New York's Cooperative and Condominium Community
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When should your board ask for legal advice? For our November issue, Habitat asks New York's leading co-op/condo attorneys about board missteps. Over 40 lawyers responded with their stories and advice.
Borah Goldstein Altschuler Nahins & Goidel
Maintaining Market Value
Identically sized apartments often sell for significantly different prices. Variables include an apartment’s condition and its location in the building. Boards must often wrestle with the competing goals of allowing their shareholders to sell their apartments while trying to preserve the market value of all shares. Although the economy is improving, many owners still find it difficult to sell their apartments at prices that are acceptable to their boards. Purchasers still lowball offers and are ever more critical of an apartment’s condition.
Affording shareholders the ability to give renovation, maintenance, or closing expense credits will enable the selling shareholder to sign a contract at a price that a board will accept, yet result in a purchaser buying the apartment at a net lower price. Where the seller’s concession takes the form of a renovation credit a mechanism must be established to ensure that the apartment is subsequently renovated. Otherwise, the same issues will be revisited with the next sale.
All forms of concessions must be written into contracts, so as to not perpetuate any type of banking fraud. However, boards must be aware that lenders may place limits on what percentage of a sales price may be rebated to the purchaser. In order to arrive at a policy that addresses the goals of all parties, boards should consult with an attorney who is familiar with these options and their limitations.
Matthew J. Leeds
Ganfer and Shore
A Matter of Perspective
Can a co-op board reject a purchaser’s application because the directors do not like the price being paid for an apartment? Can a condominium board adopt rules to ban smoking by unit-owners within their own apartments?
Although these are matters of law, the considerations giving rise to them call into play practical and political issues that might not be evident to a non-professional board. Both matters not only have a legal answer, but also have a potential effect on the values of apartments and the rights of owners and occupants, as well as the burdens of enforcement.
Experienced counsel (together with a good professional managing agent) will have dealt with these issues in other buildings and can add to the board’s perspective. As a result, the board can make an informed decision about whether to go ahead with such a significant move, and the political implications of dealing with the owners and occupants.
An Influx of Atypical Buyers
For many years, co-ops would not consider any form of ownership other than in the name of an individual. But several buyers have sought to take title in the name of a trust for estate planning purposes, and boards should no longer arbitrarily reject this request. A board should reach out to its counsel to ascertain what protections it needs in order to consider ownership in the name of a trust, limited liability company (LLC), offshore company, or other entity. Typically, we require an occupancy affidavit attesting who the occupants of the unit will be and a personal guarantee from the individual who would purchase the unit. Additionally, an irrevocable trust is more favorable from a board’s perspective as opposed to a revocable trust. All trusts will need to be reviewed by the board’s attorney for approval.
Furthermore, an influx of capital from overseas is flooding the condominium market. The majority of these investors are purchasing in cash and taking title through an LLC and/or offshore company. We have seen several condo boards place conditions on these buyers, even going so far as to require common charge escrows. This is a decision that should be carefully scrutinized by a condominium board because technically their only right is that of first refusal. The board does not have the authority to impose conditions on the issuance of the waiver of right of first refusal. Actions of this nature can potentially expose the board to liability.
Dale J. Degenshein
Stroock & Stroock & Lavan
Although New York State law provides that a cooperative board can reject a proposed purchaser for no reason or any reason, absent discrimination, the accompanying mantra is that objective reasons for a rejection fare far better than subjective reasons. A situation often occurs when a board, unhappy with a prospective purchaser’s financials, invites the purchaser to an interview so that she can explain any discrepancies. Most attorneys would have stopped the interview and advised that the board should receive all financial information and have all questions answered before they ever meet (or even speak with) the purchaser.
If the board is inclined to reject a purchaser based on financial considerations, but they meet the purchaser and the purchaser is a member of a legally protected class (and we may all be members of a protected class depending on the circumstances), the board has given the purchaser a potential cause of action: that the board rejected her not because of her financial status, but rather because of impermissible discrimination.
No matter that board members believe they are acting appropriately, if there is a potential for litigation, they should ask counsel to review the issues before they take any substantive steps in dealing with a purchase application. Unfortunately, we have seen too many circumstances where board members, acting with the best possible intentions, take action that – had they consulted (and followed the advice of) counsel – they would not have taken.
Getting Out of a Bad Deal
Most vendors and contractors try to get co-op and condo boards to sign form contracts that usually favor themselves. If the terms are not negotiated and revised, it may be difficult to cancel the contract even if the contractor or vendor fails to adequately perform its obligations.
Laundry room contracts are typically at least seven years long. In my experience, laundry room service providers will go to great lengths to satisfy demands for improved service or better rates, but in the end they typically will not agree to a voluntary early termination of contract. In situations where laundry room contracts were drafted by the service provider, I have had to advise clients that they will have to live with the provider until the end of the contract term because early termination would be difficult, if not impossible.
For long-term contracts or where large sums of money are involved, it is usually easier to monitor and control the performance of the vendors when attorneys were involved in the contract drafting and negotiation process, and the upfront legal fees will reduce costs later if there is litigation or will eliminate litigation altogether because of the clarity of the contract terms and remedies.
Novitt, Sahr & Snow
Clauses In Need of Laundering
Because of the minor nature of many construction jobs, it often does not occur to a board or to management to consult with counsel before work gets underway. I cannot disagree that going to counsel for every little job might gum up the day-to-day operations of a building. But it can be a bad decision to ignore your attorney when signing what appears to be a boilerplate, simple contract, or proposal. Many vendor-prepared contracts, whether small jobs or routine service agreements, are filled with potential pitfalls.
A classic example of this is an agreement to rent to a laundry vendor. Even though a laundry contract runs between six and eight years, it typically has all kinds of language that, if not properly negotiated from the outset, can end up haunting the building.
This can include the vendor’s ability to randomly raise or lower prices, limits to vendor responsibilities, the right to reduce the agreed-upon rents, and, most importantly, the dreaded right of first refusal. This is the clause that states that when you get to the end of the term, you may not sign with a different company unless you first offer the same terms to the current company, potentially doubling the term. When in doubt as to whether you should sign a contract or proposal on behalf of the building, bring your lawyers into the review and decision-making process. You won’t regret it down the line.
John J. LaGumina
The LaGumina Law Firm
Beware the Boilerplate
Boards should get legal advice before entering into contracts, such as for coin-operated laundry machines, renovations, refuse removal, and storage systems. Often the boilerplate forms utilized by vendors are one-sided and designed to provide maximum legal advantage to the vendor rather than the board.
For example, many laundry-room agreements are written as leases with automatic renewal clauses and rights of refusal. These can be very difficult to get out of and may end up perpetually binding future boards to the vendor. Instead, the board should seek legal counsel to convert the laundry-room lease agreement into a more balanced license agreement with reasonable cancellation and other provisions.
Similarly, refuse removal agreements often contain automatic renewal clauses that may tie the board to the vendor forever. Contracts for repair or renovation work should also be referred to counsel in advance in order to ensure that there are sufficient provisions for retainage, payment applications, approval of work, and other conditions designed to protect the board from pre-paying too much or from paying for incomplete or defective work.
Arthur I. Weinstein
Arthur I. Weinstein
The Obnoxious Director
On several occasions boards have found themselves saddled with directors whose conduct, attitude, and lack of professional understanding have made it difficult for the board to take care of business. I have seen directors who have “one-issue” constituents: to implement or stop the implementation of a particular project such as roof deck, lobby renovation, or gym; who are so focused on issues pertaining to their own apartments; who have personal issues with other directors; who are verbally abusive to other directors; who show no respect for confidentiality of board proceedings; who threaten litigation against the co-op because they disagree with board decisions; who have financial relationships with companies doing business with the co-op.
I have found that there is no single way to deal with these problems. The New York State Business Corporation Law merely provides requirements for disclosure of conflicts of interest and methods to void contracts, but the issues of the obnoxious, ineffective, counterproductive director rarely rises to the level contemplated by the law.
My initial recommendation is to educate all directors about the nature of their fiduciary obligations, expected standards of personal conduct, and confidentiality requirements. If education through personal meetings, recommended attendance at available courses, and seminars fails to change the conduct of the impossible director, the board must consider legal remedies. Most bylaws authorize an “executive committee” of directors to minimize the involvement of the director. However, if the director has a multi-year term remaining, the board may be forced to consider action, governing documents permitting, to remove the director. Rarely, however, do the bylaws permit the board to remove a director for abusive or counterproductive conduct. The ultimate solution is to present the problem to the shareholders. A removal “for cause” is allowed by law when the removal is based on a specifically identified allegation of improper conduct by the director. Recently, the shareholders of one of my clients removed a dysfunctional director at the request of a majority of the board. The result? A more harmonious, far more efficient and functional board.
Levine & Montana
Do Your Duty
One of the associations that I represent elected two people to its board. They had never served as directors or officers before. There are five members on the board, two of whom are sponsor representatives. The sponsor representatives were elected, not appointed, and the sponsor only voted for its two people. Before long, the two novice directors pronounced that one of the sponsor representatives was not entitled to serve and would not be recognized.
They offered a letter from a private attorney to support this contention. However, the organizational documents did provide that the sponsor representatives could serve. A response was provided to the outside attorney, and it has not been refuted. As a consequence, important board meetings were not conducted because the directors would not convene while this matter was being aired. If the novice directors had inquired directly, the issue and time delay could have been avoided.
One of the same two new board members is alleged to have physically interfered with a building-wide renovation project, which had been approved by the board as a whole, with plans and specifications provided by the association’s professional engineer and permitted by municipal authorities.
Board members need to realize that they are fiduciaries. They need to put aside their personal interests so that they can act in the best interests of the community as a whole, in good faith, and within the scope of their authority. When they fail to do that, they jeopardize the board’s actions under the Business Judgment Rule and potentially expose themselves to personal liability.
Belkin Burden Wenig & Goldman
Exercising Rights – and Restraint
Not so much legal advice, but practical advice regarding the limits of board power. Very often, not exercising a legal right is the wisest course of action, if exercising it will lead to greater enmity, enmesh the board in litigation, and cost tens of thousands of dollars in legal fees, which are normally not recoverable.
Joel E. Miller
Miller & Miller
The Shock of Dwindling Millions
Because one of my firm’s prime specialties is advising co-ops and condos on income-tax matters, my mind naturally turns to such issues when asked about a board’s need for competent advice before committing to anything substantial.
Lately, a number of long-standing Manhattan co-ops have been approached by brokers on behalf of wealthy persons who would like to buy the building and turn it into a single-family residence. Think of a four-unit building for which a buyer would be willing to pay $12 million. Three million dollars for each shareholder sounds pretty good. But wait a minute. First of all, there would be sizeable transaction costs. The transfer taxes alone would be more than $360,000. For the sake of simplicity, let’s assume a total of $500,000, thus leaving $11.5 million for shareholders to walk away from the table with.
But then come the income taxes. The first step in computing the co-op’s income-tax liability would be to subtract the building’s “adjusted basis” from the $11.5 million “amount realized.” If we assume an “adjusted basis” of $1.5 million, the co-op’s taxable gain would be $10 million.
Here is where the first shock comes in, at least for the many who are not conversant with such matters: there is no special capital-gains rate for corporations, and the effective combined federal-state-city rate for Manhattan corporations is approximately 46 percent. Thus, the amount available for distribution to each shareholder would be – not $3 million – but only about $1,725,000. Then comes the second shock – the phenomenon known as “double taxation.” Notwithstanding the enormous tax already paid at the corporate level, the distribution would generate another tax – of a considerable amount – at the shareholder level.
It is not surprising, then, that many such potential sales have been abandoned when the income-tax cost became known. We do know of one instance in which a building sale by a co-op did go through, but that was only because the board had signed a contract of sale without consulting its tax advisor and the court had refused to excuse it from performance.
That is not to say that there can never be a solution. Sometimes a deal can be structured in which the co-op is converted to a condo, and the buyer purchases all of the units. Of course, such an approach requires not only a favorable set of facts, but also a knowledgeable team of professionals to make it work.
James J. Veneruso
Veneruso, Curto, Schwartz & Curto
A Shopping List of Worries
Cooperative and condominium boards of directors should ensure that appropriate corporate governance policies are in place and periodically reviewed by their attorneys: conflict of interest, code of ethical conduct, retention/destruction policies, and risk management (accounting procedures). By doing so, many legal problems can be avoided.
Co-ops should also have written policies regarding admissions, renovations, parking, pets, and subletting (to the extent that the proprietary lease affords the board discretion). Co-op and condo boards should also periodically review bylaws and house rules. In addition, the following documents should be discussed:
Major contracts. Any contract beyond a nominal amount, and those with terms exceeding one year, should be reviewed by legal counsel. Examples of major contracts include roofing, boiler, elevators, and lobby or common area renovations.
Insurance coverage. Counsel should be consulted on the amount and types of insurance coverage, and scope of directors’ and officers’ coverage.
Requests for reasonable accommodations and disability-related matters. These are becoming more common and, when not handled properly, result in discrimination claims being filed at the federal/state levels. If successful, the lawsuits may result in substantial fines and penalties. The most common requests for a reasonable accommodation include exceptions to pet policies, relocation or re-assigning of parking spaces, and improved methods of access to building areas. For example, the board for one of our co-op clients recently received a request for a special accommodation in the form of a re-assigned parking space as close as possible to the buildings front entrance. The shareholder suffered from numerous physical disabilities that made it difficult for her to walk. The board considered the request, consulted with counsel, and provided a parking space immediately adjacent to the building’s front entrance. The granting of the requested accommodation was a deviation from the co-op’s established parking policy and method for assigning parking spaces.
We have found, time and time again, that what shareholders and unit-owners request is increased transparency. Boards should strive to accomplish more effective communication with residents. This will help ensure compliance with their fiduciary obligations. It also creates awareness that the board is fulfilling its duty.
Dennis H. Greenstein
Local Law 11 Compliance
Virtually all cooperative and condominium buildings will at some point be required to perform façade work to repair damages, and when such time arises, they must enter into agreements with contractors and other professionals. We have advised board members of buildings located in New York City regarding essential provisions that should be included in agreements with contractors and architects.
Buildings with six or more stories must also comply with Local Law 11, which mandates an inspection every five years by a licensed architect or engineer. It also requires a report to be filed by the architect or engineer with the New York City Department of Buildings (DOB). If Local Law 11 is applicable, the agreement with the architect or engineer (the “professional”) must state, among other things, that the professional will be complying with the DOB reporting requirements.
Further, in agreements between the board and its professional, for all work relating to façade or other exterior repairs, I would recommend that the agreement state whether the professional will be responsible for filing a site safety plan in connection with the construction. I have reviewed a number of agreements already entered into between boards and professionals that have failed to clearly define the responsibility of professionals to request from the DOB that the number of site safety inspectors be reduced. This is a critical point because it can cost a building tens of thousands of dollars to continue to have unnecessary site safety personnel on the construction site.
Many boards fail to have their attorneys review the proposed form of construction contract. I have reviewed poorly drafted warranty and insurance provisions in contracts already signed. For example, the amounts of insurance coverage may be woefully low or the types of coverage inadequate. If the bid were based on such provisions and the attorney reviews it after the bid has been accepted and recommends an increase in the insurance coverage or changes in the warranty, the contractor will probably insist on raising the contract sum to cover the added insurance and/or warranty requirements.
Boards should contact their attorneys before they have (a) retained a professional to inspect the building, (b) obtained a report detailing the results of the inspection, and (c) granted a bid to a contractor to perform the façade work. If they do so, their attorneys can guide the board and managing agent through the process, review documents, and provide comments to each of the prospective agreements the board will be signing and avoid potential liability and costs.
Steven R. Wagner
Porzio, Bromberg & Newman
Too often, co-ops and condos enter into significant construction contracts prepared by their contractor or architect without review by an attorney. This works perfectly when all goes well, but in rare instances when projects are significantly delayed, or a dispute arises, or someone is injured, the consequences can be not only expensive and aggravating, they can be catastrophic.
One of our clients had an issue with damages to the roof, apparently caused by the contractor’s improper installation. The contract prepared by the roofing company essentially provided that the co-op would receive only the manufacturer’s warranty. Thus, the warranty was nearly worthless in that it only provided for payment of materials. The co-op had to pay for the repairs and had to decide whether to spend money on an expensive lawsuit in order to recover for the poor installation.
Another cooperative signed a construction contract that failed to provide for proper insurance coverage. There was an injury on the job to one of the contractor’s employees. A suit was started, and the claim was defended by the co-op’s insurance carrier until the coverage issue with the contractor’s insurance company was resolved. It was expensive, aggravating, but fortunately not catastrophic. These issues could have been avoided with careful review of the contract by the co-op’s attorneys.
Terminating Without Cause
We recently negotiated a construction agreement that allowed the board to terminate the contractor without cause. Soon after the agreement was executed, the relationship between the board and the contractor soured, although it was not clear that the board had the right to terminate the contractor for cause and any attempt to do so would have probably resulted in litigation. As a result of the board’s foresight in having the contract negotiated by counsel, as opposed to executing a standard form, it was able to immediately terminate and replace the problematic contractor. As a result, the project could continue without significant delay or further legal costs.
Stuart Halper & Associates
Revising Standard Forms
The most important area where boards should seek legal advice is when they are contracting with firms for construction projects that reach a certain threshold that is proportionate with the size of the property. Generally where there is an architect or an engineer, he or she usually will prepare an American Institute of Architects (AIA) contract that must be reviewed by the board’s attorney. Even though the AIA is a standard document, there are many items that need to be changed in order to protect the co-op/condo/HOA. The attorney is the only party that is not financially interested in the mechanisms of the contract, unlike the contractor, architect, or engineer.
Marc H. Schneider
Keeping My Eyes on You
Many times, boards feel that their attorney is not needed to review and/or prepare a contract as long as the material terms of their agreement with a vendor (e.g. price, scope of work, etc.) are listed in a contract or proposal. This is problematic because vendors usually provide boards with a boilerplate contract that is drafted in terms most favorable to the vendor. However, it is the fine print and non-material terms that cause the most problems contained in boilerplate agreements that cause the most problems.
For example, many proposed vendor contracts contain a provision that the association must indemnify and hold harmless the vendor, instead of the other way around. I recently had a scenario where a vendor contract required the vendor to provide staffing. In addition to the material terms, the contract also required the association to indemnify the vendor for any claims relating to the removal of the vendor’s staff person at the request of the association. A staff person was ultimately terminated by the vendor, and a dispute arose as to the parties’ rights and responsibilities. The contract, which had been drafted by the vendor, did not include exclusions for instances where the vendor terminated the person on its own. This is a major issue that most attorneys would have corrected if provided with the opportunity to revise the contract.
Another major issue relates to the protections that should be afforded by vendor’s insurance. It is important that the proper insurance coverage be in place and that the contract require the association be named as an additional insured. If this does not exist (and if there is not language requiring the vendor to indemnify and hold the association harmless), the association could be left defending a lawsuit stemming from the vendor’s work. I have seen this occur many times.
In fact, in one instance, a person was allegedly injured because of the work of a vendor. The person sued the association. The association tried to require the vendor to indemnify and defend the lawsuit. The court ultimately held that since the contract between the association and the vendor did not require the vendor to indemnify, defend, and hold harmless the association, the vendor was not required to do so. The association then had to defend the lawsuit, and the settlement of the suit was ultimately paid out of its insurance policy instead of the vendor’s.
The cost of an attorney to review, modify, and/or prepare the contract is usually far less than the cost of the legal fees when something goes wrong. In fact, the legal fees associated with one lawsuit will probably far exceed the legal fees incurred to have your counsel involved in all of your contracts.
Tane Waterman & Wurtzel
Oftentimes, a board will sign a contractor’s or vendor’s simple contract, and the job ultimately results in litigation because there is no clause in the agreement for termination, the contract is one-sided in favor of the vendor, or other protections typically negotiated for by counsel are not in the agreement. Every job does not require a long, formal contract, but rarely does the contractor’s work order provide sufficient protection for the building. Even on relatively inexpensive jobs, counsel’s input should be sought. It does not matter if it’s only a $20,000 job; the cost of litigation or the losses suffered because adequate protections and safeguards were not obtained, will far exceed the relatively minimal legal fees incurred to have an attorney review the contract.
Wolf Haldenstein Adler Freeman & Herz
Who Does It Favor?
It is highly recommended that an attorney review all contracts between a cooperative or condominium and a contractor who is retained to perform work in that building. The contractual terms should include, among others, a requirement that the contractor procure liability insurance with acceptable limits naming the cooperative, condominium, and their respective agents as additional insureds; manufacturer’s, contractor’s, and subcontractor’s warranties, paying particular attention to the length of same and the applicable exclusions, indemnification, and hold harmless clauses; penalties for failing to complete the work on time, and, in some cases, bonuses paid to a contractor for early completion of the work. Very often, these agreements are drafted by the contractor or its attorney with little input, if any, from the board itself, and as a result are more favorable to the contractor. Therefore, it is critical that the building consult with its own attorney before executing.
Racht & Taffae
Review or Regret
No contract is too small or inconsequential for attorney review. There are a number of contract provisions that benefit from this, from the obvious (such as the ability to easily terminate the contract for non-performance) to the more esoteric (such as jurisdiction and lien law compliance).
Often what is being signed is nothing more than a purchase order that is missing key provisions needed to protect the co-op/condo and to make sure the work is completed as expected. Other times, contract forms contain provisions disadvantageous to the co-op/condo, such as establishing jurisdiction in another state. It is only once a problem arises that the weaknesses of the contract come to (inevitably costly) light.
A common example is the laundry room contract. Most such contracts are considered “leases.” Therefore, they must have a mortgage subordination provision. If they don’t, a subordination and non-disturbance agreement between the laundry company and the bank must be negotiated, causing delays in closing and an increase in closing legal fees. The standard forms that you are asked to sign do not have this provision, and it is something I routinely require be added.
Another example involves the standard American Institute of Architects (AIA) form of contract. The AIA provisions for contract termination in the event of a default by the contractor are written for the benefit and protection of the contractor and any supervising architect, not the co-op or condo. This imbalance is something counsel will modify, so that should you have to terminate the contract, you can do so quickly and cleanly.
Asking counsel to review and revise the document before signing is far more cost-effective than having him or her resolve a problem during the work that could have been avoided if appropriate provisions had been added to the contract up front.
Buckalew Frizzell & Crevina
The Liability Game
There are numerous areas in which condo/co-op boards should obtain legal advice, and the reasons why legal advice should be sought can vary depending on the nature of the issue. Some areas clearly warrant seeking counsel, such as amendments to an association’s governing documents, threatened litigation, and preparation of contracts.
So, the underlying question that a board should ask itself is: what is the association’s potential exposure to liability with regard to the particular issue under consideration by the board? If the potential liability is significant (e.g., entering into a major construction project), detailed legal advice will be well warranted; if the potential liability is minimal (e.g., entering into a one-year, $2,000 lease for office equipment), the attorney’s involvement is probably not needed.
It is also important to note, however, that there may be situations in which a board does not even recognize the potential liability to itself and the association. For example, many boards are not aware of the huge potential liability for wrongly denying a request for a reasonable accommodation under disability laws. Therefore, when in doubt on any given issue, the board should ask the association’s legal counsel whether his/her involvement is recommended.
Adam Leitman Bailey
Adam Leitman Bailey
Uncovering the Fakers
Discrimination claims. A recent appellate division decision held that the Business Judgment Rule does not protect individual condominium and cooperative board members from some personal tort liability. New York’s public policy of not permitting insurance coverage against the intentional acts of the insured should raise alarm, especially when combined with other recent actions: the flood of frivolous claims of discrimination by rejected purchasers, the increase in shareholders demanding access to therapy pets for alleged depression, and other similar issues. Despite a board’s good intentions, an adverse judgment could financially harm a board member and a building.
Qualified attorneys know the limits of the law. They can help you avoid the worst pitfalls. In the case of therapy dogs, for example, they can provide guidance on how to separate those with real disabilities from others who are trying to take advantage of the system.
We recently drafted a no pet policy and conditions for a waiver for a number of our buildings, which included the following paragraph to get around the fakers:
“Prior to occupancy in the building of any service, therapy, or emotional support dog, the applicant or shareholder/resident shall submit to the lessor: (a) proof that any such dog is duly licensed by the City of New York; and (b) proof that the dog has received such vaccinations as are required by law to be administered to the dog. Proof of vaccinations shall also be submitted respecting any other service, therapy, or emotional support animal for which vaccinations are required by law. In the case of a service dog, where the service it provides is not readily apparent, the applicant or shareholder/resident shall also submit proof that the dog has been issued a tag by the City of New York indicating that the dog has been trained to perform a task to assist a person with a disability.”
David L. Berkey
Gallet Dreyer & Berkey
Protect Your Own Interests
If boards adopt new policies, they should be certain that these do not violate the provisions of governing documents. They should be applied uniformly and not create different classes of shareholders or owners (for example, subleasing or leasing rules should not differ depending upon when an apartment was purchased).
A Local Law 11 building repair project may cost several hundred thousand dollars, and should be documented with appropriate contracts and riders that thoroughly protect the cooperative or condominium’s interests; provide for adequate insurance protections and firm completion dates; and contain strong incentives to have the project completed on time.
That’s where the attorneys come in. Those with many years of experience and a wide client base can show a board what other buildings have done to alleviate similar problems, and explain what solutions will work best.
Hankin & Mazel
Getting It Right the First Time
One particular area in the operation of cooperatives is often overlooked: corporate governance. Simply put, it means that the board is following the rules that apply to how it functions and how it makes binding decisions on shareholders or unit-owners. Failure to follow these regulations may result in a decision that is unenforceable and subject to reversal if the shareholders or unit-owners challenge the decision in court.
Recently, I attended a meeting of a co-op board where members mentioned in passing that they voted to pass an assessment at a special meeting earlier in the month. I was concerned because such gatherings are subject to the technical requirements in the Business Corporation Law, which requires the meeting notice to state with specificity the purpose of the meeting. Any items not listed in this notice cannot be voted upon.
I then reviewed that notice and did not find the assessment item listed. I informed the board that it needed to re-vote this issue in a regular session or in a future special meeting (this time including the proposed assessment in the notice).
In this example, we were able to catch this oversight, but boards really need to keep their general counsel in the loop so as to avoid any procedural pitfalls in their operation.
The Quest for Recovery
By seeking and relying upon advice of counsel, the building will identify the relevant and particular information needed to maximize its chances of successfully managing and recovering money unpaid to the co-op or condo. That board will then be led by counsel in the search for the best strategy. All of this will enable the co-op or condo to have a more successful recovery program for unpaid maintenance fees and/or common charges, and to avoid legal fees and costs connected with efforts that ultimately fail.
By way of example, a condo may have a delinquent unit, which may be vacant and/or abandoned. Before undertaking any action, we focus our clients’ efforts on providing information. When we learn that a delinquent unit is abandoned, we often recommend a lien foreclosure and place the unit into receivership. The rent received from this can offset accruing common charges and address past-due amounts. Had we not focused the board on identifying key information, and then developed a strategy based on it, the condo may have used a more conventional collection approach that, in this type of case, would have had almost no chance of success.
C. Jaye Berger
Law Offices C. Jaye Berger
Poorly Drafted Documents
A big topic lately has been changes to house rules in condominiums. Many boards obtain other condo building documents through their managing agents and try to save money by using them and making some changes themselves. If you do not know whether the house rules and bylaws came from a reliable source, all you are doing is bootstrapping on to poorly drafted and flawed house rules and bylaws.
Also, because the board members are not co-op and condo lawyers, they do not spot the contradictions between what they are drafting and the existing bylaws. They tend to treat the house rules as though they were the bylaws and add far too many topics that do not really belong in them.
For example, most buildings have a section on pets. A building that was using someone else’s house rules adopted the term “domesticated animals.” I pictured horses and cows roaming the hallways and grazing on the roof. Another building set up a system like housing court within the building where unit-owners accused of violations would come for a hearing. Many of these ideas do not pass muster when they are brought before judges in a lawsuit by a unit-owner. It is best to work with an attorney to come up with a list of the concepts you want to have included and allow the attorney to draft the rules, then review them together with all the comments in order to finalize them.
Law Offices of Richard Klein
Amending Documents Correctly
Co-op and condo boards should get legal advice when they want to make changes to the house rules. Often they will attempt to impose penalties and fines, address certain quality-of-life issues, or deal with insurance questions, all in the house rules. While these are all important areas, often the changes may not be done by merely amending the house rules by a vote of the board. Frequently, these issues need to be first addressed by amending the proprietary lease, which typically requires at least a two-thirds vote of the outstanding shares.
If a board does not follow the proper procedures, then a smart shareholder may be able to stop it from enforcing a rule, and may also threaten to let all the shareholders know, for example, that a sublet fee was improperly collected and should be refunded to any shareholder who paid it. So it is important that a board consult its attorney when adopting or amending its operative documents.
Phyllis H. Weisberg
Montgomery McCracken Walker & Rhoads
The Power to Make Changes
A board may make a seemingly innocuous – and certainly well-intended – change in house rules without consulting counsel. After all, it has the authority to enact these rules, so what could go wrong? The answer is plenty.
House rules are intended to amplify the proprietary lease (in a condominium that would be the bylaws) and deal with quality-of-life issues; they may not, however, circumvent the amendment provisions of the lease or the bylaws. If the board enacts a house rule that exceeds the permissible scope, a determination that is not always clear-cut, the board may find the rule challenged as an illegal act.
For example, if the house rule deals with a financial matter – such as a late fee, a sublet fee, or a fine for a breach of the rules – the board may, in many if not most cases, have exceeded its authority and be confronted with a challenge. This may not only have political repercussions, but could lead to a lawsuit at some future point seeking to declare the house rule invalid and, perhaps more significantly, to require a refund of all sums paid under the challenged house rule at any time within six years prior to the date of the lawsuit.
Had the board consulted with counsel before embarking on this course of action, it would have been advised that for a sublet fee to be enforceable, the power to impose it must be contained in the proprietary lease; and that for a late fee or fines for breaches of the rules to be enforceable, the power to impose the same must be in the lease, or, in the case of a condominium, in the bylaws. While boards are always eager to control costs, they should understand that when dealing with matters relating to corporate governance and house rule changes, counsel should be utilized as an adviser whose job is to prevent trouble before it happens. And in so doing, the board may actually find that it saves money in the long run.
Michael T. Manzi
Balber Pickard Maldonado & Van Der Tuin
Counsel in the Loop
Boards should seek advice of counsel when faced with a troublesome shareholder or unit-owner. Some boards take an aggressive stance from the outset while others prefer to start with a softer approach. Although both approaches may operate within the boundaries of the law and the building’s governing documents, they involve different tactics. Furthermore, if we are aware through previous interaction that a particular owner has a history of misbehavior, we are better able to give advice in the context of that history.
There is a natural, and understandable, reluctance to contact counsel since most boards want to avoid unnecessary expenses. As a consequence, some of them avoid seeking help when they should and simply rely on advice from their managing agents or perhaps lawyer-board members who do not specialize in co-op law. Generally speaking, this is a mistake and, in our experience, can often lead to unintended consequences; boards take positions, usually with the best of intentions, that cannot be legally supported. Checking with counsel normally involves limited time and limited expense. Often, this is the most cost-effective part of the lawyer/client relationship.
When they consult us regularly, even if briefly, we can render better advice. To a remarkable degree, every building has its own culture, with its own priorities and style of doing things. With sufficient interaction, we get to know our clients and give advice that is tailored to their preferred way of operating.
Robert D. Tierman
Litwin & Tierman, and Salon Marrow
Getting a Second Opinion
Boards are not monolithic in their decision-making; it is quite common for them to have one or more members whose positions differ from those of the majority. Those minority members often need legal advice and cannot rely on the board’s regular attorney (they may be barred from having direct contact with the attorney ostensibly to minimize charges or to comply with a retainer arrangement). They also may be concerned that the attorney will not objectively render advice that diverges from the mainstream board opinion, or will report their communications to the majority.
I recently counseled a board member of a large co-op who was attempting to decide whether he should vote for, and cooperate with, an investigation into the disclosure of allegedly confidential information. Especially because he believed that the board president was targeting him in order to get him removed for other reasons, my client did not feel comfortable relying on the co-op’s regular attorney, who had a long-standing working relationship with the president.
An extensive e-mail debate ensued among my client, the president, and other board members, with the co-op’s attorney largely supporting the president. The members vacillated but ultimately succumbed to pressure from the president and voted for the (expensive) investigation, and later to conduct a shareholder vote to remove my client. When shareholders were informed of the vote, they revolted and instead voted out of office the long-standing president and some of his cohorts.
If the board members other than the president and my client had consulted with an independent attorney, they very well might have decided to vote with my client against the investigation. The president lost in the end anyway, but in most cases, that does not occur, so (especially on critical matters) it would be wise for minority board members to have access to truly independent legal advice. This might seem impractical in many cases, but the value of well-informed decision-making often will far exceed the cost of the additional advice. A truly upstanding president and board majority should have nothing to fear from exposing their proposals to the light of a second opinion.
Holland & Knight
Issues to Call About
Boards should seek legal advice (a) whenever they are about to reject a purchaser to make certain that they are not unintentionally discriminating; (b) on any contract for a term greater than one year or for more than $5,000 to make certain there are no unpleasant surprises (such as automatic renewals); (c) any time there is a proxy fight; (d) whenever they receive letters from shareholders’ or unit-owners’ lawyers; (e) if a co-op’s proprietary lease and bylaws have not been reviewed in more than five years in order to ascertain it is still in compliance with applicable laws, decisions, and rules, or (f) if they receive notices from any city, state, or federal agency indicating that they are in violation of any laws, rules, or regulations.
Dean M. Roberts
Norris McLaughlin & Marcus
Arthur Gussaroff, the late managing partner of our firm, had a good story. He said there were two types of clients – those that call you before they do things and those that call you after they have to do things – and that the latter tended to pay dearly for that mistake.
A good example of this would be two of our cooperative clients that had similar difficulties with their managing agents, but who dealt with them in very different ways. In both co-ops, the boards continued to have ever-increasing difficulties with the site managers and their managing companies.
One board requested a meeting with counsel without management present to discuss the issue, and expressed its concerns. They asked us to review the facts as well as the contractual obligations of the respective parties and to report back to them. Based on this review, it was agreed that a memorandum would be prepared detailing the board’s issues and requesting that the managing agent propose solutions. This resulted in a meeting between the managing agent’s principal owners and the board, and a full and frank discussion that not only resolved the existing problems but also created a far better relationship.
The other board had serious complaints both with its on-site manager and its management company, but felt that this was an issue of management and not a legal issue and therefore should not include counsel. The board, through various members, complained to the management company about the on-site manager and the overall performance of the firm. These complaints tended to be of a more personal nature and were not presented in a clear or concise format; they did little to resolve issues and inflamed passions on both sides.
In the end, the board elected to hire a new managing company, but it was done without legal review or input until well into the process. There was a difficult and unpleasant transition from the old managing agent to the new one, which resulted not only in serious disruption to the cooperative’s operation, but also in litigation between the cooperative and its prior managing agent. It is good to remember the old adage about penny-wise people.
Marc A. Landis
A Strategic Partnership
Legal advisors should be viewed by co-op and condo boards as strategic partners, particularly when the decision (or even the failure to decide) may cause the building to incur significant financial, operational, or other consequences. Frequently, well-intentioned boards will seek to accomplish a project – perhaps replacing the roof, revising the bylaws, updating a sublet policy, implementing a flip tax, or imposing a special assessment. Any of these may be a worthy goal, but could result in permitting issues, contractual violations, municipal fines, or shareholder litigation. The proverbial ounce of prevention in the form of consultation with legal counsel will enable a board to identify potential pitfalls in advance, and develop a road map to complete the project while minimizing exposure to risks.
Bruce A. Cholst
Rosen Livingston & Cholst
The occasion that most clearly merits a board’s consulting with counsel is right before the board announces a controversial policy or decision adversely affecting individual residents. Any such action is likely to invite legal challenge.
Prior consultation with counsel should uncover any flaws in the board’s legal position, thereby averting an embarrassing (and costly) defeat in court or an unfavorable settlement. The real-life example that most clearly comes to mind is a condominium board’s exercise of its right of first refusal to vitiate the sale of an apartment by one unit-owner to his neighbor. The board’s actions were for the avowed purpose of allowing one of its member’s relatives to acquire the apartment. The purchaser sued the board to void its refusal and stop its intended resale of the apartment to a board member’s relative. After costly litigation, which infuriated the entire condominium community and resulted in removal of six of the seven board members, the court issued a preliminary injunction. Ultimately, the case was settled in favor of the original purchaser.
Had counsel been consulted in advance of the board’s action, he would no doubt have warned that its exercise of the right of first refusal for this purpose was a breach of its fiduciary duty and, therefore, an injunction would be granted because the board was using its power to favor one of its own members at the expense of a fellow unit-owner.
Counsel should be consulted whenever a board is considering action that could result in legal risk. Such proactive use of counsel will not always avoid litigation but will certainly put the board in a better position to preserve its rights or to defend against any claim.
Boards should obtain legal advice before signing any contract, entering into any transaction, or responding to any lawsuit.
Schechter & Brucker
When In Doubt, Ask the Lawyer
Unfortunately, we live in a very litigious society. More often than not, decisions are made on a daily basis by the board of a cooperative or a condominium that might result in a dispute. These often result in lawsuits that may be very costly to the housing company, and perhaps even to the board member personally.
Perhaps the most common illustration of this involves the co-op’s right to reject a purchaser. Without even realizing it, the board may reject someone who might then have a claim for discrimination. For example, a board member may want diversity among shareholders, and state at a board meeting that the applicant should be rejected because there are too many middle-aged single women in the building. While diversity is fine, rejecting someone because of his or her age, or marital status, or gender is illegal. When in doubt, ask the lawyer.
The Business Corporation Law provides that a director must perform his/her duties in good faith, and with a degree of care that an ordinarily prudent person in a like position would use. It further provides that in performing his/her duties, a director is entitled to rely on the opinions of counsel. Therefore, the housing company’s attorney acts as insurance against any complaint that the director acted in bad faith or illegally. Any complaining shareholder or unit-owner would be hard pressed to claim a board did something improper or acted in bad faith if the co-op’s counsel was consulted and gave his/her opinion that the decision was proper.
Tarter Krinsky & Drogin
Be On Time with Notifications
If it becomes known to the association – by a board member, managing agent, or perhaps even a building employee – that a unit-owner or third party is or may be making a claim against the association for monetary damages (e.g., as a result of a water leak or a sidewalk defect), the association’s liability insurance carrier may take the position that these facts constitute a notice of occurrence of an event that may trigger liability by the association for which insurance coverage may be available to defend the claim and even pay the claim.
If, however, after receipt of knowledge of those facts the association does not give notice of same to its insurance carrier, the carrier may later take the position that such failure to notify constitutes a breach of the insured’s obligation to report occurrences that may result in damages, and disclaim coverage. This could be disastrous for the association, which might then have to retain counsel to defend a lawsuit at its own expense and, if the court finds against the association, be responsible for payment of whatever damages are awarded.
Brill & Meisel
A Collection of Concerns
One of the areas that co-op boards seem to need the guidance of experienced counsel is in dealing with the conflicting desires of long-term versus new tenant-shareholders. This is less of a problem for condo boards as condos are often new construction and having become popular much more recently than co-ops have fewer long-term owners.
Long-term co-op shareholders often acquired their apartments many years ago at prices that may have seemed high at the time but are a small fraction of their current value. Many of them have now reached a stage of life where, despite significant appreciation in the value of their apartments, they’re living on fixed or otherwise diminished incomes. On the other hand, newer shareholders have recently paid very high prices for apartments that may not have been painted, let alone renovated, in many years. They’re often in their peak earning years and willing to spend a great deal, not only renovating their apartments, but also wanting to update lobbies, hallways, elevators, and windows, and to install new amenities such as health clubs, playrooms, and recreational roof areas.
Experienced counsel can guide boards to reasonable compromises in determining how many and how long individual renovations can go on; how much to spend on any upgrades and amenities; and how to structure their financing through a combination of maintenance increases, assessments, mortgage refinancings, credit lines, adopting or increasing capital contributions upon sales of units, and utilizing reserves with the objective of protecting the quality of life and financial stability of the long-term residents while allowing new owners to realize the potential of their new homes.
Ronald A. Sher
Himmelfarb & Sher
An Estate-Planning Primer
Estate-planning primer: do you know what type of owner you are? The answer can spare you headaches. Boards should contact shareholders/unit-owners to facilitate the review of their stock certificates and proprietary leases or their deeds to determine the specific type of title ownership that is designated. This is a simple task and needs to be performed now, because many who purchased their apartments before January 1, 1996 may be under the mistaken impression or unfortunate misconception that they own their respective cooperative units, without the proper title designation, of either (i) joint tenants with rights of survivorship (JTWRS); or (ii) tenants by the entirety (TEN ENTS). These two designations permit married couples to pass their respective ownership interest in the apartment by operation of law, both without the need for probate and with certain inherent protections from creditors of the decedent.
We are constantly faced with the problem that either the people involved in these situations (a) are unaware or uninformed, (b) did not make the necessary inquiry, and/or (c) incorrectly presumed the type of ownership. They never realized the significance of date of purchase or simply did not look at the stock certificate before the closing. We require that all sellers submit the same in advance of a closing, so that we can ensure the enabling power of the surviving spouse to sign the transfer documents and validity of the transfer or sale.
We have found that many shareholders and unit-owners who purchased their apartments before 1996 – when the law changed the presumption of ownership in favor of marriage or married persons – are unaware of how they hold title or simply presume they have rights of survivorship and title passed by operation of law at the time of death of their decedent spouse. Accordingly, any married couple that purchased after January 1, 1996, in the absence of a title designation, is presumed to hold title as JTWRS, TEN ENT, or as husband and wife, with all rights of survivorship benefits and protection from creditors.
What should a board do to help shareholders and unit-owners obtain peace of mind? First, send a letter to all owners suggesting that they look at their stock certificate or deed, especially if they acquired the apartment prior to 1996, to determine if the correct title designation appears on the shares of stock or deed for JTWRS, TEN ENT, or H&W. Then, recommend they check with their personal or estate lawyer, transfer agent, or managing agent to ascertain the proper procedure to change the title designation. This simple exercise can save you time, avoid the necessity to probate, and avert unnecessary legal expenses, especially if both spouses are still alive and can facilitate the expeditious appointment of an executor.
Kaufman Friedman Plotnicki & Grun
When a shareholder/unit-owner living alone has either died or become incompetent or significantly incapacitated, and is no longer residing in the apartment, what should you do? Boards are occasionally faced with requests for access to the apartment by a person claiming to be a close relative, boyfriend, girlfriend, or legal representative of the owner. Often, when this person is known to building staff or management, the inclination may be to provide such access. However, legal advice should be sought in this situation.
Where there is a death, no one should be permitted in the apartment except for a duly authorized executor or administrator of an estate, or a person to whom an emergency order granting access has been issued by a court. The board is hardly in a position to know if there will be competing claims to an estate, and granting access to unauthorized persons could embroil it in such a dispute. In the case of the incapacity or incompetence of the owner, only a person who has legal authority to act on behalf of the owner, either by court order or a valid power of attorney (which must be reviewed for legal sufficiency in the circumstance), should be given such permission. If access is provided to a person who is not so authorized, the board may be exposed to liability for such things as theft or unauthorized removal of items from the apartment (including possible claims relating to the destruction of a will), damage to the apartment or property, or trespass.
Kenneth R. Jacobs
Smith, Buss & Jacobs
The Limits of Power
All boards have a natural tendency to protect the majority of their owners from the risky or disturbing activities of a few whose behavior may not fit the expectations of the community. However, evolving interpretations of state and federal laws grant additional protections to many of these persons, especially older and disabled residents, as well as families with children. Government and advocacy groups have also increased members’ awareness of their rights, forcing boards to adjust.
Boards need to verify whether they have the right to take action that could potentially restrain, deny, or exclude persons from enjoying individual rights. For example, we have recently been consulted as to whether (a) a corporation can compel a shareholder to evict a mentally disabled subtenant who has engaged in threatening and aggressive behavior, but who was placed in the apartment under a New York City program to help the disabled; (b) an owner claiming depression has the right to designate a Rottweiler as his emotional support pet despite weight and breed limitations in the house rules; and (c) a condominium can bar children from using its swimming pool after 8 P.M. so that adults can swim laps. The answers may surprise you.
If a shareholder, unit-owner, or tenant engages in an activity that appears to impinge on the rights of others or violate the house rules, boards sh
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