As a recent court ruling from Southwest Florida demonstrates, associations that go too far in their screening efforts could face significant legal consequences.
Most Florida community associations are
authorized under their governing documents to conduct
screenings for prospective new buyers and tenants.
Naturally, associations wish to prevent individuals from
becoming a new resident who could present a danger to the
community or are too much of a financial risk based on their
credit history. However, as a recent court ruling from
Southwest Florida demonstrates, associations that go too far
in their screening efforts could face significant legal
consequences.
The recent ruling ordered a Marco Island condominium
association to stop its unreasonable screening practices,
and the case made local headlines in the pages of the Naples
Daily News.
David Mech, a prospective buyer at the Crescent Beach
Condominium, sued the condominium association in December
and represented himself in the case without the benefit of
legal counsel. He alleged that he walked away from his
$425,000 all-cash offer to purchase his dream condominium
unit because he refused to comply with the associations’
request to provide his last two annual tax returns for
himself and Katarina Palijusevic, who planned to invest in
the unit with him.
“There’s no reason for them to know the total income for
people,” he states in the newspaper article. He believed the
financial screening requirement was unjustified and just
“plain nosy,” so he walked away from his opportunity to the
Marco Island condo. “Do I really want to live in a building
that has that type of board? That’s really an issue to me,”
he stated.
The Collier County court judge ruled that the board’s
blanket policy requiring new buyers to produce personal tax
returns was “patently unreasonable.” The judge awarded Mech
his legal costs and is yet to determine the final award.
Mech claims that he lost approximately $4,000 just from his
early withdrawal from his apartment lease in Irvine,
California, prior to being informed of the tax return
requirement.
Mech was able to demonstrate to the court that the
association had no valid reason to see his tax returns after
he successfully passed its full background and credit checks
with a clean criminal record and outstanding credit score.
He even attempted to negotiate with the board to provide it
with more limited financial background information, but it
declined.
The board’s treasurer testified that it began requiring tax
returns from prospective buyers after the housing market
crashed more than a decade ago, but court documents
demonstrated that the board added the requirement to its
documents only after Mech filed his lawsuit. The association
argued that tax returns provide more information than a
credit report, showing not only income but also assets and
interest income, as well any partnerships or corporate
interests.
The judge concluded tax returns should only be requested
under extreme circumstances when there’s good cause based on
negative results from background screenings or credit
checks. She expressed concerns that the board’s demands for
tax returns could be a “fishing expedition” rather than a
reasonable effort to determine whether a buyer is acceptable
for the community.
“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,” the judge
concluded. “What person wants the people who share the
condominium complex with him or her to know their financial
business? Answer: Nobody.”
As a local county court ruling, this decision will not have
significant precedential value, but it does serve to
illustrate the potential dangers for associations that also
request tax returns or other personal financial records as
part of their screening procedures. The state’s courts have
generally only upheld screening restrictions against
property transactions that are considered reasonable. These
could be argued to include criminal records, negative
experiences with past landlords, low credit scores and
responses in applications demonstrating an inability to
abide by community rules, such as pet restrictions barring
pet owners.
Boards of directors should consult with highly qualified and
experienced association legal counsel to develop and
implement effective screening protocols for their community.
This should include a standard application, interview and
background/credit check process with full documentation for
every step. By adhering to the highest standards of
reasonability and fairness, associations will be able to
benefit from effective screening procedures that do not
expose them to potential legal repercussions.