The Meter is Running
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Shareholders are often too self-interested and push alterations beyond the scope approved by the board.
AUTHOR Peter Zlotnick (with Jesse Schwartz), Kagan Lubic Lepper Finkelstein & Gold
Alterations, when properly managed, can be an opportunity for a shareholder to improve his or her quality of life, while at the same time updating and enhancing the apartment’s value.
Kagan Lubic Lepper Finkelstein & Gold
To rewrite the old saying: there are not only two certainties in life, there are three: death and taxes... and shareholder/co-op board apartment alteration disputes. Shareholders are too often self-interested and push alterations beyond the scope approved by the board. That was the recent experience of one of our co-op boards, whose cautious tact throughout the alteration process is a good example of how a board can effectively position itself to defend against alteration disputes with its shareholders when they inevitably arise.
In our client’s case, the shareholder initially presented construction plans to the co-op board that involved remodeling two bathrooms and the kitchen. However, after the board approved those relatively discreet plans, the shareholder covertly expanded the project’s scope far beyond anything the board had approved. The project had now morphed into a gut renovation of the entire triplex penthouse apartment. As soon as the superintendent – who was monitoring the construction – caught wind of what was happening, the board threatened to shut down the project and imposed fines under the alteration agreement. (Note, these communications should always be in writing to create a record.)
The shareholder returned fire, demanding that the board consent to the remainder of the unapproved work. He also requested an upgrade of the electrical service to the apartment, which he claimed was required to service the unsanctioned improvements that were already completed. The board refused. Naturally, the shareholder then sued, alleging that the board had breached its fiduciary duty by withholding approval of the shareholder’s remaining work.
The co-op had the lawsuit dismissed by showing that it had exercised its business judgment by taking simple yet critical steps to protect itself from the outset of the project. First, the co-op specified exactly which construction drawings were approved in the alteration agreement. That level of specificity undercut the shareholder’s argument that he had not gone beyond the scope of the approved work. Second, the co-op’s engineer and electricians reviewed all of the construction drawings, the unapproved work, and the shareholder’s request for additional electrical service. The board then was able to show that it based its decisions to grant or withhold approval primarily on the advice of its professionals. Third, the board had long-established policies of forbidding certain types of installations, such as steam showers, which it applied consistently to both this project and prior alterations. And fourth, the co-op was able to show that it had treated other similarly situated shareholders who had violated their alteration agreements in exactly the same manner by stopping their work and imposing fines.
There are a few easy lessons to be learned from this example, which will yield enormous dividends when alteration disputes inevitably arise.
(1) Be precise about what work is approved. There is no substitute for a clean and clear record, one that delineates the precise scope and specifications of the approved alterations. Optimally, the board should memorialize this record in writing by meeting regularly and establishing formal corporate resolutions that create a record of what work has been approved, what terms or conditions govern the work, and who is authorized to perform it.
(2) The board should find good design professionals and legal counsel and trust them. Courts will almost always defer to a board’s business judgment if it has adhered to the corporate formalities and if that judgment is based on professional expertise. If you trust your professionals, the court will trust you.
(3) Stay on top of the progress of the work. It is much easier to stop unapproved work from proceeding than it is to undo it after completion. A good superintendent should be the board’s eyes and ears and can usually monitor most projects, warning the board in advance of minor infractions before they become major problems.
(4) Be consistent. Each alteration can involve unique circumstances, but the board will be protected if its policies are consistently applied. If arbitrary decisions can be a board’s undoing, consistency is its best ally. Of course, good communication with the shareholders is always a key to avoiding misunderstandings or incorrect expectations. Make sure that the shareholders are told in writing up front what will be required of them and what the rules of the game will be when they plan to alter their apartment. They still may not follow them, but if they don’t, it will be easier to show a court what was told to them and what the rules were.
Alterations, when properly managed, can be an opportunity for a shareholder to improve his or her quality of life, while at the same time updating and enhancing the apartment’s value. To that end, it makes sense for boards to work cooperatively with shareholders of the building to expedite alterations.
If your board applies these simple procedures consistently, it will be in a good position to quell the next shareholder alteration dispute, and to prevail if the dispute reaches the courts, striking a balance between the benefits of such alterations and protecting the building.