Look up "lawyer jokes" on an internet search engine and you'll find about 10 pages worth of links. Click some, read a few, and you'll find they're not all that funny; some are even downright cruel and nasty. I'll spare the viciousness here, but let's just say that "drowning" and "lawyers" come up fairly often.
Love 'em or hate 'em, everyone's got an opinion on lawyers, but in this day and age of liability, exposure, and litigation, having a good attorney has never been more necessary. For self-managed buildings, attorneys take on an even more important role. Not only do they handle all the traditional legal responsibilities (closings, refinancings), but they can also serve as a financial advisor, consultant, and makeshift managing agent. Some self-managed buildings proudly say they work very closely with their lawyers, relying on their advice in a number of operational arenas.
On the flip side, some boards consult their attorneys as a matter of last resort, and sometimes not even then. Whether relying on hubris, bad advice, or a cost-controlling mentality, these boards may end up making decisions without considering all the legal ramifications and potential downsides. The end result could be drastically spending money on legal fees to sort out a mess that could have been avoided.
Boards owe it to their shareholders to find a middle ground. Don't overdo it on expensive legal fees, but at the same time, don't be hasty and do something that could end up costing the co-op even more. For a self-managed board trying to both rein in costs and make sound decisions, the best advice is to be cautious. "As soon as something has legal implications," says Bruce Cholst, a partner in Rosen & Livingston, "you don't want to take any actions that are potentially irrevocable before you know what direction you're heading in." Keeping to these guidelines will help boards avoid making mistakes.
Don't reflexively assume that calling your lawyer is the costly, "last-step" option, especially when dealing with shareholder disputes. William Penny, board president at his self-managed Park Slope co-op, credits his board's attorney with resolving a particularly uncomfortable situation. A first-floor shareholder (who was also a board member's spouse) was adamant about installing a satellite dish on the co-op's rooftop so he could watch out-of-town football games. The board said, "no," not wanting to give up public roof space for a shareholder's private use. Eventually, the lawyer hammered out an agreement: the shareholder would pay for the dish's installation and sell it to the co-op for $1; other shareholders could run their own line from the dish if they were interested. "That's a good place to bring in an outsider's opinion," Penny says, describing the attorney's input. "One person was totally opposed to it, the other person wanted it for her husband."
Thorny shareholder situations like noise complaints and late maintenance payments can grow into larger problems if they're not dealt with promptly. Getting a lawyer's advice early can help defuse situations before the heavy legal fees have a chance to pile up in litigation. Barry Korman, a former board president at his 60-unit Upper West Side cooperative, says his co-op's attorney convinced a disgruntled shareholder who was threatening to sue the board that a lawsuit would be a costly waste of time for all parties. Having a third party step in, Korman says, can help bring about a speedier resolution without emotions reaching the boiling point.
Contracts are another area where self-managed boards should tread lightly. With both an attorney and an experienced business executive on the board, a small, six-unit Financial District co-op thought it had enough expertise internally to put together a sound contract for some roof and brick work. Based on the scope of the work prepared by the contractor, the board entered into an agreement without a lawyer's review.
"We made what we thought was a good contract," one of the board members says. "But when the guy turned out to be a really bad contractor, we tried to pin him down to the contract, and we realized that the contract wasn't very good. We paid more than we should have, we got a poor job, and he was rude and incredibly difficult to work with. But we were obliged to try and follow this through to get him to complete as much as we could force him to."
Why did it happen? Miscommunication and an aversion to spending money, the board member says. And it's something that certainly could have been avoided. Attorney Mark Axinn, a partner in Brill & Meisel and also a resident in a self-managed co-op, says attorneys can help boards put together contracts that will reflect the building's interests better.
"If [the board is] doing a major capital improvement, then it would make sense to have an attorney prepare or review a contract for that work," Axinn says. "I would want the co-op to have the protections that would be in an agreement that I would prepare, as opposed to a one- or two-page proposal from the contractor."
Make sure your attorney checks out any service contracts and vending agreements as well. Attorney Howard Schechter, a partner in Schechter & Brucker, notes that laundry room agreements are particularly troublesome. These agreements often contain language that restricts a board's options if they're unhappy with the service and want to change vendors, including provisions for automatic renewal and a right of first refusal. While these provisions are routinely removed in negotiations at the request of the co-op, "that's not something a board would necessary know until they try to change suppliers and get a threatening letter from the existing supplier saying they're going to sue them." When dealing with these contracts, lawyers can often spot situations that may cause a co-op headaches further down the road.
For some self-managed buildings, the advice of a lawyer is invaluable. Margaret Newman is the board president of her 10-unit loft co-op in Tribeca. She says her board relies heavily on the advice of their attorney Meg Goble, a partner in Hanley & Goble. "She functions as the sort of defacto building manager, although we don't pay her those kind of fees," Newman says. "But everything we do pay her has been worth it."
Goble has gotten involved in everything from refinancing the building's mortgage, to negotiating the purchase of roof rights for a top-floor owner, to tracking down the occasional late maintenance payment. The co-op recently revised the flip-tax policy and Goble helped keep the board's discussion organized. "We had some people on the board supporting it, some were not. It was a fairly contentious discussion," Newman says. "She sort of advised me and the whole group, focusing the discussion, and what the terms would be when we got around to renewing it."
Goble bills Newman's Duane Street co-op on an hourly basis, and even though the building may spend several thousand dollars a year on legal fees, it's still cheaper than a typical monthly fee for a management company. She says many of her clients come to her looking for advice that extends beyond strictly law. "There's a lot of times when people are calling and saying, 'Here's the situation, what should we do?'" she says. "They're really just looking for some practical suggestions. I get that a lot of times, even when they have a managing agent. It's not strictly legal [advice that I offer]."
Whether you want to have a hotline to your lawyer, or would rather call him or her on an as-needed basis is up to your board. But an attorney should always handle specific board matters before moving forward. At the very least, Axinn recommends that boards consult a lawyer whenever a co-op transfers a unit, initiates a major capital improvement, or refinances its underlying mortgage. Self-managed buildings should also have their attorneys review building documents, such as alteration agreements and sublet policies, to make sure they're up to snuff. In smaller buildings, Axinn says, legal issues may not come up very often, but they still need to be properly handled.
One way to navigate the legal waters is to have your board lawyer sit down and review all the corporate documents - bylaws, proprietary lease, house rules - and compare them against the board practices. Attorney Eric Goidel, a partner in Borah Goldstein, says that knowing what a board can and can't do, and how to do it, as stated in the corporate documents, keeps a board from making potentially bad decisions.
"What I find in many small and self-managed co-ops is that policies are often adopted without regard to the limitations that may be imposed by the proprietary lease or bylaws," Goidel says. "It's only sometimes in litigation that the board may find out the hard way that it may have overstepped its bounds."
Goidel, who calls himself a believer in preventive maintenance on legal issues, says boards should also institute practices like requiring second signatures on checks and contracts. These are all moves that could help avert bigger problems and bigger legal fees down the road.
These days it seems like there are no decisions a co-op can make that aren't fraught with legal pitfalls. But as in most board issues, taking the cautious route, consulting with your professionals, and not making hasty decisions based solely on the bottom line are always good practices to follow. You never know when a seemingly simple by-the-books move could blow up in your co-op's collective face - but it's a good bet that your lawyer does.