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Technology and the law – two big reasons for revising your proprietary lease.
If things are spelled out clearly in the proprietary lease, boards can avoid arguments and not waste time and money in litigation.
Read this article in the digital edition.
If you pick up your proprietary lease and find a velocipede, don’t panic and don’t call an exterminator. Call a board meeting instead – because if your proprietary lease is still specifying where you can and can’t store your 19th-century bicycle with the big front wheel, well, it’s time you looked at wheeling your document to the 21st century.
“I’ve seen phrases in a propriety lease not only about your velocipede but also about the coal chute and running a clothesline out your window,” says attorney Jessica Richman, an associate at Montgomery, McCracken, Walker & Rhoads, who is currently helping a co-op update its lease and bylaws.
But who cares if there’s some quaint, old-fashioned language adding a whiff of history to your building? You should. First, because this is a legal document, not Downton Abbey, and second, says Richman, “We find that boards spend a lot of time in disputes. If things are spelled out clearly in the proprietary lease, boards can avoid arguments at the outset and not waste time and money in litigation.”
Indeed. There are proprietary-lease areas that critically need updating. Attorney Stuart Saft, a partner at Dewey & LeBoeuf, recalls how the Hotel des Artistes, a co-op on Manhattan’s Upper West Side, was forced to refund $350,000 in sublet fees to former shareholders because the fee policy, approved by a majority of tenant-shareholders, was never incorporated into the proprietary lease.
Saft has also seen board members get blindsided when they belatedly discover that their bylaws’ indemnification provision covers only damage awards and not legal fees, forcing board members to pay considerable sums out-of-pocket.
That’s the “why” of it. You also have to be aware of the “how” of it – how do you do it? “Part of the process of amending the proprietary lease is managing the politics of it,” notes Phyllis H. Weisberg, an attorney with Kurzman Karelsen & Frank. “You have to educate the shareholders,” she says, “and make them understand that it’s for the good of the co-op as a whole and in everyone’s best interest.”
So, what areas do you have to update? “[Ones dealing with] advances in technology and advances in the law,” says Richman.
Technology. “Some leases are unclear in terms of the building’s right to access the roof or someone’s balcony to install or maintain internet [and cable] connections or other things that were not common some years ago,” Richman notes. This may even involve access by outside parties, such as phone-company personnel who install and maintain the cell-phone transceivers and other devices for which your co-op has leased location rights, or advertising agencies hanging a banner ad on the side of your building.
The law. As for advances in the law, boards and their attorneys need to be aware not only of new legislative statutes but also case law created by the court decisions that clarify those statutes. “Thirty years ago, there may have been two or three co-op decisions every year,” says Saft. “Now there are multiple decisions every week. You constantly have to think about updating your documents in order for them to remain current.”
One major statutory change came in 1988, when New York State amended the Business Corporation Law to increase the indemnification available to board members. If your bylaws, in this case, rather than the proprietary lease, don’t contain up-to-date language, that could spell trouble.
New Clear Proliferation
Aside from issues of damage and repair – which can extend to who’s responsible for damage to roofs and terraces, damage caused by apartment alterations and repair, and damage when the board has to forcibly enter an apartment in an emergency and the shareholder didn’t provide a key – other areas you should look at include:
• Fees, such as sublet and late fees. If the proprietary lease says the shareholder has to pay monthly maintenance “promptly,” explain your intent. Are you allowed to charge fees? Can you charge interest on those fees? If so, how much does the law allow? What about the ability to set “user charges” for things like parking garages and gyms?
• Flip taxes. Unless there’s a provision in the proprietary lease for a transfer fee, colloquially called a flip tax, you can’t have one.
• Subletting and other uses of the apartment. Unless there’s a provision in the proprietary lease for this, it is also a non-starter. Check the lease to see how much control you have regarding subletting, over who can live in the apartment besides the shareholder and family, and what kind of work or profession the board will allow. Without going into detail on the topic of home offices, including what’s allowed by law, prudent boards draw a distinction between occupations that put stress on habitability and security, such as a day-care center being run out of an apartment and those that do not, such as a draftsman or a writer.
• Insurance. Does the lease require the shareholder to carry apartment insurance?
• House rules. What’s the board’s procedure to create them? What types of rules can and can’t you create? Is there a provision for enforcement?
• Alterations. Another big area. The main thing to know is whether there’s a provision requiring that apartment alterations be approved by the board, what the specific steps are for approval, and the board’s responsibility to provide a timely decision.
That last brings up an another important point to consider. Draconian rules and leases that absolve a board of any responsibility for behaving in a fair and timely manner may not pass legal muster and may depress the value of apartments, since no one wants to invest in a building where you have to jump through hoops to replace the kitchen stove.
Apropos of this, attorneys advise that a modern proprietary lease include a provision for arbitration/mediation, terms more or less used interchangeably (see “Mediating a Solution,” Habitat, December 2011). For quality-of-life issues especially, arbitration can be a quicker, easier, cheaper, and more confidential alternative to the judicial process.
If It Ain’t Broke…
Some things in a proprietary don’t necessarily need to be changed or added. To allow reverse mortgages, which have come into vogue over the last few years, “You don’t need the proprietary lease amended,” says Saft. “The board has the ability to approve reverse mortgages.”
And surprisingly, the advent of same-sex marriage in New York State may not require any changes to most proprietary leases. “Up until last year when same-sex marriage was approved,” says Saft, “when we did a proprietary-lease review we suggested the lease be revised to say ‘spouse’ and ‘domestic partner’ [rather than husband and wife]. But with the new law, that language change no longer has to be made.” However, Richman does advocate making the language “more gender-neutral. We’ll change ‘wife’ to ‘spouse,’ for instance.”
Politics and Intent
Ironically, the most important change to a proprietary lease is also the easiest: extending the co-op’s proprietary lease. Like all such documents, your proprietary lease has an expiration date, although that usually doesn’t come for 50 years or more. This is partly because the New York State Department of Financial Services requires that a proprietary lease have a term of at least 35 years before the department allows 30-year financing in the building. Every co-op routinely gets super-majority approval to extend the lease term (otherwise shareholders wouldn’t be able to get financing), but a super-majority is difficult to get when you’re updating the proprietary lease. “Depending on what the lease provides, the [needed] super-majority could be two-thirds or three-fourths of the outstanding shares,” says Weisberg. “I’ve seen it go up to 90 percent. And that’s not the percentage of people voting but of all outstanding shares, so if a lot of people abstain, it’s effectively a negative vote.”
The politics of it have to be carefully managed, she cautions. “This may mean lots of informational meetings and coffee klatches with floor captains about why you’re doing what you’re doing and getting their input,” says Weisberg. “Sometimes shareholders have very good suggestions you could incorporate into the provisions being submitted for a vote.”
The hot-button items are repair policies, restoration after a casualty, flip taxes, and alteration agreements, as well as the “transfer requirements” governing selling, bequeathing, or otherwise passing along an apartment’s shares requirements.
And be ready for opposition over things you’d never expect opposition to. “The problem is when people buy an apartment, they don’t necessarily read the lease,” says Weisberg. “Now they’re suddenly reading the lease, and they’ll complain about some other provisions that are not being changed.” One solution: “We typically give them a blackline lease,” she says, meaning a lease where old provisions have black lines through them and a new or rewritten provision is attached. This makes for easy comparison so that shareholders can easily digest all the changes being proposed.
Finally, there’s all the vague phrasing that needs clarification as to intent. Bruce Robertson knows firsthand how costly that can be. “Our building replaces flushometer valves and radiator valves at our expense,” says Robertson, former board member of an 83-unit Riverside Drive co-op in Washington Heights’ Audubon Park Historic District, who now serves on the co-op’s finance committee. Years ago, his flushometer broke and one of his downstairs neighbors was flooded.
“I told our managing agent that the building is responsible for repairing the damage. He said, ‘No, look at your proprietary lease.’ I said, ‘No, in 2005 there was a policy change’ – and then it turned out there have been policy decisions made by the board that we never put into the proprietary lease.”
Building documents seemed to bolster his claim, but then they found that the wording was vague. “We said the building would assume flushometer responsibility,” says Robertson. “Did that just mean replacement, or [fixing] damages to the building?” In this case, he says, the building replaced the valve, but Robertson was responsible for his own insurance claim for the repairs.
And to this day, they still haven’t updated the proprietary lease. Uh-oh! Better hop on your velocipede and speed down to your lawyer’s office. Make that change!
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