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Tough Love

These days, living in Jeff Hostetler's Bay Ridge co-op is a little like looking for leg room on Noah's Ark. Barely a month goes by without Hostetler, the co-op's vice president, or some other board director spotting yet another new dog or cat in the building - a problem that is growing particularly acute, given the number of dogs and cats already in the 168-unit building.

“It's pretty much a free-for-all here,” says the beleaguered director. “We have one person who has five dogs in a studio. Someone else [has pets] in a one-bedroom. I don't know how many they have, but it sounds like a kennel in there. We still require new shareholders to sign the 'no-pet' agreement but I continually see new dogs in the building.”

The real problem is not just the animals, it's that they are there in spite of a specific policy, implemented only three years ago. Everyone seems to be flouting the rule, and the board members are at a loss about what they should do. The directors have tried to stay on top of the problem, directing the managing agent to write a letter to any shareholder who is seen with a new animal, all to no effect. As for further action, Hostetler notes: “Our agent says that it would require a lot of money in legal fees to force people to get rid of their new dogs and cats, and it still might not work.”

Enforcing house rules is a serious business - but also a tough one since you are dealing with your neighbors. But it has to be done. Boards that allow shareholders to continue with infractions take the risk of not being credible, and ultimately could lose control of the running of the property. So, when a house rule is broken, what should you do?

The smart boards will move quickly, firmly, and respectfully to deal with the problem immediately. Mediation is the preferred first option. “Generally speaking, the cardinal rule is to try and reason with a recalcitrant shareholder and explain the rationale behind the rule,” observes Bruce Cholst, a partner with the law firm of Rosen & Livingston.

Indeed, the board should initially address the issue with a series of non-aggressive steps. First, the board should have the building manager write a letter to the shareholder, respectfully pointing out that the shareholder is in violation of the rules. If that doesn't work, or there is no response, the board should attempt mediation on its own, asking the shareholder to come and speak with the board so the directors can explain why the rule exists and ask the shareholder to respect it.

Observes Robert Tierman, a partner in the law firm of Litwin & Tierman: “It's not a thing that's going to work all the time, but I would say that, in a not insignificant percentage of the time, when the board takes the time to directly talk to the shareholder, the problem can be resolved.”

But if that still doesn't work, the board should hire a lawyer and review its options, says Arthur Weinstein, a co-op and condo attorney. The strongest one you have is “The Bank Option,” which involves threatening to default the shareholder, terminating his/her lease, and then contacting the bank that holds the owner's mortgage. This makes the lender the heavy and invariably gets results.

“That really panics the bank, because the bank's lending collateral is the [proprietary] lease. And if the lease is terminated, the bank doesn't have collateral for the loan and they may try to take action to get the shareholder to cure the default,” says Weinstein, who notes that it will cost about $250 to send a notice of default to a shareholder, and another $250 to send a notice of termination of the proprietary lease.

Typically, the bank will do one of two things: either call in the loan to have it paid, or else charge “default interest rates,” which can run as high as 18 percent. “Lending banks do not appreciate their collateral being threatened with termination,” explains Weinstein. And while it may seem an extreme reaction on the part of a bank to threaten to call in a loan or institute default interest rates after receiving the notice of termination of the proprietary lease because of the breaking of a house rule, “banks don't really care what the issue is,” says Weinstein. “The banks care that their collateral has been frozen.”

At the end of the day, notes Tierman, it is up to the board to decide how to best handle a shareholder who breaks the rules. While some boards are afraid to escalate the problem, because of the cost of litigation, it is probably worth the investment to hire an attorney for an hour or two to go over your choices, rights and responsibilities, and any potential pitfalls.

After everything has been done, if the shareholder still won't comply with the policy, the board has to consider whether it is ready to follow through with its threat to terminate the proprietary lease. If there are bigger issues to contend with in the building, it may not be worth the board's attention.

On the other hand, if the board's reluctance to press the issue is part of a pattern of being timid with shareholders, it may be time for the board members to consider whether they need to step down and let people with a firmer hand guide the building. It's a hard call to make, acknowledges Tierman. But if the current board isn't strong enough to deal with recalcitrant shareholders in the building, “they should think about finding people to serve on the board who are.

“If you set a precedent of not enforcing house rules,” adds the attorney, “then it makes it very hard to be credible in enforcing house rules at all. It's an open invitation to other people to violate them.”

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