Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Hotel condo developer charged with tying rental and maintenance agreements, (Feb 20, 2015)

By Linda O’Brien, J.D., LL.M.

The developer of a hotel established as a condominium has usurped the role of the condominium association through the use of illegal tying arrangements with its affiliated entities in relation to required hotel maintenance and unit rental agreements, according to a complaint filed in the federal district court in Chicago (Board of Directors of the Raffaello Condominium Association v. 201 East Delaware, LLC, February 19, 2015).

201 East Delaware, LLC is the developer of the Raffaello Hotel, which was established as a condominium association. The Board of Directors for the Raffaello Condominium Association is responsible for the maintenance of the common elements of the property as set forth in the Declaration of Condominium Ownership and Easements, Restrictions, Covenants, and By-Laws.

The complaint states that, since 2005, the developer has sold units within the Association. The hotel condominium was marketed to prospective purchasers to allow unit owners to use the units at their discretion or allow the units to be rented out for term use by guests. As a requirement for purchasing a hotel unit, unit owners must enter into a hotel unit maintenance agreement that permanently grants the hotel manager the right to manage the hotel. The maintenance agreement cannot be terminated by unit owners but can be terminated if the developer terminates the relationship with the hotel manager. Since the developer and hotel manager are related entities, such termination rights are illusory, the condo association claimed.

The maintenance agreement establishes the rental rates for guest rooms and imposes charges on the unit owners without limitation, including administration fees, assessments, and reserves. In addition, the hotel manager has unlimited discretion to upgrade the interior of the units “in a manner suitable for luxury hotel accommodations.” Although expressly established as a condominium under the Illinois Condominium Property Act, the developer allegedly structured the condominium Declaration through tying arrangements as to never actually turn over control over the common elements within the building to the Association’s Board, the complaint states.

In addition to the lack of control, the defendants have imposed improper and onerous changes on the unit owners, and the association itself has no recourse to negotiate such charges absent legal action, according to the complaint. The arrangement has been lucrative to the defendants, which have intentionally prevented the association from learning about the costs and revenue they receive from the operation of the hotel.

The main incentive for unit owners to purchase units within the Association was the opportunity to participate in the rental program for the hotel. Under the rental program agreement with the hotel manager, unit owners can collect rental income by the periodic rental of their units for hotel purposes. Although the rental program agreement is described as “optional,” the defendants have represented that execution of the agreement is the only way for unit owners to receive rental income. The agreement sets forth the economic split by which the hotel manager, which has the sole authority to rent the units, takes a share of the rental income paid by guests. Under the split, the hotel manager takes an unconscionably high share of the rental income — 55 percent —even though the current prevailing market rate for similar services is 35 percent, the complaint charges.

The plaintiffs allege that the split is even more unconscionable for the unit owners, since they are required to the hotel manager for the shared facilities expenses under the maintenance agreement. Moreover, the defendants allegedly have hid rental income from some unit owners by renting out their units and failing to report the income attributable to the rental of those units. Furthermore, the defendants have refused the repeated requests of the Board to negotiate in good faith the terms of the rental program agreement.

The plaintiff asserts claims for unjust enrichment, conversion, and unlawful tying arrangements in violation of Section 1 of the Sherman Act. The action seeks declaratory and injunctive relief, an accounting, compensatory, punitive, and treble damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 1:15-cv-01558.

Attorneys: David J. Bloomberg and Adam K. Beattie (Chuhak & Tecson, P.C. for Board of Directors of the Raffaello Condominium Association.

Companies: 201 East Delaware, LLC; Raffaello Management, LLC; Raffaello Hotel Operations, LLC

News: Antitrust IllinoisNews