Those who forget the past are destined to repeat it.
The e-mail was polite and breezy. “Sorry to bother you,” a broker who was representing a potential buyer wrote to the secretary of the co-op board. “I seem to missing several amendments to the offering plan. I can only locate the first and second [amendments]. If there are additional amendments, as a third, fourth, etc., could you please forward? The amendments I have [are] from 1986. I want to make sure I have all the updated and correct material.”
The secretary was at a loss and e-mailed the rest of the board. “Does anyone know what she is talking about regarding additional amendments?” he asked.
“I have the original offering plan,” responded one board member, “but I don’t have copies of the first and second amendments, not to mention any additional amendments (if any actually exist). Perhaps our lawyer has a complete copy?”
The lawyer said he had no records concerning the missing amendments. Finally, after their search proved fruitless, the president wrote to the broker: “I have lived in the building since 1987 and have been on the board almost continuously since then. In that time, we have never been asked for any of the amendments you have requested, nor do we have any of those amendments. We have searched our files and cannot find what you request. I’m afraid you’ll have to carry on without them.”
Much ado about nothing, you say? Not if you’re concerned about the smooth running of your property. For if, as the saying goes, those who forget the past are destined to repeat it, then boards should be worried. As more and more veteran board members step down, more and more pieces of institutional memory go with them. And with that loss comes the potential for trouble.
“Boards keep revisiting the same issues year after year and [often] don’t actually know what the policies are,” observes veteran real estate attorney Stuart Saft, a partner at Holland & Knight. “In many instances, I have become the institutional memory of the boards that I have represented for decades, remembering what a prior board did and why. However, that is not an efficient system.”
Besides the frustration of not having proper paperwork on hand, there are other headaches that result when there is no institutional memory.
The board may not know the reason for a house rule and ignore it, causing unforeseen consequences. Board members can have conflicting memories of rules, fines, protocol, and procedure. Residents can end up caught in the middle of different board members who insist that what they, and only they, know is true. One president says: “We’re in litigation with an owner who has torn down her wall with a hammer, and management wanted to see if it was policy – is [the restriction against tearing down your walls] in our bylaws? We assumed it was, but we didn’t know. And we couldn’t find the paperwork.”
Down Memory Lane
The board needs to bolster its institutional memory. For some, that means getting your files out of the basement – or out of a manager’s back office or warehouse – and putting them on disk, or on an electronic backup service.
Some management companies can assist you with this. The Lovett Group, for instance, is one of many management firms that will post all the documents needed for an admissions package, including the house rules, on its website. “But, as far as offering plans, bylaws, or other documents or official records,” says Ellen Kornfeld, a vice president at Lovett, “they have to purchase it if they want it. We don’t normally put all the documents online. That’s a lot of paperwork.”
“I don’t know if any co-op scans everything,” says Arthur Weinstein, an attorney in private practice. “Some may, but I don’t think they are in the majority. You still have to have hard paper files, and the institutional memory for most buildings is in locked file cabinets either in a building storage area in the basement or in the secretary’s apartment.”
The Organization Man
Some think the issue of online or paper files is secondary to the larger question of organization. “Every co-op should have some sort of a filing system,” says Weinstein. “It is not difficult to set up a filing system with all of the topics duly indexed. Certainly the institutional memory would require evidence of adoption of amendments to the bylaws, amendments to the proprietary lease, and policies adopted, such as sublet or pet policies.”
With that thought in mind, several years ago Saft created a prototype “policy manual” for cooperatives and condominiums to keep their buildings’ past within easy reach.
The idea behind the policy manual is that it contains all the policies on every subject cross-referenced to the source of the policy. Each board has to review its proprietary lease, declaration, bylaws, and certificate of incorporation (the “organizational documents”) and the house rules and minutes of owners’ meetings and board meetings (the “operating documents”) to compile and categorize all the policies (i.e., the proprietary lease, the declaration, the bylaws, the certificate of incorporation, or board resolution) and the date the particular policy was enacted. This enables each board member, the manager, and the cooperative’s or condominium’s professional advisers (as well as the shareholder or unit-owners) to quickly determine the policy on any subject. This also allows new board members to quickly become active participants on the board rather than spend their first year trying to unwind a Gordian knot of rules and regulations.
In addition, since resolutions and “house rules” cannot contradict the proprietary lease, declaration, or bylaws, compiling and maintaining the policy manual provides the board with a guide to make certain that it does not unintentionally violate the cooperative’s or condominium’s governing documents and take an action that is invalid.
Even though he is offering a prototype, Saft warns that compiling such a policy manual is not easy. But once prepared, it is easy to maintain, and the benefits are clear: having a manual saves the board a tremendous amount of time because it does not have to revisit decisions that were made years earlier.
Because a manual contains all policies set down by boards through the years, it can protect a new board from liability should it want to change a policy. A policy manual is, therefore, a valuable asset in cases where lawsuits are brought by shareholders or unit-owners claiming they are being treated differently from another shareholder or unit-owner. Since a board has the right to change its policies, there can be a basis for different treatment; in the final analysis, however, a board must be able to look back at the building’s history. Indeed, board members need to know where they’re coming from to figure out where they’re going.