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What steps should boards take when a shareholder is making unfounded accusations against another?
AUTHORMarc H. Schneider, Managing Partner, Schneider Mitola
PAGE #p. 46
Terminating a proprietary lease is a drastic step, but sometimes it’s necessary.
A shareholder’s wife was filming vehicles in the community and posting on Facebook, indicating that other shareholders were engaging in terrorist activities at the complex, including decapitations. This person actually made calls and wrote letters to the local police precinct, advising that there were criminal activities occurring at the complex. The FBI even investigated the residents who were accused of these activities. Meanwhile, the co-op’s board was receiving correspondence from other residents complaining about this individual and asking if anything was going to be done to stop her from making these outrageous accusations and exhibiting the outrageous conduct.
We provided our client with two options: the board could either move forward with the “objectionable conduct” approach, or proceed with a general default approach. Under the former approach, boards can terminate a proprietary lease based on the “objectionable conduct” of the shareholder. In some cases, the language of the proprietary lease allows a board vote to terminate the lease. However, other proprietary leases require a shareholder vote to terminate the proprietary lease based on “objectionable conduct.” That’s a difficult route.
We looked at the particular proprietary lease at issue and determined a shareholder vote was needed if the board wanted to terminate based upon the “objectionable conduct” provision. We spoke to the board and the board agreed to proceed based upon a default of the provisions in the proprietary lease, which prohibit a shareholder from engaging in conduct that interferes with the rights, comfort, and convenience of other residents. This did not require a shareholder vote. So, a default notice was prepared and sent, giving the shareholder and occupant a 30-day notice to cure. The conduct didn’t stop and the postings on the web continued. Since the violation of the proprietary lease continued, a notice of termination was sent and, thereafter a summary proceeding was commenced in court to evict the shareholder and his wife.
The shareholder and his wife agreed to vacate the property immediately and never to return. They also agreed to sell the apartment by using a broker so they would not have to return to the premises. The agreement provided that the minute they stepped on the property, they were in default and the warrant of eviction would immediately be executed and they would be evicted. They were also required to reimburse the co-op for legal fees and expenses.
After the agreement was signed, the offending individuals returned to the property. All bets were off. The good news is that the court issued a warrant of eviction, a judgment of possession, and a money judgment. The shareholder and his wife were ultimately evicted from the property. After the eviction occurred, we moved to foreclose on the shares. The lender came forward and paid everything the co-op was owed.
First, when you have a situation where your shareholders are being affected, you should consult your attorney immediately so that you don’t wind up taking actions that might delay the process and make it harder for you to get your remedy. Second, when you’re dealing with objectionable conduct, look at your proprietary lease. Determine whether you have a provision that requires a shareholder vote, or if you are allowed to have a board vote, which is obviously an easier process. Don’t avoid taking action just because you think you will need a shareholder vote. There are multiple ways to deal with objectionable residents who are causing problems at the co-op.