Three Essential Things Michigan Condominium Board Members Must Know Before Adopting Rules and Regulations
One of the most powerful tools available to a board of directors of a community association in administering their community is the use of rules and regulations. Boards use rules and regulations to respond quickly to issues and help fill in gaps in governing documents; effective rules and regulations assist the community’s members in determining permissible or prohibited conduct. In some cases, however, a board may attempt to exert authority through its rule-making power that it doesn’t have. In such instances, the board may inadvertently increase noncompliance, subject the association to a potential challenge, or even raise questions within the community about the association’s authority. Accordingly, in order to ensure that its efforts are valid and enforceable, to minimize the risk of non-compliance and owner challenges, and to promote the reasonableness of a community’s governing documents, it is important that, prior to adopting a rule or regulation, a board of directors understands the extent of its rule-making authority and any limitations on such authority.
The three Essential Principles below are intended to help guide boards in ensuring that their rules and regulations are appropriately adopted and implemented.
Essential Principle No. 1 – Rules and Regulations Must be Reasonable and Implement or Interpret Existing Restrictions Only
With respect to an association’s rule-making power, the Michigan Court of Appeals has held that an association may “promulgate rules interpreting the covenants and restrictions and setting the procedures governing its own enforcement of those covenants and restrictions.” Conlin v Upton, 313 Mich App 243, 265; 881 NW2d 511 (2015). The use of rules to interpret existing restrictions is commonplace in Michigan. An association may not, however, “expand [a] restriction or impose a new burden on the lot owners with less than unanimous consent under the guise of interpreting the restriction.” Conlin, 313 Mich App at 265 (citing Golf View Improvement Ass’n v Uznis, 342 Mich 128, 130–131; 68 NW2d 785 (1955) (“We do not accept this round-about interpretation of the restrictions to fix a minimum area when it could have been expressed directly in so many words. We conclude that it would have been so expressed had that been the intent of the subscribers.”)). Improperly imposing a new burden under the guise of “interpreting” an existing restriction is one of the most common mistakes made by a board of directors in adopting a rule.
In other words, the general rule in Michigan for community associations is that the authority of an association to adopt rules and regulations is subject to the limitation that a rule be used to “implement or manage existing structural law” and not to “expand [a] restriction or impose a new burden . . . .” Conlin, 313 Mich App at 265–66. In addition, Michigan courts have long held that an association’s exercise of its existing authority must be reasonable. See Ardmore Ass’n v Bankle, 329 Mich 573, 578; 46 NW2d 378 (1951) (stating that a requirement that construction be preapproved is valid, but must be enforced in a fair and reasonable manner). Essentially, in Michigan, a board of directors can only use rules and regulations to effectuate and manage restrictions that already exist in the recorded documents (i.e., the master deed, declaration, or recorded covenants and restrictions). It cannot use a “rule” to add new restrictions or make the existing restrictions harsher. Courts have also consistently maintained that when a board exercises its authority (for example, exercising a right of architectural control), it has to be done in a fair and reasonable way.
Under the principles of Conlin v Upton, an association’s rule-making authority must ordinarily be connected to a concept contained in a recorded declaration if the rule is going to limit in some way a member’s use of their property.[1] For example, a declaration could authorize an association to adopt rules and regulations pertaining to architectural control, but that authorization may not extend to an association’s authority to prohibit certain signs or adopt rules regarding noise or leasing if these issues are not addressed in some way in the recorded declaration. To summarize, if a board wants to adopt a rule that limits how an owner can use their home or unit, that rule usually must relate back to something that’s already addressed in the recorded master deed or declaration. The board cannot use a rule to create a restriction on an issue if that issue is not addressed in the recorded documents.
An association has more flexibility when considering the adoption of rules and regulations related to common property administered or owned by the association, such as hallways, lobbies, pools, clubhouses, etc., as opposed to individual property owned by an individual owner. Specifically, in an unpublished decision, the Michigan Court of Appeals relied upon the Restatement of Servitudes to conclude that an association has an implied power to adopt reasonable rules and regulations regarding its common areas. See Hunters Woods Site Condo Ass’n, Inc v Homes of Hunters Woods Condo Ass’n, Inc, unpublished opinion per curiam of the Court of Appeals, issued May 24, 2011 (Docket No. 296001), p 1 (“A condominium association has an implied power to adopt reasonable rules to govern the use of common property except as limited by statute or the condominium documents. See 2 Restatement Property (Servitudes), 3d, § 6.7(1), p 140.”). While an association has more flexibility in adopting rules pertaining to common areas, such rules must still be reasonable.
This concept of “reasonableness” is more fully described in Rule 6.7 of the Restatement Property (Servitudes):
(1) Except as limited by statute or the governing documents, a common-interest community has an implied power to adopt reasonable rules to
(a) govern the use of the common property . . . .[2]
Comment c to Rule 6.7 provides the following additional guidance:
- Rules governing use of common areas. The association’s power to regulate the use of common property is limited only by the provisions of the governing documents, any applicable statutes, and the requirement that the regulations be reasonable. In determining the validity of a regulation, the primary determinant is whether the regulation is reasonably related to furthering a legitimate purpose of the association. Rules designed to minimize wear and tear or damage to common property, to promote safety in the use of common property, and to minimize conflicts over the use of scarce resources, like parking or tennis courts, clearly further the association’s prime purpose of maintaining and managing the common property.
(2 Restatement Property (Servitudes), 3d, § 6.7 cmt c, p 140 (emphasis added)).
Accordingly, if an association is considering a potential rule, it must ensure that the proposed rule is reasonable and that it interprets or implements an existing restriction. If the rule relates to a common area administered or owned by the association, then the association has more flexibility in adopting such a rule, but the rule must still be reasonable. If a board adopts rules that are unreasonable or that do more than simply implement or interpret an existing restriction, then such rules are unlikely to be enforceable. Rules are intended to assist in the administration of a community, but the adoption of unenforceable rules would likely instead lead to uncertainty and inconsistent enforcement, and would increase the risk of liability for the association.
Essential Principle No. 2 – Rules and Regulations Are Adopted by the Board of Directors
In Michigan, most communities are administered by the board of directors of their respective community associations. Accordingly, in nearly all cases, the responsibility for adopting rules lies with the board of directors to be done in accordance with the powers and limitations contained in the governing documents. A board of directors exercises the discretion needed to manage a community and to adopt rules in reliance on the business judgment rule.
Specifically, most community associations are nonprofit corporations organized under the Michigan Nonprofit Corporation Act, MCL 450.2101, et seq. The purposes of an association are described in the association’s articles of incorporation. See MCL 450.2202(b) (“The articles of incorporation shall contain all of the following . . . (b) the purposes for which the corporation is formed.”). Pursuant to MCL 450.2501(1) the “business and affairs” of a nonprofit corporation are “managed by and under the direction of its board . . . .” An association’s bylaws will often describe the powers and duties of the board of directors that are relied upon by the board to serve the purposes of the association and administer their community. The articles of incorporation and bylaws of an association constitute part of a contract between the association and its members. See Conlin, 313 Mich App at 255 (“Thus, to the extent that they do not conflict with the Association’s articles of incorporation or this state’s law, the bylaws would constitute a binding contractual agreement between the Association and its various members.”). See also MCL 559.153 (“The administration of a condominium project shall be governed by bylaws recorded as part of the master deed . . . .”).
In the context of a condominium association, the business judgment rule was described by the Michigan Court of Appeals as follows:
The applicability of the business judgment rule to decisions made by condominium association boards is discussed in 15B Am Jur 2d, Condominiums, § 23:
Ordinarily, the decisions made by a condominium association board should be reviewed by a court using the same business judgment rule that governs decisions made by other types of corporate directors. The business judgment rule limits the judicial review of decisions made by a condominium’s board of managers to whether the board’s actions are authorized, and whether the actions were taken in good faith and in furtherance of the legitimate interests of the condominium. It can be gleaned from the case law that so long as a condominium board acts for the purposes of the condominium, within the scope of its authority and in good faith, the courts will not substitute their judgment for that of the board’s. [Id. at p 591 (emphasis added; citations omitted).]
MJ Dev Co, Inc v Inn at Bay Harbor Ass’n, No 330496, 2017 WL 726591, at *2 (Mich Ct App Feb 23, 2017).
Accordingly, community associations in Michigan are administered by boards of directors that exercise the authority granted by their articles of incorporation and bylaws, relying on the business judgment rule. This means that it is the board of directors that has the authority to adopt rules and regulations on behalf of the association, subject to the requirement that any rules and regulations be reasonable and “implement” or “interpret” existing restrictions as set forth above. If the association’s articles of incorporation or bylaws impose limitations on the board’s rule-making authority, such as by requiring an owner vote, then such limitations must be respected as a part of the contract between the association and its members. Furthermore, if the proposed rule exceeds the board’s rule-making authority, the rule cannot be adopted unilaterally by the board of directors.
Essential Principle No. 3 – Notice of an Adopted Rule Must Ordinarily Be Provided to the Association’s Members
Even if a board of directors adopts an otherwise valid rule, the bylaws may impose procedural limitations on the manner in which the rule is adopted. For example, many bylaws require that a rule become effective only after having been distributed to the members, often with a thirty (30) day period between distribution and effectiveness. This type of limitation serves the judicial requirement that all rules be reasonable by requiring that owners be notified of the rule prior to being subject to its enforcement. Further, in some instances, bylaws may permit the owners within a community to rescind a rule by a majority vote of the owners. This type of provision aims to ensure that the association’s rules and regulations serve the interests of the majority of the community as a whole.
Conclusion
Rules and regulations are an important tool for boards of directors. They are more flexible than recorded restrictions and can be adopted relatively quickly to address issues as they arise. Rules and regulations can provide guidance and clarity to an association’s members when the governing documents may otherwise be difficult to understand. However, there are both substantive and procedural limitations on a board’s rule-making authority, and a board of directors that intends to adopt a rule or regulation must ensure both that it has the power and authority to adopt the rule or regulation and that it follows the appropriate procedure in order to ensure that it is adopted correctly.
At Hirzel Law, PLC, we regularly assist condominium and homeowners association boards in reviewing their governing documents, evaluating their rule-making authority, and drafting or updating rules and regulations that are enforceable and compliant with applicable law. If your board needs guidance on adopting new rules, revising existing rules, or addressing a dispute involving rules and regulations, please contact our office to discuss how we can help.
Sources:
[1] Certain provisions of the Nonprofit Corporation Act grant an association the authority to make rules and regulations pertaining to the qualifications of members and government, along with rules for meetings, but all such rules must be consistent with the association’s articles of incorporation and bylaws. See MCL 450.2304(7) (“A corporation may adopt rules of qualification and government of its members, including rules of admission to, retention of, and expulsion from membership, under its articles of incorporation or bylaws, if those rules are reasonable, germane to the purposes of the corporation, and equally enforced as to all members.”); MCL 450.2406(2)(“Unless the articles of incorporation or bylaws provide otherwise, the chairperson that presides at a meeting of the . . . members shall determine the order of business and has the authority to establish rules for the conduct of the meeting. Any rules adopted for, or for the conduct of, the meeting must be fair to . . . members.”).
[2] The Restatement would also appear to provide an association with an implied authority to adopt rules and regulations regarding individually owned property when necessary to “to protect the common property” and, if the association has the general power to adopt rules, to “protect community members from unreasonable interference in the enjoyment of their individual lots . . . caused by use of other individually owned lots . . . .” and to “restrict leasing . . . to meet valid underwriting requirements of institutional lenders . . . .” (2 Restatement Property (Servitudes), 3d, § 6.7(1)(b) & (2), p 140 (emphasis added)). No Michigan court, however, appears to have considered whether the implied rule-making authority of § 6.7(1)(b) & (2) would permit an association to adopt rules that do not merely “interpret” or “implement” existing recorded restrictions as required by Conlin, 313 Mich App at 265. Accordingly, at present, the implied authority of the association to adopt rules under the Restatement appears limited to rules pertaining to a community’s common areas.
Matthew W. Heron is a Member at Hirzel Law, PLC where he concentrates his practice in real estate, community association law, condominium law, real estate litigation, and zoning and land use. Mr. Heron also has extensive experience in a variety of litigation matters, including insurance coverage, non-compete agreements, automotive supplier disputes, and breach of contract. He routinely appears in both federal and state courts throughout Michigan and has argued before the Michigan Court of Appeals and the Court of Appeals for the Sixth Circuit.
