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What is the most realistic option for a board dealing with a shareholder’s objectionable behavior?
AUTHORDennis H. Greenstein
In one of the cooperatives we represent, I recently guided the board through the process of terminating the lease of a shareholder who repeatedly threatened board members, other shareholders, and staff and consistently exhibited other unacceptable behavior.
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Dennis H. Greenstein, Partner, Seyfarth Shaw. What is the most realistic option for a board dealing with a shareholder’s objectionable behavior?
BACKSTORY Our firm has counseled numerous of our cooperative and condominium boards on the issue of objectionable conduct exhibited by shareholders and condominium unit-owners. In cooperatives, proprietary leases provide authority for the board and/or the shareholders to terminate a lease for objectionable conduct of the shareholder or other related parties. The bylaws of condominiums provide, among other things, for bringing an action to enjoin the unit-owners and other parties from such behavior.
In one of the cooperatives we represent, I recently guided the board through the process of terminating the lease of a shareholder who repeatedly threatened board members, other shareholders, and staff and consistently exhibited other unacceptable behavior. With our guidance, the board and the managing agent of the building sent correspondence and other communications to the shareholder. It was our view that the board had taken reasonable steps to attempt to have the shareholder cease such behavior. Having failed, the proper action at that point was to seek the termination of the shareholder’s lease based upon her objectionable conduct. Further, we advised the board that it had other options, such as serving a notice to cure.
However, since the shareholder had been consistent in refusing to respond to the board and managing agent and her acts were of a serious nature, it was unlikely she would cease such behavior. Additionally, if she cured the violations within the time limit set in the notice and then again began the offensive behavior, we would be repeating our actions and therefore delaying the board’s ability to move the process along. Alternatively, if the co-op brought a default of the lease based upon objectionable conduct, there is no cure period available to the shareholder. Additionally, we advised the board of the steps required to be taken to satisfy the provisions of the lease and applicable case law to effectively terminate the lease. This included sending repeated written notifications to the shareholder of her behavior, warning that if she did not cease, the board would meet to determine if her lease should be terminated.
We also counseled the board to explore possible options to come to an agreement with the shareholder. If successful, this would avoid a protracted and costly process of litigation and consumption of the board’s time and energy in dealing with this issue. Our firm and the managing agent sent several letters to the shareholder, met with her, and attempted to resolve the matter. We proposed entering into an agreement that the shareholder would sell her apartment and be out of the building by a certain date. One of our conditions was to provide certain provisions in the interim period to allow her to extend the sale date of the apartment provided she not breach the agreement by exhibiting bad conduct.
It became clear that a resolution with the shareholder was not going to happen, and we advised the board to cease all attempts to resolve this and to proceed with the termination of the lease as a default based upon objectionable conduct. We prepared and sent a letter to the shareholder to meet with the board and me; summarized the litany of bad behavior; and referenced the many written notices sent to the shareholder and complaints received from other residents. The letter further stated that the purpose of the meeting was for the board to listen to her and then decide why it should not terminate her lease for objectionable conduct.
A date was set for her to meet with the board and me and her counsel. At the meeting the shareholder and her counsel were given the opportunity to respond to the allegations. We advised the shareholder and her counsel that a stenographer would be present to record the discussions. After the meeting the board voted to terminate the lease by a certain date. The proprietary lease of the co-op provided for a majority vote of the board to terminate the lease based upon objectionable conduct.
Shortly after, the shareholder sold her apartment and the board went back to dealing with the many other day-to-day issues and decisions such as the maintenance and repairs of the building, finances, and other matters.
COMMENT I have concluded that the initial response of most boards to difficult shareholders and condominium unit-owners has a common thread. The boards generally wish to resolve these situations by meeting with such owners in the hope of having them change their behavior and live by the rules and be “good citizens.” The process could become lengthy and consume the board members’ time and energy and distract the members from the day-to-day duties of the board and managing agent. It also could lead to the co-op incurring significant legal fees from almost daily calls and counseling as the shareholder continues his or her behavior, and as residents and staff complain to the board, whose members feel a greater sense of frustration and urgency.
While I advocate attempting to resolve matters as quickly and reasonably as possible, I believe that boards must recognize in the early stages of this process that some situations cannot be fixed by talking and negotiating with unreasonable people. The board members cannot allow their governance of the building to be distracted by one shareholder who clearly will not conform to the rules of community living. While proprietary leases generally provide for a defaulting shareholder to be responsible for the cost of legal fees incurred by the co-op, the co-op may expend significant money over an extended period of time before the matter is resolved and fees are reimbursed to it.
The takeaway is that boards and their counsel must use good judgment to decide how they wish to proceed in each set of circumstances. Making the right decision should prevent having these matters take on a life of their own – at great cost and distraction to the board.
From the Desk of DHG:
At an annual shareholders’ meeting Q&A, a man stood up and angrily asked, “What happened to my $15,000?” The board president was puzzled, and the accuser continued impatiently: “I was promised a $15,000 credit at last year’s meeting. I never got it.” A number of people in the crowd of 250 said, “Yeah, I remember that. I was supposed to get a credit, too!” As the rumbles grew louder, the president said to the man: “What is the address of your co-op?” He gave an address – and found he was at the wrong annual meeting. “Never mind,” he said, and left.