This couldn’t happen in my mixed-use condominium….or could it?

I just finished reading an article about a recent Superior Court case, Board of Trustees of the Gates of Greenwood Home Owners’ Trust v. Gates of Greenwood LLC, 2014 Mass. Super. LEXIS 12, in which the court invalidated an indemnification clause contained in the condominium Declaration of Trust that entitled the condominium trustees to indemnification from both the condominium trust and the individual unit owners against liability incurred in connection with their actions as condominium trustees.  Since the trustee seeking indemnification in that case was the original developer of the project, and the claims for which indemnification was sought were based on the trustee’s failure to require the developer and its contractors to correct defective work in the condominium’s common areas, the result did not seem all that surprising.  When the court wrote, “By inserting the clause, Greenwood attempted to insulate itself from all liability and make the Trust and unit owners financially liable for its malfeasance”, there was no question that the decision was correct.  But that couldn’t happen in a multi-hundred million dollar downtown Boston mixed-use condominium development (say a hotel and residential tower with commercial space)….or could it?

This case involved a 24-unit residential condominium, presumably with unsophisticated unit purchasers who needed protection against the wily developer.  As is always the case in condominium projects, the developer designated the initial condominium trustee.  As is unfortunately often the case, after the developer turned over control of the condominium trust to the unit owners, the new trustees claimed that certain of the construction work in the common areas was defective and that the initial condominium trustee was less than zealous in trying to obtain satisfaction from the developer and the responsible contractors.  The developer, for its part, impleaded a number of contractors and subcontractors as third parties and also asserted a claim against both the condominium trust and the individual unit owners for indemnification under the provisions of the Declaration of Trust, should the former trustee be found liable to that very same condominium trust.

The offending indemnification clause in Greenwood read:

“The Trustees and each of them shall be entitled to indemnity both out of the trust property and by the owner(s) of the lands subject to this Declaration, against any liability incurred by them or any of them in the execution hereof, including without limiting the generality of the foregoing, liabilities in contract and in tort and liabilities for damages, penalties and fines.”

Clearly what this clause lacks – and what led the court to invalidate it – is an exception to the indemnification obligation for liability incurred by a trustee through its bad faith or willful misconduct.  The clause in the Declaration of Trust exculpating the condominium trustees from liability for actions taken as a trustee contained an express exclusion for liability arising out of “his own personal and willful malfeasance”.  That clause looked familiar to me from my review of mixed-use condominium projects, and I have always considered this type of exculpatory clause to be enforceable precisely because it contains this type of exception.  I must note, however, that Greenwood cites a 2000 decision issued by Justice Gants when he sat on the Superior Court which came to the opposite conclusion (Harris v. McIntyre, 2000 Mass. Super. LEXIS 181).

But what surprised me when I started comparing the offending indemnification clause to comparable clauses in the documents of a number of mixed-use downtown Boston projects, including those multi-tiered condominiums in which an entire hotel or an entire residential condominium project comprises a “unit” of a “primary condominium” (so no unsophisticated unit purchasers there), was how frequently the indemnification clause suffered from the same defect as the Declaration of Trust in the Greenwood case.  Although these condominium documents uniformly contain a limitation in the exculpatory clause so as to preserve the condominium trustee’s liability for claims based on his or her “bad faith” or “own personal and willful malfeasance” (as did the exculpatory clause in Greenwood), the indemnification clause frequently does not include a similar limitation on the indemnification obligation.  For example, I found this example from just such a project:

“The Trustees and each of them shall be entitled to indemnity both out of the trust property and by the Unit Owners severally in proportion to each Unit Owner’s ownership in the common areas and facilities, against any liability incurred by them or any of them in the execution hereof, including, without limitation, liabilities in contract and in tort and liabilities for damages, penalties and fines.”

Since even in these multi-tier condominium projects, the developer (or their designees) will be the initial trustees of the condominium trust, this should be a matter of concern to commercial condominium developers.  Unless the attorneys drafting these condominium documents pay closer attention to the indemnification clause, they may inadvertently leave these trustees exposed to personal liability (by virtue of the carve-out to the exculpatory clause) but without indemnification from the condominium trust and/or the unit owners because of an invalid indemnification clause.

The fix is simple – make sure that the indemnification clause contains an exception for claims or liabilities arising out of the bad faith, or personal and willful malfeasance or misconduct, of the condominium trustee.  Simple logic – and now the courts – demand nothing less.