Agreements to Arbitrate Will Be Enforced Against Unit Owners Even Where the Claims of the Condominium Association Will Be Litigated

Purchasers of units in planned real estate developments, such as condominium complexes, often enter into purchase agreements with the developer that contain arbitration provisions requiring the purchasers to arbitrate any claims they may have arising out of the construction and sale of the unit. In Hudson Tea Buildings Condo Assoc. v Block 268 LLC, the New Jersey Appellate Division recently considered questions over the enforceability of such provisions in a lawsuit involving some claims that were subject to the arbitration provision and some that were not.

More than two hundred individual unit owners, as well as the condominium association suing on behalf of the unit owners, filed a lawsuit against the developer of a condominium complex relating to alleged construction defects. The developer moved to compel arbitration and dismiss the claims of the individual unit owners because their purchase agreements contained an arbitration provision. The Trial Court denied the motion to compel and the developer defendants appealed.

The Appellate Division noted that the arbitration agreement applied to the claims of the unit owners, but, because individual unit owners are precluded from pursing claims relating to the common elements of the condominium complex by the New Jersey Supreme Court’s decision in Siller v. Hartz Mountain Assocs., the claims of the condominium association were not subject to arbitration. The unit owners argued that their claims should not be arbitrated because of concerns over inconsistent results between their claims in the arbitration process and those of the condominium association in the litigation. The Appellate Division, however, rejected this argument and, relying on the United States Supreme Court decision in Dean Witter Reynolds, Inc. v. Byrd, stated that the risk of inconsistent decisions is unavoidable and not a basis to deny enforcement of an arbitration provision. In addition, the Court stated that the Trial Court could stay the claims of the condominium association pending resolution of the unit owner claims in arbitration.

Under New Jersey law, unit owners have standing to assert only those claims relating to their units, while claims relating to the common elements belong exclusively to the condominium association. Construction defects often exist in both individual units and common elements. In such circumstances, if the unit owners are bound by an arbitration provision they will be required to arbitrate their claims while the claims of the condominium association regarding the common elements will need to be litigated in a court. Parties and their counsel confronted with such circumstances will need to weigh the costs and risks associated with proceeding simultaneously in both forums and assess whether it is appropriate to seek a stay.

Damian V. Santomauro is a Director in the Gibbons Business & Commercial Litigation Department.
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