When the bank rejected the buyer's application for a loan, saying that the co-op he was buying into was financially shaky, the board was stunned. But when their attorney, Arthur Weinstein, heard about it, he wasn't surprised. Even though the directors were fiscally responsible, the lawyer knew why their building was branded. "The board was being too efficient," he says.
"Too efficient" translates as trying to save money — and, by doing so, the board kept its lawyer out of the loop. In order to avoid paying Weinstein's fees, the directors did not have him review the financial statement. After the rejection, he did and immediately spotted the issue of concern to the bank: the statement indicated that the co-op had taken a major financial loss that year, and the lender thus deemed the building a risk.
What had actually happened was that the co-op had replaced the roof, an expenditure of $1 million, but the bank missed the fact that this was not a recurring expense. Weinstein says the misunderstanding could have been easily cleared up through a footnote. "The statement should have indicated that this was a one-time capital expenditure, drawn from the reserves, and not a regular operating loss. That's where the bank misunderstood. The board could have sent me a draft of the building's financials and saved a lot of headaches. I know what lenders are concerned about and would have spotted it right away. But they wanted to save on my fee. To me, that's a false economy."
False economies come up a lot when boards are using their attorneys. From suing without thinking to signing a contract without consulting, board members are frequently not using their lawyers properly. Yet, as part of their regular duties, the officers of a cooperative or condominium corporation deal with legal issues constantly.
"There are two levels of things attorneys are involved with in cooperatives and condominiums," observes Herb Cooper-Levy, a management executive who has worked as a housing consultant. "On one level, they do the nuts and bolts stuff, when you need to go to court to go after someone who has not paid maintenance. That is a critical piece, like cement in the mortar. The other side is when you are conceptualizing — when you are drafting operating documents or looking to refinance. That's when you want to get his experience and his perspective."
In fact, understanding the role of your attorney — and then effectively using him in that role — can often mean the difference between a legal heaven and a legal hell. When do you need to call your attorney and when can you go it alone?
ONE MAN, ONE CALL
The most common mistakes in utilizing a lawyer are the simplest to correct. Many times, board members phone first and research later. When there is a problem, instead of looking at the proprietary lease for the answer, they call their attorneys. "My advice to many boards is to familiarize themselves with the proprietary lease and the house rules," says Douglas P. Heller, a partner in Friedman, Krauss & Zlotolow. "I can understand if there are interpretation issues, but I have a little difficulty with people calling me up and asking whether this is covered or not."
Frequently, the full board — often seven members — will each call the attorney to ask the same question...seven different times. One way to avoid such hassles is to set up a liaison to interact with the attorney. That settles the question of redundancy and also allows the liaison to build an ongoing relationship with the lawyer. By talking about issues frequently, the director doesn't have to be constantly bringing the lawyer up to speed.
This process is helped along if the liaison is an attorney himself. According to Richard Siegler, a partner in Stroock & Stroock & Lavan, there is a great deal of commonality of language and shared training; they can almost speak in shorthand because they understand the terminology. "With a lawyer as liaison at least that gives you someone on the board who can understand the issues and can translate them to the board members," notes James Samson, a partner in Bangser Klein Rocca & Blum.
Some argue that the liaison should be a person other than the board president, as he already has a great deal on his plate. Still others say that two liaisons — a mini-committee, if you will — are better than one, since that avoids one liaison pushing his or her agenda.
In fact, even if the board appoints a liaison, on complex issues it makes sense to have a board meeting — either in person or through a conference call — in which everyone can question the lawyer. It also gives him the opportunity to explain complex legal matters firsthand. When you do bring your attorney to a meeting, however, be sure you are cost-conscious as to how you utilize his or her time. Many boards ask lawyers to attend board gatherings and then have them wait until the end of the meeting to talk — forgetting that the fee clock is ticking the whole time they sit and twiddle their thumbs.
A number of boards are also increasingly communicating with their attorneys through e-mail. With e-mail queries, generally from the liaison or board president, the lawyer can research questions thoroughly before replying and do so more efficiently. "I can take the time to find out the information and can then e-mail you with an answer," says Steve Wagner, a partner in Wagner, Davis & Gold. The correspondent also has a written reply to take back to the full board. Beware, however: e-mails are relatively unprotected and should not be used for very sensitive documents. Wagner notes that e-mails are akin to writing important information on postcards. So be selective in how you use them.
Some boards employ a variety of attorneys for a variety of tasks: one firm handling litigation, another handling landlord-tenant matters, still another construction contracts. Bruce Cholst, a partner in Rosen & Livingston, a full-service firm, sees such a system as less efficient than one-stop shopping. Still, others argue that when dealing with highly specialized tax certiorari work or negotiating your way through the complexities of the Byzantine landlord-tenant court, having an expert in a particular field is a must.
Most lawyers suggest that boards use their professionals proactively. The phrase "penny wise and pound foolish" comes up a great deal in this context. Boards try to save on costs by avoiding a phone call to the lawyer — and then end up paying more in the long run to correct a mistake. "It seems to me that too few boards use attorneys proactively, consulting with them before taking actions," says Cholst. "They often consult with us afterwards about cleaning up a mess."
"Many call an attorney when the property is in crisis," agrees Arthur Davis, a co-op consultant. "But they should be calling to avoid a crisis. Good advice is worth paying for."
Cholst points to a typical scenario: rejecting an applicant. "The board will decide first [about a rejection] and then offer the attorney a fait accompli. Then they'll get a letter from the rejected applicant charging 'occupational discrimination' and the co-op gets sued. That's when they ask the lawyer to fix it, which is a lot more expensive than otherwise. If the attorney is consulted beforehand and the board says, 'Here's what we're trying to accomplish, how do we do it?' the attorney can advise them so that they do the right thing and the attorney can help fortify them against legal challenges. But that is harder to do after the fact."
"Ask questions first; keep an attorney apprised of what you're doing, so he can red-flag any problems," adds Edward T. Braverman, senior partner in Braverman & Associates. "Most members should know intuitively when they have a problem they need to consult on."
But you should also use your attorney in conjunction with other professionals. And trust your gut instinct: does it follow the common sense rule? Take the case of Nick Biondi, president of Beekman Hill House, an East Side co-op, and his board. After an interview with sublet applicants Gregory Broome and his wife, a racially mixed couple, the board discussed the issues with its attorney, Herbert L. Cohen, a partner in Stiefel & Cohen. The owner of the apartment the Broomes were to sublet had reportedly threatened to sue the co-op if her sublease was rejected. Some on the board believed the Broomes were also litigious. According to Biondi — and confirmed in the minutes penned by the lawyer himself — Cohen said, "They're obviously litigious. If Broome were white and was making these threats, would you approve them?" The directors said no. "Well," Cohen said, "then you must turn him down." In Cohen's view, the board could not give in to blackmail, that accepting a subtenant after the owner had threatened the co-op with litigation, would be setting a dangerous precedent. Based on this advice, the board voted unanimously to reject.
That Cohen would give such advice is amazing, considering the fact that the Broomes were both lawyers and that Gregory Broome was a member of a legally protected class who would have strong grounds to sue if rejected. But the board members had no way of knowing that: they trusted their lawyer, did not think they were racists, and were buoyed by the feeling that they were in the right. Rather than try to get them to avoid trouble, however, Cohen was steering the directors right into it. The co-op lost a lawsuit brought by the Broomes and the board members were personally liable for thousands of dollars.
That case underscores the need not only to use the attorney properly, but to have the proper attorney. "When it comes time to select an attorney, you should check references, and be sure they have a lot of co-ops. Everyone has to start somewhere, but you don't want their first co-op job to be at your building," says Cooper-Levy. "Experience counts."
And the right experience, too. A lawyer who deals primarily in rentals may not know much about co-ops. A co-op specialist might not know condos. And if he does not have the appropriate experience, he may or may not do the right things and, either way, it will probably take longer and cost more money.
Cost-saving concerns also surface in the review of contracts. Robert Tierman, a partner in Litwin & Tierman, says that oftentimes boards that have spent a lot on a recent lawsuit will now try to save money by not talking with a lawyer about a contract, feeling that it is boiler plate, or a standard form. "What they tend to say is, 'Let's do it ourselves and save money, we've got a lawyer on the board.'"
That is the wrong attitude. When dealing with contracts, it is important to consult with someone who knows technical and legal issues, whether it is your managing agent or your attorney. "I've seen boards lose a lot of money by accepting elevator or cable TV contracts that were not to their advantage," Braverman says. In one classic case, a board signed a "typical" contract with a laundry company and then found it had locked the co-op into regular renewals with that company, regardless of the quality of work. There was no escape clause.
One way to be proactive, argue some, is to have unlimited access to an attorney, and that means a monthly retainer. Controversial, the retainer is one of three ways fees are computed. The other two are as an hourly rate and as a flat fee.
THE RETAINER. Usually, this means an annual fee (for a minimum of a year) that covers everything except litigation, refinancing, contract negotiations, and closings. The retainer system is controversial, with some attorneys swearing off it as a "no-win" scenario. "One side or the other feels cheated," argues Samson. "Either the board is not getting enough service or the board turns you into a junior managing agent, calling you on everything."
"I don't believe in retainers," says Braverman. "Somebody's going to come out on the short end of the retainer and it's usually the client. It's better to pay as you go and pay only for what you use."
Others argue that it can work, however, and offers its pluses if both sides do not abuse it. "I've still got plenty of buildings paying on a monthly basis," says Heller. "It works if everyone is flexible enough to change if you find it is being misused on one side or the other." Wagner notes that, in the beginning, the retainer is more of a positive for the board because of heavy consultations with the attorney. But as time goes by and consultations taper off, things even out.
THE HOURLY RATE. This is the most common form of payment since boards only pay for work delivered.
THE FLAT FEE. This is only used on specific, one-time-only jobs, such as refinancings or contract revisions, never for litigation.
Remember, though: quality of work can often make up for quantity of cost. Someone with less experience and a lower fee may cost more in the long run. By the same token, boards should be wary of trying to save money by using in-house — i.e., free — help. What you save in fees, you lose in expertise, objectivity, and potential conflicts of interest.
Another fee-related issue is how the attorney's bills are calculated. Don't be afraid to discuss that with attorneys. "The bottom line is the board president and the treasurer should carefully review the attorney's bills, and make sure they are accurate," says Weinstein. "I have board presidents who time our calls — one or two have said that I underbill them. Also, if you feel the matter didn't merit the time spent — that it was overkill — bring it to his attention. The bill will probably be reduced."
Efficient use of an attorney is even harder to achieve when it comes to litigation, which, by its very nature, is unpredictable and, thus, potentially costly. "It is usual for litigation to cost a lot more than anybody expected because there are tremendous inefficiencies to sitting around in court," says Tierman. Generally not included in flat fee or retainer arrangements, litigation must be handled carefully.
"You have to communicate your objectives very precisely," observes Cholst. "Is your approach one of principles or pragmatism? What are you trying to accomplish? Once he knows, he can craft a strategy."
For instance, say your garage operator has a sporadic arrears problem and is also washing cars in the garage, running up water charges. Is your concern the economic impact or is it to teach him a lesson so he will not get out of line in the future? If you simply want to get the arrears settled, a simple letter will probably do the trick. The other approach is more hard-nosed: full-scale litigation. "In a case like that, you sue if you want to make an example so that he's intimidated from ever straying again," says Cholst. It is a question of short-term versus long-term solutions.
In litigation — as in other matters that could involve a lawyer — the board has to attempt to be objective. "If someone on the board is outraged, that alone isn't a reason to litigate," says Heller. "You have to find an objective viewpoint. Sometimes, you can accomplish a lot without litigation. Sometimes appropriate communication can save you time. When a shareholder isn't paying maintenance in a hot economy, you should ask why before you sue. Why would he risk losing the apartment? Maybe he's got financial problems. Maybe you can work it out. The alternative is dragging the guy through the mud — even though he may just be having a temporary difficulty."
The board should not call in attorneys on every issue. When you do, it can become an adversarial situation. It becomes a show of force that can be counterproductive. Most advise boards to save the big guns for later. "If you bring in an attorney when the conversation [over a disputed issue] is still cordial, that may send a signal that the board is thinking about litigation," observes Cholst. "That may be premature and force the other side into getting an attorney. Bringing in a lawyer says you mean business. You are exercising your trump card, so do not overplay your hand."
The attorney should be warning you against lawsuits — or at least giving you the pros and cons, so the board can make an informed decision. Notes Davis: "The attorney has to have a strong business sense to be effective. He has to help you understand what issues are important legally and which ones you're going to want to spend money on. He cannot make the decisions. You have to use your own discretion as to which issues to pursue. Very often, the manager has a lawyer on staff. You may want to get a second opinion."
TO EACH HIS PART
Boards need to understand the different roles of the managing agent and the lawyer. Sometimes the manager is consulted too frequently on legal questions, and the lawyer quizzed unduly on management issues. "I often find board members calling the attorney for every problem, big and small," notes Wagner. "They may be unhappy with the performance of the managing agent and are calling up to complain about him; or they may not understand the roles of each." That confusion can be costly.
"It never ceases to amaze me how many boards use me as a shrink or for hand-holding purposes, bemoaning the problems other shareholders are creating," adds Cholst. "They use us for therapeutic, not legal consultation, purposes."
In the end, the most efficient way to use an attorney is to understand what he's there for: as a guide, teacher, and adviser. The board is made up of volunteers who usually know little about the business of running a property. The members come and go. So, it is up to the attorney — along with the manager and the accountant — to provide the professional expertise, education, and guidance that the board lacks. The lawyer provides continuity. When boards change, the lawyer can explain why decisions were made the way they were. He also is the one with the expertise you need to keep bumps in the road from turning into major accidents.
Above all, it is important to have a trusting, ongoing relationship with your three chief professionals: the manager, lawyer, and accountant. Ask them all questions — their experience counts and not just in legal matters.
"I was sitting with a board member at a closing and we were just chatting," recalls Samson. "She was talking about how frustrated they were at the low selling price of an apartment in their building. Well, I've seen this happen so many times before; I suggested the board buy the apartment and resell it themselves. If you're only hiring a lawyer to dot Is and cross Ts on contracts, then you're overpaying him. I urge you to ask him questions that are not purely legal. He's in the business. When it comes time to refinance, before hiring a mortgage broker, talk to your attorney. He may know about refinancing and what banks are looking for — and, more importantly, he knows about your building. A good lawyer knows how to get things done in the world."