ago for an unusual case brought by a prospective buyer in small claims court.
David Mech sued the association in December after walking away from an all-cash offer to purchase his dream condo at Crescent Beach because he didn’t want to comply with its demands to see two years’ worth of his tax returns before approving his application to become part of the community.
“I didn’t get to have my ideal condo,” he said.
While he loved the condo and its prime waterfront location, Mech said he saw the financial screening requirements as unjustified and just “plain nosy,” so he let it go based on principle.
“There’s no reason for them to know the total income for people,” he said. “No reason.”
The association must sign off on a prospective buyer’s application before any sale can go through at the high-rise community, unless the purchaser already owns a unit in the building.
Based on principle
Mech, a real estate broker and instructor who’s familiar with condominium law, represented himself in the lawsuit. He said he took action mostly based on principle, not on how much money he might collect.
“To me, I thought I wouldn’t just give somebody my tax returns,” he said. “Do I really want to live in a building that has that type of board? That’s really an issue to me.”
After hearing arguments on both sides at a trial in early June, Collier County Court Judge Tamara Nicola sided with Mech, finding the board’s blanket policy requiring new buyers to produce personal tax returns “patently unreasonable,” striking it down.
Nicola awarded Mech his legal costs, which he estimates at about $500, but he hopes to get a little more money than that to offset other costs related to his failed attempts to buy the condo. The judgment amount has yet to be decided, so Mech said he’s not sure if he’ll get any other money awarded to him.
While he canceled his purchase contract in time to get his $10,000 deposit back, Mech said he lost roughly $4,000 when he ended the lease for his apartment in Irvine, California, early before discovering the tax return requirement. He hopes to recover at least some of those break-up fees.
In his suit, Mech argued the condo association had no reason to ask him for his tax returns when he had a perfect credit score and a clean background – and nothing in Crescent Beach’s governing documents gave it the authority to require such private and sensitive information from any buyer.
Mech questioned why the association would need to see anyone’s tax forms in the first place, as they’re not an indication of current – or future – income.
Representatives for the board couldn’t be reached for comment about the situation.
According to court documents, the board added a specific requirement for new buyers to produce their tax returns to its condo documents only after Mech filed his suit. In her ruling, Judge Nicola ordered it removed.
Right of the board?
In court documents and at trial, the condo association’s representatives argued it had the right to ask for tax returns due to its authority to require any information that’s “relevant to the application.”
Judge Nicola disagreed, finding that such closely guarded information should only be requested under extreme circumstances when there’s “good cause” based on negative results from background screenings or credit checks, such as a history of bad behavior that could lead to money problems.
Mech didn’t win his suit on all accounts. The judge denied his request for injunctive relief, saying it was too late to grant it anyway. The purpose for such relief, she said, is to prevent something from happening – and the condo Mech had set his eyes on quickly sold after he walked away from his purchase contract, so it’s off the market now.
Since filing the suit, Mech has purchased a condo elsewhere on Marco – but he said he’s still interested in the possibility of buying a unit at Crescent Beach, especially if he no longer has to produce his tax returns.
In his suit, Mech also accused the association of “tortious interference” with his attempts to buy the condo, but the judge found no evidence that the board “specifically targeted” him to “defeat his contract,” as it required all new buyers to produce tax returns, not just him. The legal term refers to intentional interference from a third party in a business transaction.
Protecting itself
At trial, the association’s treasurer Ronald Rebner testified the board started requiring tax returns from prospective buyers after the housing market crashed more than a decade ago, which led many of the building’s owners to stop paying their mortgages, association dues and other bills, causing the association to face financial difficulties.
The board argued that tax returns provide more information than a credit report, showing not only income, but assets and interest income, as well any partnership or corporate interests, allowing it to see a more comprehensive financial picture.
In her ruling, however, Nicola said she was concerned the board’s demands for tax returns was merely a “fishing expedition,” rather than a “reasonable requirement” to determine whether a buyer is “acceptable for membership at Crescent Beach.”
“Unlike a lending institution, which is neutral and provides loans to strangers, a board at a condominium association is mostly made up of the people who live there,” she said. “What person wants the people who share the condominium complex with him or her to know their financial business? Answer: Nobody.”
Initially, the board only asked for the first few pages of a tax return, then later decided to require the entire return.
“The court can find no justification for the invasive requirement that a full, or even partial, return would be required when, in fact, the board already requires a full background check and credit check,” Nicola stated.
During trial Mech told the judge he tried to compromise with the board by offering more limited financial information, but to no avail, so they reached an impasse.
The board also asked Mech’s partner Katarina Palijusevic, who planned to invest in the unit, to produce her tax returns, but she refused as well. Palijusevic, who lives on Florida’s east coast, didn’t join Mech in the lawsuit, but she testified on his behalf.
“Once I saw the unit and how beautiful Marco Island is, I just figured I’d offer to buy it with him and gain some real estate exposure on Florida’s west coast, while reducing his capital risk,” she said via email. “I didn’t incur any damages, myself, as a result of the contract cancellation so there was no reason for me to be a party to the litigation.”
Like David, she said she would have been comfortable showing documentation to the board that she made “whatever minimum income level satisfied their assessment obligation.”
“But providing aggregate income to a condo board, which basically is comprised of your neighbors who are simply elected by other neighbors each year, is highly intrusive and unnecessary,” she said.
Mech and Palijusevic offered to buy the condominium for $425,000 in cash. It wound up selling for $400,000, resulting in lower commissions for the Realtors and less money for the seller for “no reason,” he said.
Unusual ruling
Naples real estate attorney Chris Thornton, with Treiser Collins, wasn’t involved in the case, but he followed it after having a few legal discussions about it with Mech. It’s an unusual case in more ways than one, Thornton said, including the fact that Mech represented himself and did it so well, resulting in a declaratory judgment in his favor.
Thornton said he was a bit surprised by the strong wording in the judgment, with the judge going as far as to describe the board’s requirement for tax returns as extreme, invasive, shocking and draconian, and the board’s arguments for why the policy is needed as absurd.
“Rules have to be reasonable,” he said. “That really comes down to the main point of this case, the thing that makes this case so interesting.”
While the ruling is unusual, Thornton said it will probably not have a “very big precedential value.” That’s because the case was tried in small claims court, where pleading standards are less stringent and decisions have less weight.
“It’s helpful and illustrative, but probably not binding” on other courts, Thornton said.
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