Be Reasonable, It’s Good Business Judgment
A recent decision by Florida’s Fourth District Court of Appeals (“4th DCA”) highlights the deference courts in Florida give community association boards of directors when they make informed, reasonable decisions with respect to enforcing restrictions in their governing documents. In Miller v. Homeland Prop. Owners Ass’n, Inc., 284 So. 3d 534 (Fla. 4th DCA 2019), the 4th DCA determined the Homeland Property Owners Association, Inc.’s (“Association”) Board of Directors reasonably exercised its business judgment when it approved a garage based on the information presented to it even though the owner building the garage did not strictly adhere to the architectural review requirements imposed by the Association’s governing documents.
Mr. Miller and Mr. Llano live in a community governed by the Association. The Association’s Declaration requires all alterations to the lots it governs go through an architectural review process and be approved by its Architectural Review Board (“ARB”). In connection with the Association’s architectural review process, Mr. Llano submitted plans to the Association’s ARB for permission to alter his residence by adding a garage, which the ARB approved.
After Mr. Llano’s garage addition was completed, the Association learned Mr. Llano did not adhere to the plans approved by the ARB with respect to the height of the garage and the type of roof installed on the garage both of which were restricted by the Association’s Declaration. The Association sent a letter to Mr. Llano, informing him he violated the Declaration’s requirement for ARB approval of any changes to ARB-approved plans and the garage as built did not comply with the restrictions in the Declaration. In response to the letter, Mr. Llano provided the Association documentation supporting his contention that both the height and roof type on the garage did conform to the requirements of the Declaration.
After reviewing Mr. Llano’s submissions and working with its legal counsel on its enforcement rights, the Association’s Board approved Mr. Llano’s garage addition as built. Mr. Miller apparently took issue with the Board’s approval of Mr. Llano’s garage addition and sued the Association for approving it. Mr. Miller alleged the Association failed to enforce its restrictions against Mr. Llano, among other lot owners.
In response to Mr. Miller’s claims, the Association argued that the enforcement of its Declaration was discretionary, not mandatory. Additionally, the Association argued the decision of its Board to approve Mr. Llano’s garage was protected by the business judgment rule, which dictates that directors have broad discretion in performing their duties to the Association absent a showing of mismanagement, fraud, or breach of trust by the directors. The trial court agreed with the Association, entered judgment in favor the Association and ended Mr. Miller’s case against the Association. Mr. Miller appealed the trial’s court decision.
On appeal, the appellate court agreed with the trial court’s decision and held the business judgment rule protected the Board’s decision to approve Mr. Llano’s garage even though there were issues with the manner in which Mr. Llano constructed his garage addition. The court reasoned, while the business judgment rule is traditionally applied to protect directors from personal liability in their business dealings, the courts are permitted use the rule to evaluate the management decisions of community associations and to avoid the second-guessing of the decisions they make.
In reaching its holding, the appellate court relied upon Hollywood Towers Condo. Ass’n, Inc. v. Hampton, 40 So. 3d 784, 787 (Fla. 4th DCA 2010). Specifically, the appellate court stated when applying the business judgment rule to the decisions of a community association’s board, the test is: (1) whether the association had the contractual or statutory authority to perform the relevant acts; and (2) if so, whether the board acted reasonably. The appellate court then applied this test to the facts of the case before it in determining the business judgment rule protected the Board’s decision to approve Mr. Llano’s garage addition.
Since it did not appear the parties disputed the Association’s authority to review and approve architectural plans for alterations to the lots governed by the Association, the appellate court focused on whether the Associations’ Board acted reasonably with respect to the approval of Mr. Llano’s garage. The question of whether the Board acted reasonably is an issue of fact requiring an examination of whether the Board acted in a manner that was not arbitrary, capricious or in bad faith. No evidence was presented in the case showing the Board’s actions were arbitrary, capricious or in bad faith or otherwise showing the Board’s decision to approve Mr. Llano’s garage was unreasonable.
Instead, the appellate court noted the Board took enforcement action by sending a violation notice to Mr. Llano when it learned of the possible issues with his garage and when the Association received the documents from Mr. Llano showing the garage complied with the Declaration it reviewed, the Board, in its business judgment, determined there were no violations and approved the garage. Furthermore, the Association utilized its legal counsel to assist in determining its enforcement rights with respect to Mr. Llano’s garage addition and help the Board make an informed, reasonable decision. All of these facts indicated the Board acted reasonably in connection with its decision to approve Mr. Llano’s garage.
This case emphasizes the importance of the Boards of Directors making informed, reasonable decisions and working with their professional service providers to fully enjoy the protections Florida law offers Directors.