You’re new to the board and you have a legal question. but you’re told, “we don’t want to spend money by calling our lawyer. Our managing agent can answer that question.” Another time, you have a question and you are told that Bob, a fellow board member, is a corporate attorney. “We don’t want to spend money by calling our lawyer. Bob can answer that question.”
What’s wrong with these pictures? Ever hear the phrase, “penny wise and pound foolish”? Indeed: not spending money when it counts – early in the process – can result in larger bills (and possibly liability) if your de facto attorneys don’t give you the right advice. Certainly, in some routine legal matters, a manager can offer guidance (but, for a whole host of reasons, I wouldn’t ask a board member to act as a legal adviser). Yet when it comes to most issues involving the law (and its nuances), you should spend the money and get the right advice.
How do you know when to turn to the attorney? The following are examples of the types of day-to-day and special circumstances where counsel should be involved.
Elections. The attorney should offer counseling on such issues as general board governance and election procedures and requirements. The managing agent should prepare the notice of meeting and the agenda, and gather proxies for annual meetings of the shareholders or unit-owners and the agenda for board meetings. As counsel, we suggest reviewing the text of the documents for annual or special meetings, particularly if there is any business beyond the election that will require a vote of the shareholders or unit-owners.
Amending documents. The lawyer should interpret questions relating to the governing documents and prepare amendments to those in cooperatives (certificate of incorporation, bylaws, and proprietary lease) and condominiums (declaration and bylaws). For example, the board, managing agent, and counsel may discuss a proposal to enact a transfer fee (“flip tax”), and then the counsel will prepare the text of the proposal and any necessary documents and communications relating to the proposal.
Dealing with Shareholders and Unit-Owners
Monetary defaults. Initially, boards should have their managing agents send a letter stating that the arrears must be brought current. If arrears are overdue by 60 days, the board should contact counsel for action.
Non-monetary defaults. When dealing with violations of the rules, the proprietary lease, or the bylaws (noise, odors, objectionable behavior), boards should contact their managing agents first – unless the behavior is a threat to the safety and welfare of the other residents. Illegal subletting, occupancy, use issues, and violations of rules initially are dealt with by the managing agent. If they are not quickly resolved, that’s when you turn to your lawyer.
Complaints by residents. Ordinary complaints should be handled by the managing agent. Any allegations of discrimination, harassment, or other violations of law should be promptly brought to the attention of counsel by the managing agent or the board.
Sales and leases. Questions concerning the rejection of a purchaser or subtenant of a cooperative or the right of first refusal of a condominium should be reviewed immediately by counsel.
Disciplinary action or termination. While the managing agent has the responsibility of dealing with staff, counsel should be contacted if the board is considering disciplinary action or termination. Counsel can work with the Real Estate Advisory Board in guiding the board and its managing agent through the issues and this process.
Harassment or discrimination. Where allegations are made by staff that they are being harassed or discriminated against or if they have similar serious complaints, counsel should be contacted promptly to review and advise on what action should be taken.
Construction agreements to repair a roof or façade, or replace major equipment, parts, and systems (and service agreements) should be prepared by counsel.
Leases and license agreements between a co-op or condo and the owners or third parties should be prepared by counsel. Buildings may wish to lease or license to its residents’ bike, wine storage, or other common areas. Further, some buildings have commercial space which they wish to lease.
Bylaws of condos should be reviewed by counsel to advise if there are any limitations on expenditures of money by the board to perform certain work.
Budget. The board will generally work with its managing agent and accountants to plan the budget and expenditures for capital improvements. This may involve borrowing funds from lenders. Counsel should review any financing proposals from lenders and the loan-closing documents as well.
Additional funding. Counsel should advise the board of any legal requirements or impediments to replacement or additional funding. For example, does an existing loan with the building provide for a prepayment penalty or prohibition against additional financing? Do the bylaws of a condo provide for any limits on borrowing that require the consent of the unit-owners? Is a mortgage broker obtaining the loan and is there a written agreement regarding the fees? These are issues which must be known before entering into any binding agreements with a lender or other parties.
Limits of privilege. Board communications with their counsel can be privileged. Nonetheless, the attorney-client privilege will not extend to managing agents or other non-board members. Accordingly, any sensitive or confidential issues relating to residents, staff, or any other parties should only be discussed with counsel and the board in the first instance to protect the privilege.