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Condominium Documents That Require Co-Owners to Use a Developer’s Rental Management in Condo Hotel May Violate The Sherman Antitrust Act

As a condominium attorney, I have always been fascinated with condominium hotels, and wrote one of my first published articles on condominium hotels in 2012. Condominium hotels can often be a great investment, as they provide a place for co-owners to vacation and rent their units for a portion of the year to earn supplemental income.  While the concept of purchasing a unit in a condominium hotel can be attractive for many purchasers, it is not uncommon for the co-owners to be required to participate in some form of a rental pool that is operated either by the condominium association or a management company.  Accordingly, it is important for co-owners to carefully review the condominium bylaws to determine whether participation in a rental pool is mandatory or optional.  In many cases, if the condominium documents create a mandatory rental pool, and the rental pool is run in an equitable fashion, either by the condominium association, or an independent property management company, there will be no issues.

However, in some cases, a developer will sell units, and the condominium documents will mandate that the co-owners utilize a management company owned by the developer to rent units.  Issues often arise as co-owners may question whether the developer’s rental management company is charging a fair price and whether the rentals are distributed equitably, especially if the developer’s units are also being rented.  Accordingly, a recent federal court case, Anderson v Boyne USA, Inc, No. CV-21-95-GF-BMM, 2022 WL 2528242 (D Mont, July 7, 2022), has recognized that co-owners may be able to pursue claims against a developer when they are forced to use the developer’s rental  management company under the condominium documents in conjunction with the purchasing a condominium unit.

 

Boyne, USA, Inc.’s Rental Management Agreements With The Co-Owners in The Condominium Hotel

Defendant, Boyne, USA, Inc. (“Boyne”), was the developer of the Big Sky Resort, as well as three condominium-hotels at the base of Big Sky known as the Summit, Shoshone, and Village Center (collectively “the Condos”). Boyne owned all the commercial units and some residential units on the condominiums.  Plaintiffs were residential co-owners that purchased condominium units from Boyne.

Boyne marketed the Condos as investments to prospective purchasers and made representations regarding the economic benefits of ownership. Boyne created the condominium documents, which could not be amended without the consent of the Developer. The condominium bylaws allow the condominium units to be used either by the unit owners or as “transient hotel type accommodation.” The condominium documents required all co-owners to use Boyne, or its agent, as their exclusive rental agent.  The co-owners could decline to renew the rental management contract with Boyne, or its agent, if 75% of the co-owners voted to terminate the management contract.

Boyne prepared the rental-management agreements that require the co-owners to pay Boyne 50% of gross rental revenue “after the payment of costs.” Boyne charges the co-owners for various other services, including resort fees, credit card process fees, wholesalers, and travel agent commissions. Boyne also controls the central reservation center through which guests of the Condos make their reservations. Boyne can use this system to control pricing for each of the units and the order in which units are booked.  Plaintiffs brought various claims against Boyne that the mandated use of Boyne, or its rental management company, constituted a violation of various state and federal laws.  Boyne filed a motion to dismiss the claims, which in large part was denied, as will be discussed below.

 

Breach of Fiduciary Duty Claim Against Boyne

Plaintiffs asserted a claim against Boyne for breach of fiduciary duty on the basis that Boyne put its own interest ahead of the co-owners in operating the rental management company by decreasing rents and increasing certain fees that it charged.  Specifically, the Court held as follows:

Plaintiffs assert that Boyne created a special relationship with Plaintiffs by acting, first, as Plaintiffs’ rental manager, and second, by effectively making itself the investment manager of the Condos as an “unregistered security.”

An agency relationship created by “the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act” constitutes a fiduciary relationship. Butler Mfg. Co. v. J & L Implement Co., 540 P.2d 962, 965 (Mont. 1975). Boyne agreed to act “as [Plaintiffs’] Agent for the purpose of renting, managing, and operating the Unit[s].” (Doc. 1-2 at 1.) The fiduciary duties Boyne owes to Plaintiffs’ as their agent “encompass full disclosure …; good faith …; and acting in the client’s best interests.” Adams v. Cheney, 661 P.2d 434, 441 (Mont. 1983) (internal citations omitted).

The Court need not determine whether Boyne acted as an “investment manager” for the Condos, because Boyne’s role as rental manager proves sufficient to establish a fiduciary relationship. Plaintiffs plausibly have pled a fiduciary relationship sufficient for Claim I to survive Boyne’s motion to dismiss.

Similarly, the Michigan Supreme Court has also recognized that a fiduciary duty exists in an agency relationship, and has defined a fiduciary relationship as follows:

…[a] relationship in which one person is under a duty to act for the benefit of the other on matters within the scope of the relationship. Fiduciary relationships—such as trustee-beneficiary, guardian-ward, agent-principal, and attorney-client-require the highest duty of care. Fiduciary relationships [usually] arise in one of four situations: (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.

In re Estate of Karmey, 468 Mich 68, 75; 658 NW2d 796, 799 (2003).  See also Brotman v Roelofs, 70 Mich App 719, 729; 246 NW2d 368, 373 (1976) (“According to Michigan law, a real estate broker is in a fiduciary relationship with his client. Parker v. Poll, 16 Mich.App. 542, 168 N.W.2d 425 (1969). The duties of loyalty, fidelity, care and disclosure may arise impliedly from the agent’s position or out of an express agency contract in a listing agreement.”)

Accordingly, while the merits of Plaintiffs’ claims must still be litigated, it is important to note that a rental management company owes a fiduciary duty to act in the best interests of the co-owners that participate in a rental pool in a condominium hotel.

 

Unfair Trade Practices/Antitrust Claim Against Boyne

Plaintiffs also alleged that Boyne illegally and unfairly “tied” its rental management services to ownership of units in the Condo-Hotels under the condominium documents.  In determining whether a violation of the Sherman Antitrust Act had been properly pled, the federal court stated as follows:

“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.’ ” Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992) (citing Northern Pacific R. Co. v. United States, 356 U.S. 1, 5–6 (1958)). 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; Mont. Code Ann. § 30-14-205.

“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.” Paladin Associates, Inc. v. Montana Power Co., 328 F.3d 1145 (9th Cir. 2003)….

In analyzing the Plaintiffs’ “tying” claim for violating the Sherman Antitrust Act, the Court stated as follows:

Boyne alleges that it lacks the market power to force Plaintiffs to use Boyne as a rental manager. The Declarations require Plaintiffs to use Boyne as a rental manager as a condition of purchasing their Condos, but that requirement applies only if Plaintiffs choose to rent out their Condos. Plaintiffs freely may use their Condos for personal use. Boyne essentially would have the Court believe that they lack market power because Plaintiffs are not required to enter the market. The fact remains, however, that if Plaintiffs wish to enter the rental market, the Declarations bind their hands in terms of rental managers.

A tying arrangement exists whenever the seller exploits 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.” Jefferson Par. Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (2006). 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 Boyne instead. Id. The Declarations grant Boyne market power in “reduc[ing] competition in the market for the tied product,” in this case rental management services.

Similarly, after determining that Plaintiffs adequately pled a “tying” claim against Boyne, the Court analyzed Boyne’s argument that the Plaintiffs had failed to adequately plead damages and stated as follows:

Boyne’s argument that Plaintiffs have failed to allege an injury as a result of the alleged tying arrangement also fails. Plaintiffs have pleaded that the 50% gross rental income payable to Boyne 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 Boyne’s cost, had they not been limited by the Declarations.

Accordingly, the federal court denied the Plaintiffs motion to dismiss and held that the Plaintiff had asserted a valid claim for violating the Sherman Antitrust Act against Boyne.

 

Conclusion

Similar to Anderson v Boyne USA, Inc, No. CV-21-95-GF-BMM, 2022 WL 2528242 (D Mont, July 7, 2022), it is likely that a Michigan court would determine that a fiduciary relationship exists between a rental management company.  Irrespective of whether the rental management company is operated by a developer, a condominium association, independent property management company, or real estate agent, it is important to note that entity operating the rental pool must fulfill its fiduciary to act in the best interest of the co-owners, as well as any contractual duties imposed by the rental management contract.  Accordingly, rental management companies should ensure that there is an equitable method to allocate rentals, rental rates are representative of fair market values, that the rental management does not comingle funds with its general operating account or the condominium association’s general operating account.

Finally, when the developer that sells condominium hotel, it may result in a violation of the Sherman Antitrust Act.  As discussed above, if a purchaser of a condominium hotel unit desires to enter the market, a mandatory rental pool may grant the developer market power in reducing competition with other rental management companies.  However, while the Montana federal court has recognized the validity of a “tying” claim, it is important to note that the Boyne case is still pending, and we will be monitoring the outcome. It is also important to note that in situations where the condominium association or co-owners select an exclusive rental management company, if permitted by the condominium documents, a tying claim is unlikely to exist as the rental management agreement is not connected to the sale of condominium units.

Like Montana, Western Michigan and Northern Michigan and have various condominium hotels, particularly along Lake Michigan and in the Traverse City area.  While condominium hotels can be an exciting investment, it is important for purchasers to carefully review the condominium bylaws to determine what restrictions exist on renting condominium units and whether the co-owners are required to participate in a mandatory rental program.  Accordingly, if you are a developer or condominium association that is operating a rental pool in a condominium hotel, or a purchaser looking to purchase a condominium hotel unit, it is wise to consult with an experienced condominium attorney to ensure that the rental management program is being properly operated.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association law and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel has been recognized as a Michigan Super Lawyer’s Rising Star in Real Estate Law by Super Lawyers Magazine, a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine, and as a Best Lawyer in Real Estate Law by U.S News and World Report’s Best Lawyers Publication. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 450-0339 or kevin@hirzellaw.com.

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kevin@hirzellaw.com

Kevin Hirzel is the Managing Member of Hirzel Law, PLC. Hirzel Law has offices in Farmington, Grand Rapids, and Traverse City, Michigan with a fourth office location in Chicago, Illinois. Mr. Hirzel focuses his practice on condominium law, homeowners association law, and real estate law. He is a fellow in the College of Community Association Lawyers (“CCAL”), a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel formerly served on the CCAL National Board of Governors and is a former member of the Community Associations Institute’s (“CAI”) Board of Trustees, an international organization with over 40,000 members worldwide that is dedicated to improving community associations. Mr. Hirzel has been recognized as a Leading Lawyer in Michigan by Leading Lawyers, a distinction earned by fewer than 5% of all lawyers licensed in Michigan. He has been named a Michigan “Rising Star” in real estate law by Super Lawyers Magazine, a designation is given to no more than 2.5% of the attorneys in Michigan each year. Mr. Hirzel was also named as a “Go-To-Lawyer” in condominium and real estate law by Michigan Lawyer’s Weekly. Hirzel Law was also voted the best law firm in Metro Detroit in the Detroit Free Press Best of the Best awards. He is the Co-Chairman of the State Bar of Michigan’s Real Property Law Section Committee for Condominiums, PUDs & Cooperatives. Mr. Hirzel has authored numerous articles on community association law for publications such as the Michigan Community Association News, Michigan Real Property Review, Macomb County Bar Briefs and the Washington Post. He is also the author of “Hirzel’s Handbook: How to operate a Michigan Condo or HOA”, which is available for purchase on amazon.com. Mr. Hirzel has been interviewed on community association legal issues by various media outlets throughout the country, such as CBS, CNBC, Common Ground Magazine, Community Association Management Insider, the Dan Abrams Show on SiriusXM Radio, the Detroit News, Dr. Drew Midday Live on KABC Radio, Fox Business News, Fox News, HOALeader.com, the Law & Crime Network, Michigan Lawyer’s Weekly, NPR, WWJ News Radio and WXYZ. Mr. Hirzel is a dynamic speaker and frequently lectures on community association law throughout Michigan, as well as nationally at the CAI National Law Seminar, and is a two-time winner of the best manuscript award at the CAI National Law Seminar.

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