STATE OF FLORIDA DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION DIVISION OF FLORIDA LAND SALES, CONDOMINIUMS AND MOBILE HOMES. v. Case No.

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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 BAY SHORE COOPERATIVE, INC., Petitioner, v. Case No ANN MARIE PROCACCI, Respondent. / FINAL ORDER The petitioner filed this action for non-binding arbitration, alleging that respondent Ann Marie Procacci is a shareholder and owner of cooperative parcel 1001 of Bay Shore Cooperative, also known as Point View on the Bay, and that she is allowing occupancy of her cooperative parcel (hereinafter referred to as her unit ) either by a tenant, in violation of a prohibition on subleasing contained in the occupancy agreement and the cooperative s rules and regulations, or by a guest who has stayed for a length of time in excess of the limitations described in the cooperative rules and occupancy agreement. The association seeks entry of a final order requiring the respondent to cease subletting her unit or to cease allowing her guest to occupy the unit in violation of the cooperative documents. The petition for arbitration was filed prior to the amendment to Section , Florida Statutes, which made disputes involving the eviction or other removal of a tenant ineligible for arbitration; thus, the arbitrator has jurisdiction over this dispute. 1

2 The respondent filed an answer to the petition, in which she denies that she is violating the condominium documents and asserts several affirmative defenses. The respondent claims that the rule prohibiting subleasing is invalid because it contravenes portions of the certificate of incorporation and the version of the occupancy agreement signed by the respondent which suggests that subleasing is permissible under certain circumstances. She also claims that the association selectively enforces the restriction on subleasing and guest occupancy, and that several other units are occupied by tenants or long-term guests. She finally argues that because she stays in the unit periodically, she is not really subletting it. Both petitioner and respondent filed supplemental information as required by the arbitrator. The case was abated from June 30, 1998 until October 25, 1998, pending the outcome of a motion for rehearing in the case of Ruffin v. Kingswood E. Condominium Association, Inc., 719 So.2d 951 (Fla. 4th DCA 1998). A hearing was held on January 13, 1999, at 9:00 a.m. by video teleconference. The parties and their witnesses appeared at the State of Florida video-teleconferencing facility in Miami, Florida, and the arbitrator presided in Tallahassee. This order is entered based on the entire record in these proceedings. FINDINGS OF FACT Bay Shore Cooperative was built in the early 1960s with money loaned by the U.S. Department of Housing and Urban Development Federal Housing Administration ( FHA ). It has been the association s understanding since the creation of the cooperative that the FHA prohibits subleasing as a condition of the mortgage agreement. Other than a letter it received in 1986, the association has no documents 2

3 from the FHA to evince these restrictions, nor was it able to provide citations to statute or to the Code of Federal Regulations codifying these restrictions. The FHA mortgage will be paid off in December, Respondent Procacci admits that she has been a shareholder and owner of cooperative parcel 1001 since February 1967, and that she has resided only periodically in the unit since 1980, staying there when she or her husband has business in the city or when her husband is out of town. On an average, Ms. Procacci spends about 12 days and nights per year at the unit. Ms. Procacci admits that she is allowing the unit to be occupied by a woman named Diane Stephens, who pays consideration for the use of the unit in the form of money towards the expenses of the apartment every month. Ms. Stephens has occupied the unit in this fashion for well in excess of a year. Ms. Stephens is a friend of the respondent and thus the respondent occasionally stays with Ms. Stephens in the unit when the respondent is in town on business. It is undisputed that Ms. Procacci did not seek the association s permission to sublet her unit to Diane Stephens. part: The Certificate of Incorporation for Bay Shore Cooperative states in pertinent Article V, Section 1. Limitations on Alienation Encumbrances, Remodeling, Occupancy, Changing Corporate Structure, Disposition. The corporation shall not, without prior approval of the holders of the Preferred Stock 1, given in writing,... (d) permit occupancy of any of the dwelling accommodations of the corporation except by a tenant-stock-holder of the 1 According to Article VIII of the bylaws, the Federal Housing Administration is the holder of the preferred stock in the corporation. 3

4 Corporation;... [or] alter or amend this Certificate of Incorporation or amend its by-laws. (Emphasis supplied.) The bylaws of Bay Shore Cooperative state, in pertinent part: Article V Directors Section 2. Powers and Duties.... The powers of the Board of Directors shall include but not be limited:... (d) To promulgate such rules and regulations pertaining to use and occupancy of the premises as may be deemed proper and which are consistent with these By-Laws and the Certificate of Incorporation. (Emphasis supplied.) The current version 2 of the Rules and Regulations of Bay Shore Cooperative, Inc. (enacted during or after 1994) states in pertinent part: Prohibition of Rentals and Pets: The rental of apartments at Point View is totally prohibited by the Department of Housing and Urban Development; by the Cooperative s By-Laws and within the Occupancy Agreement. HUD reaffirmed this in 1986 stating the mortgage for Point View was insured to provide home ownership, not real estate for investor purchasers. Adherence to this requirement was reaffirmed by the Board of Directors in January of The version of Bay Shore Cooperative s occupancy agreement ( master lease ) which was in effect when Procacci purchased her unit in February, 1967, states in pertinent part: ARTICLE 5. PREMISES TO BE USED FOR RESIDENTIAL PURPOSES ONLY. The Member shall occupy the dwelling unit covered by this agreement as a private dwelling for himself and his immediate family and for no other purpose, and may enjoy the use in common with other Members of the Corporation of all community property and facilities of the project so long as 2 Prior versions of the rules and regulations were not offered into evidence. 4

5 he continues to own common stock of the Corporation, occupies his dwelling unit, and abides by the terms of this agreement. (Emphasis supplied.) ARTICLE 7. NO SUBLETTING WITHOUT CONSENT OF CORPORATION. The Member hereby agrees not to assign this agreement or sublet his dwelling unit without the written consent of the Corporation. Violation of this provision shall, at the option of the Corporation, result in termination and forfeiture of the Member s rights under this agreement. Rents under any sublease shall be assigned to the Corporation and the sublease shall be delivered to the Corporation, and the Corporation irrevocably empowered to collect rents and apply the rents in reduction of sums due from time to time under this agreement. The sublease shall be in form acceptable to the Corporation, shall require the subtenant to abide by the terms of the Occupancy Agreement during his subtenancy, and shall give to the Corporation an irrevocable power to dispossess or otherwise act for the sublessor in case of default under the sublease. The liability of the Member under this agreement shall continue notwithstanding the fact that he may have sublet the dwelling unit with the approval of the Corporation. The Member shall continue liable (sic) for all obligations hereunder and shall be responsible to the Corporation for the conduct of his sublessee. (Emphasis supplied.) The occupancy agreement was amended in approximately 1990 (that particular amendment is not in dispute and excerpts from that version of the occupancy agreement are not reprinted in this order). A unit owner vote on additional amendments to the occupancy agreement and rules was held at the 1991 annual meeting. The 1991 proposed amendments to further restrict subleasing and to place additional restrictions on guest occupancy were rejected by a majority of the unit owners who voted. Nevertheless, the board subsequently amended the occupancy agreement to 5

6 incorporate these amendments. The occupancy agreement now reads, in pertinent part: ARTICLE 5. PREMISES TO BE USED FOR RESIDENTIAL PURPOSES ONLY. The member shall occupy the dwelling unit covered by this agreement as a private dwelling unit for himself and/or his immediate family and for no other purpose, and may enjoy the use in common with other Members of the Corporation of all community property and facilities of the project so long as he continues to own shares of common stock of the Corporation, occupies his dwelling unit, and abides by the terms of this agreement. Only sons, daughters, grandchildren, parents, grandparents, sisters, and brothers of the Member are considered to be immediate family by the Corporation. The Board will require proof of this relationship should the immediate family member(s) reside in lieu of the member. The apartments, common areas, and other facilities are designed for maximum occupancy of two persons per studio, two persons per one bedroom unit and four persons per two bedroom unit. ARTICLE 7. NO SUBLETTING WITHOUT CONSENT OF CORPORATION The Member hereby agrees not to assign this Agreement nor to sublet the dwelling unit. A non-paying guest of the Member may occupy Member s unit for a maximum of thirty (30) days with thirty (30) day renewals permitted if approved by the Board. (Significant deletions have been stricken through and additions underlined by the arbitrator.) The association has made several general inquiries to the FHA over the years about the possibility of allowing subleasing. In 1986, in response to one such inquiry, the FHA sent a letter saying, in pertinent part: We have given due consideration to the request for the leasing of units to non-members and are unwilling to approve the request at this time... Perhaps the interested 6

7 members may wish to seek the advice and services of a real estate broker. If the suggestion we have made does not prove to be effective, and if an overwhelming preponderance of the membership still express a desire to permit the leasing of units to non-members, we will be pleased to give reconsideration to our decision. According to virtually all the witnesses, there has been a long history of subleasing at Bay Shore Cooperative, and for a number of years the association made little attempt to control it. In fact, one current member of the board began her residency at Bay Shore Cooperative as a sublessee. Consequently, when the board decided to beef up its attempts to prohibit subleasing in 1994 (as commemorated in a corporate resolution dated January 17, 1994) it felt the need to grandfather-in several existing tenants of whom the board was aware and had not sought to remove in the past. Since 1994, the board has made diligent attempts to enforce its restrictions on subleasing. However, at any given point in time there are always several units which are sublet, and as soon as the board has dealt with those, more crop up to take their places. The association itself owns a unit which it has rented out for more than 20 years (unit #301). This unit was originally occupied by the building superintendent, but when the association decided to hire contractors to provide maintenance services instead of having a resident superintendent, the unit was rented out. Current board members believe that the board cannot sell this unit because it has no folio number (said to be similar to a tax ID number) although the association has never tried to obtain a folio number for it so that it could be sold. In support of her defense of selective enforcement, the respondent lists six other units (in addition to unit #301, the association s unit) which she asserts are sublet or 7

8 occupied by a long term guest: Unit 302, owned by Philip Sassoon; unit 1202, owned by Suzanne Benjamin; unit PH5, owned by Shirley Gill; unit 606, owned by Ann Hannecker; unit 1107, owned by Claudia Barreyro; and unit 804, owned by Mr. Cizek. Testimony of the witnesses indicated the following: Unit 302 is occupied by a member of the Sassoon family, and the association has confirmed the relationship. The association has been pursuing the violation in unit 1202, although the matter still has not been resolved. Unit PH5 is occupied by the owner, an elderly woman who has a live-in companion. The association does not consider the presence of a live-in companion to be a violation of the subleasing or guest rules and has taken no action. Unit 606, owned by Ann Hannecker, was occupied by a long-term guest, but the violation was addressed by the association and the guest has vacated. Unit 1107, owned by Claudia Barreyro, is occupied by Ms. Barreyro s sister, and so is not in violation of the guest rules. Unit 804, owned by Mr. Cizek, was occupied by two individuals who were apparently there in violation of the restriction against subletting and/or long-term guest occupancy. However, the witnesses testimony failed to establish that the association was aware of these occupants unauthorized presence, and the violation has since ceased. CONCLUSIONS OF LAW The totality of the circumstances surrounding Ms. Stephens occupancy of the unit make it impossible to conclude that she is a mere guest. She is unrelated to the respondent; she has occupied the unit for an extensive period of time (well over a year) in the respondent s absence; and she pays consideration for the use of the unit. It is concluded that she is a tenant, rather than a guest. 8

9 Ms. Procacci s claim that she herself occupies the unit by virtue of the fact that she spends about 12 days a year there is also rejected based on the totality of the circumstances. She has not resided in the unit since her marriage in 1980, and spends about 353 days of the year living somewhere else, while allowing the unit to be occupied by someone who pays to use it. The unit is obviously not Ms. Procacci s primary or even secondary residence. The respondent asserts that the board has exceeded its authority by enacting a rule and amending the occupancy agreement to completely prohibit subleasing because nothing in the cooperative s documents prohibits either having a long term guest or subleasing. The respondent argues that the prohibition on subleasing creates an infringement on the property rights of the unit owners. None of the cooperative documents specify the method for amendment of the occupancy agreement. Sections , and , Florida Statutes, address the amendment of cooperative documents under certain conditions, but are inapplicable in the instant case. The original occupancy agreement (comparable to a proprietary lease) prohibited subleasing except with the permission of the association. The certificate of incorporation prohibits the association from permitting occupancy of the units by anyone other than a tenant-share-holder, and prohibits amendment of the bylaws without prior approval from the FHA. 3 A board cannot pass a rule modifying the declaration of condominium; the 3 Article V, Section 1. states, in pertinent parts: The corporation shall not, without prior approval of the holders of the Preferred Stock, given in writing,... (d) permit occupancy of any of the dwelling accommodations of the Corporation except by a tenant-stock-holder of the Corporation;... [or] alter or amend this Certificate of Incorporation, or amend its by-laws. 9

10 declaration is a controlling document. Gordon v. Palm Aire Country Club Condominium Association No. 9, Inc., 497 So.2d 1284 (Fla. 4th DCA 1986). In the case of a cooperative, the certificate of incorporation is a controlling document, which the board cannot modify by amending a subordinate document. A board s action which contravenes an express provision of the governing documents of a cooperative or contravenes a right reasonably inferred therefrom is an ultra vires act which must be declared invalid. Buddin v. Golden Bay Manor, Inc., 585 So.2d 435 (Fla. 4th DCA 1991); Koplowitz v. Imperial Towers Condominium, Inc., 478 So.2d 504 (Fla. 4th DCA 1985). However, Bay Shore s certificate of incorporation prohibits subleasing unless permission is granted by the FHA. The FHA reaffirmed its unwillingness to allow subleasing in response to several inquiries by the board. The board is empowered via the bylaws to make reasonable rules and regulations pertaining to use and occupancy of the premises, so long as the rules are consistent with the bylaws and the certificate of incorporation. A rule prohibiting subleasing, where the certificate of incorporation already prohibits subleasing unless the FHA first gives its approval, where the bylaws are silent, and where the FHA has reaffirmed its prohibition on subleasing, cannot be said to conflict with either the certificate of incorporation or the bylaws. It is concluded that the association s rule prohibiting subleasing does not contravene rights which are set forth in or can reasonably be inferred from the certificate of incorporation or the bylaws. Even though the rule does not contravene the certificate of incorporation or the bylaws, the board s action in promulgating the rule must still be reasonable. 10

11 Beachwood Villas Condominium v. Poor, 448 So.2d 1143 (Fla. 4 th DCA 1984). Testimony of at least two witnesses, coupled with a letter from the Federal Housing Administration which was submitted into evidence, indicated that the Federal Housing Administration at several junctures reaffirmed its prohibition on subleasing (although it expressed a willingness to reconsider its position if the board requested it and if an overwhelming majority of unit owners wanted to be able to sublease). Under the circumstances, the board s action in promulgating the rule cannot be said to be unreasonable. The respondent asserts the affirmative defense of selective enforcement, claiming that at least seven other cooperative parcels in Bay Shore Cooperative are being sublet and/or are occupied by long-term guests who do not receive board approval every 30 days. However, of the seven units she listed, three are not in violation because the persons living in them are relatives or live-in companions to the owner. The association has taken enforcement action against two of the others. One violation has ceased, and enforcement efforts continue against the other. The association took no action in the case of unit 804; however, witnesses testimony did not establish that the association was aware of the violation, and the violation has now ceased. The association s rental of unit #301 presents a perplexing problem. It would appear that the association has permitted this unit to be occupied for almost 40 years by persons who are not tenant-stock-holders of the corporation initially by the resident superintendents employed by the cooperative, and later by the long-term renter(s). No evidence was presented as to whether the FHA ever approved the use of the unit as 11

12 housing for cooperative employees or as a rental unit, as would appear to be required under Article V, Section 1 of the certificate of incorporation. However, the defense of selective enforcement by its nature refers to the unequal enforcement of restrictions against other unit owners. Selective enforcement has its genesis in estoppel and is based on the premise of discriminatory treatment and/or arbitrary and capricious enforcement of a rule or regulation. See Chattel Shipping and Inv. Co. v Brickell Place Condo. Association, Inc. 481 So. 2d 29, 30 (Fla. 3d DCA 1985)(citing to the Florida Supreme Court's opinion in White Egret Condo., Inc. v. Franklin, 379 So. 2d 346 (Fla. 1979)). Selective enforcement will not lie where the association has not been shown to have knowledge of the other existing violations. Cypress Lake Estates Condominium Association, Inc. v. Snyder, Arb. Case No , Summary Final Order (December 27, 1994). Thus, the respondent has not established that the association is arbitrarily enforcing its subleasing and guest occupancy restrictions against her but not against other owners who are also in violation. Based on the above, it is therefore ORDERED: The relief requested by the association, an order requiring respondent Procacci to cease subleasing her unit, is GRANTED. Within 30 days of the date of this order, respondent Procacci shall ensure that Diane Stephens vacates the unit, and shall thereafter comply with the association s rules and regulations regarding subleasing and guest occupancy. DONE AND ORDERED this 7 th day of July, 1999, at Tallahassee, Leon County, Florida. 12

13 Leslie O. Anderson-Adams, Arbitrator Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida RIGHT TO TRIAL DE NOVO PURSUANT TO SECTION , FLORIDA STATUTES, THIS DECISION SHALL BE BINDING ON THE PARTIES UNLESS A COMPLAINT FOR TRIAL DE NOVO IS FILED BY AN ADVERSELY AFFECTED PARTY IN A COURT OF COMPETENT JURISDICTION IN THE CIRCUIT IN WHICH THE CONDOMINIUM IS LOCATED WITHIN 30 DAYS OF THE DATE OF MAILING OF THIS ORDER. THIS FINAL ORDER DOES NOT CONSTITUTE FINAL AGENCY ACTION AND IS NOT APPEALABLE TO THE DISTRICT COURTS OF APPEAL. CERTIFICATE OF MAILING I hereby certify that a true and correct copy of the foregoing was mailed by U.S. mail, postage prepaid, to: David H. Rogel, Esq., Becker & Poliakoff, P.A., 5201 Blue Lagoon Dr., Suite 100, Miami, FL 33126; and Betty Hyman, Esq., SE 8th St., Suite 224, Miami, FL 33184, this 7 th day of July, Leslie O. Anderson-Adams, Arbitrator 13