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The Wall

Antiquated and imprecise bylaws are blocking boards from acting.
Is there anything you can do about them?

 

The board members of the Biltmore Towers Condominium in Westchester thought they had a slam-dunk. Metro PCS New York, a cell phone company, had made the high-rise building a lucrative offer it wouldn’t refuse to place multiple cell phone towers on the roof of the property. The much-needed infusion of cash – the board estimated that the eight cell towers would generate over $270,000 in revenues – would be welcome as a way to offset the costs of putting in energy-efficient equipment. It was a no-brainer.

Not to one unit-owner, however. Rose Kaung was concerned enough about the effects of cell phone radiation on the denizens of the Biltmore Towers to drum up support among about half-a-dozen other owners. The group then sued the condominium, the board, and Metro PCS, which had signed a 25-year lease to maintain the towers on the roof. The case challenged the board’s right to make the deal. And – despite existing case law, common sense, and conventional wisdom – the dissidents succeeded.

The board was stunned. “They were surprised because they thought that most people would want the income rather than assess everybody for projects,” says John Holzinger, a principal at Barhite & Holzinger, the property’s management company.

Most recent case law had given boards the power to make such decisions, as long as the choices didn’t involve self-dealing. That was clearly not the case here. After all, what could be more beneficial for the condo than a profit-center like a cell tower?

The problem was simple – an antiquated bylaw provision – but the solution was not.

The dissidents had found a provision in the bylaws through which they could overturn the board’s action. They argued that the cell phone tower lease involved a “commercial use” of the roof and therefore violated the governing documents. The bylaws, written some years ago, required that the board maintain the “residential character” of the condominium. Not only were the apartments restricted to residential use – fairly common in most properties – but so were the common elements. The language was dense, saying that the roof “shall be used only for the furnishing of services and facilities for which they are reasonably intended and which are incident to the use and occupancy of units.” The judge in the case agreed with the dissident group’s arguments that the cell towers did not directly benefit – i.e. “are incident to” – the condo owners.

Why hadn’t the board amended the bylaws? One of the problems was that the bylaws stated the condo association needed 25 of the lenders to agree to any bylaw change. Yes, that’s right: 25 lenders. Banks, individuals, note-holders, a foreign trust – 25 of them, wherever they were.

And you thought collecting proxies was hard.

Biltmore Towers is not unique. Many condominiums throughout New York City and its suburbs are facing a fact of life: the state is years behind much of the country in how its condominiums are governed – and there is very little anyone is doing to change it.

The Way It Began

The terms “co-op” and “condo” are often used interchangeably when discussing legal issues. However, the two are very different entities. Most involved with them know the basic difference: in co-ops, you own shares in a corporation that owns the building while in condos, you actually own real property. Most also know that the condo board has little control over who buys and who sells (outside of sometimes having the right of first refusal).

What most unit-owners – and apparently some attorneys and managing agents – don’t know is how unlike a co-op a condo is in other, more consequential (i.e., corporate) ways. For, unlike co-ops, condos cannot fall back on the Business Corporation Law (BCL) for guidance when there are blanks left by the bylaws. Attorneys often refer to the BCL when talking about actions a board can take in condominiums, notes attorney Jeffrey Schwartz, a partner in Wolf Haldenstein Freeman & Herz, but they do so incorrectly.

“With the BCL, if you don’t specifically say you have a right to have a board meeting by telephonic conference call, you’re okay because the BCL lets you do it,” says attorney James Samson, a partner in Samson Fink & Dubow. “The trouble with the condominium statutes is that the bylaws can contain basically anything.”

That has to do with the way the laws governing condos were set up. Cooperatives are governed by a proprietary lease and, primarily, by the bylaws, which need only a majority vote of the board to amend. Condominium associations, however, are ruled by a different form of bylaws, ones that need anything from two-thirds or a majority of the owners to two-thirds or a majority of the lenders to revise them.

According to Arthur Weinstein, a co-op and condo attorney in private practice, the difference is a matter of the forms of governance coming from two dissimilar traditions. “The story of the co-op parallels that of New York corporate law going back several hundred years,” he notes. The feeling was that a corporation required functionality, with rules that would be applicable to a huge public corporation as well as to a small one. So the rules were set up in such a way that there would be no need to poll all the shareholders to amend a routine point such as the size of the board. The Condominium Act, however, was specifically designed for condominiums. It didn’t have to be as versatile. “You didn’t have to merge it into the law for the General Motors Corporation,” explains Weinstein.

More significantly, the Condominium Act was outdated from the moment it was put in place by Governor Nelson Rockefeller and the New York State Legislature in 1964. It was based on a condominium law that was then current in Puerto Rico, which was itself based on one used in Spain, and contains none of the corporate aspects of running a condominium.

“Rockefeller was looking for a way to have housing developed that could be financed, and in those days, co-op apartments weren’t subject to financing because they were considered personal property, so he brought the condominium concept to New York,” says attorney Stuart Saft, a partner at Dewey & LeBoeuf.

And because co-op conversions and construction were so dominant until the mid-1980s – when developers began switching over to the less restrictive, more profitable condominiums – the problems in the Condominium Act and the individual associations’ bylaws were easily ignored.

 

A National Shame

Most of the rest of the country has long since left New York’s act behind, adopting a standardized law crafted by the National Conference of Commissioners on Uniform State Laws. Called the Uniform Condominium Act, it fills in the corporate gaps that exist in New York’s legal system. “Every state is several generations ahead of us,” Saft notes. “Ours is totally outdated.”

Because the state government has ignored this issue – and also because many co-op and condo attorneys and managers do not seem to be familiar with the national picture – condo owners are left holding the bag; i.e. antiquated or quirky bylaws that can be a roadblock to getting anything done. “The world would be better off if [the condominium bylaws] were all rewritten,” says Holzinger, the management executive. Indeed: many were designed for problems of developers who were often worried about inexperienced new owners going on a spending spree, hence the sometimes ridiculously low dollar amount limits for capital work and/or the need to get the 100 percent consent of lenders and/or the unit-owners.

Just as importantly, sponsors developing condominium offering plans often cribbed from one another, copying where they saw fit, and improvising when they couldn’t find the copy they needed. “And bad behavior was routinely propagated because nobody wanted to think about it and do it,” Holzinger says. “It costs a lot of money to do something right and when somebody else has already written something which seems adequate, why go to the extra cost?”

That sort of haphazard creation has led to a lack of standardization on simple things. “The trouble is they don’t standardize,” complains attorney Samson. “It’s just all over the place and you’ve got to really read them carefully and know what should be in them.”

Attorney Tom Smith, a partner at Smith Buss & Jacobs, finds the situation appalling: “These buildings are $10 million to $50 million assets and if you and I were engaging in a transaction involving that much money, we would negotiate all the fine points to make sure that our respective interests were being addressed. But here, you end up with a multi-million dollar asset that has governing documents that aren’t tailored to the circumstances.”

Faulty bylaws can lead to unforeseen circumstances. At 3800 Blackstone Avenue in the Bronx, for instance, the condo association had bylaws providing that the condominium would insure floors and walls inside each unit (a money-saving move by the sponsor, since otherwise he would have had to carry a separate policy for each of his units; this way, the association would foot the bill). When leaks in the roof or walls caused property damage, the condominium had to make a claim to its insurance company. After a few such claims, explains attorney Ken Jacobs, a partner at Smith Buss & Jacobs, the insurer threatened to cancel the condominium’s insurance because of an excessive loss history. If the current insurance were cancelled, the condo would not be able to obtain replacement insurance except at a 30 percent premium increase and with a water damage exclusion.

So, how can you change the bylaws and govern effectively? The first step is knowing what’s in your bylaws. It’s such a basic idea, yet some do not do it. For instance, a condo on West 110th Street in Manhattan has gotten into trouble because no one apparently read the governing documents. The board had hired a team to begin replacing the windows. One drawback: it hadn’t gotten permission from the unit-owners, a requirement that is clearly spelled out in the bylaws.

The next step is recognizing that your bylaws probably need revision. Look for low-dollar limits on borrowing, impractical restraints on board power and/or common area use, and a required high-threshold of lenders or owners to make a simple bylaw change. And look for missing but important safeguards, like giving the board the right of first refusal on an apartment sale.

The final step is usually the hardest: making the change. If you need to reach a threshold of lenders for approval to amend your bylaws, for instance, be prepared to spend many long hours of plodding phone and/or legwork.

“Is it impossible [to revise the condo bylaws]?” asks attorney Phyllis H. Weisberg, a partner at Kurzman Karelsen & Frank. “No it is not impossible, especially if you have somebody who is willing to write letter after letter and get on the phone with people wherever they may be – if you can track them down. Often, in a condo the owner is an offshore corporation or some kind of entity. They view it as an investment and they don’t want to get involved. They don’t live there; they don’t have the same interests. If you work over a period of months you may be able to get enough proxies to make the change. But it’s a real time commitment.”

That sort of commitment is evident at 543 Main Street, a 90-unit condominium in New Rochelle, where the bylaws only call for a three-member board, including one sponsor or commercial unit-owner member. This has placed a huge time burden on the two residential unit-owners who serve and deprives the other residential owners of a cross-section of representation.

“It’s been challenging, observes Andrea Brown, the vice president. “We’d like to offer things like a newsletter and a website for the building where we can foster a community spirit. We’d just like to have more voices to respond to questions and needs. These are all things I think a board should spearhead but because of our size we’re really not able to do it.”

The two members, Brown and Margie Vasquez, the president, proposed increasing the number of board members to five. A simple change that has nonetheless been defeated twice. “Getting everyone into the same space or on the same page with regards to getting the ballot initiative passed has been challenging,” Brown notes, “especially going through the economic times that we’re in, it’s just really hard for people to focus. Unless there is a real sense of urgency – I almost think that if the ceilings aren’t falling down, if the walls aren’t crumbling, then there’s a sense that, ‘It’s being taken care of; I really don’t have to pay that close attention to what’s going on.’”

Elsewhere, perseverance is the watchword. At 135 West 16th Street, a 48-unit condominium, the board successfully amended the bylaws to impose a “deferred assessment,” comparable to a co-op’s flip tax (when a person buys into the condo, an assessment equal to one percent of the purchase price is imposed; but then he pays when he sells).

“This took over a year to do,” recalls Edna Cohen, the long-time board president. “First, we sent out a letter telling people what we wanted to do. And we timed it so it was right before our annual meeting so they could ask us any questions there. We were hoping that we would pass it at that meeting but we didn’t have enough people. So it meant really reaching out to them and talking to them on a personal level and saying, ‘Look, for the betterment of the building…’ That’s how we accumulated enough votes.”

Some lawyers and managers report that they simply ignore the outdated provisions in condo bylaws. “No one pays attention to those arcane rules,” says one veteran real estate lawyer. Other experts, however, say you ignore the rules at your own risk because you will probably, inevitably, be challenged. As Weinsten puts it: “Nothing self-enforces in this world,” so you’d better do it yourself – before you’re forced to do so in a lawsuit.

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