Every co-op or condo has rules, but because they are not something that boards turn to every day, it’s really easy for them to become outdated and problematic. First off, where are these rules found?
In a co-op they are typically found in the original offering plan. In a condominium, they’re a public document, and you can actually find them recorded in the county clerk’s office. These rules are the bylaws, and they cover different things depending whether it’s a co-op or condo. Co-op bylaws only talk about the relationship between the shareholder and the corporation and other shareholders. They don’t talk about the use of the apartment or the common space, because that’s in the proprietary lease. In a condominium the bylaws not only talk about how the board should act and the relationship between the unit-owners and the condominium itself, but also about the use of the apartments and the common areas. The bylaws are a substitute for a proprietary lease, because in a condo there is no lease.
Let’s say a board or the building’s attorney reads the bylaws and suggests that they be updated or revised. What’s the process?
With a co-op, the bylaws themselves will tell you exactly how to do it, but every co-op is a little different. For example, some co-ops say that the board itself can actually change the bylaws by a vote. What’s more typical is that you need the shareholders to vote, but even then there’s a lot of differences. At some buildings you need a supermajority of two-thirds of the shareholders, while others simply need a majority. So it’s really all over the map. When it comes to a condominium, there’s a wrinkle in that if unit-owners vote to change the bylaws, you have to record it as an amendment to the declaration.
In your practice, which specific bylaws typically need to be updated?
One of the areas where we see a lot of changes is the election process. At many co-ops, where the bylaws define the corporate relationship between shareholders, we’ve been amending the bylaws so that there are qualifications to become a member of the board, such as being a resident at the building for at least two years. I really don’t think that’s a bad idea, because somebody could just decide, “I want to be a board member because I think there are perks.” And in reality, they don’t even know what’s going on in the building.
Another change we’ve seen a lot is how you give notice about annual meetings. Many buildings are now allowing email instead of old-fashioned mail. And probably the most important thing is the fact that you set up the procedure for the annual meeting prior to the meeting itself. You can put in your bylaws that nominations will be taken two weeks prior to the meeting, so you don’t bog things down with speeches and such, and request the names of nominees and their bios. It’s more sensible.
If a building wanted to modernize its election process, could the board just do that without putting it in the bylaws?
First off, let’s assume that it’s a building where the board itself can’t amend. So they would set up a process for the election. But the problem is that most lawyers realize that the standard way of handling an election is to take nominations from the floor. So if a board decides, “We’re just going to do this on our own. We’re simply going to say, ‘We’re going to take nominations ahead of time,’” most lawyers believe you really should take nominations from the floor. So we’ll often ask for nominations ahead of time and ask again at the annual meeting. We may say something like, “Well, being that nobody else wants to be nominated,” listen for two seconds, and then say we’re going to close the nomination process and have the election. There’s a lot of gray areas in co-op law and this is one of them.
What’s the distinction between a bylaw and a house rule, and can boards change the latter by themselves without going to residents for votes?
There’s no great definition I’ve ever seen of house rules. At co-ops, a lot of people are not sure what’s a house rule and what should be in the proprietary lease. For example, when it comes to requiring shareholders to have insurance, we put this in the house rules, but I wouldn’t be surprised if someday some judge says, “You know what? This is the kind of thing that should be in the lease.” It’s really not 100% clear. Certain things, like allowing pets or washing machines in apartments, you can talk about in the house rules. One of the most important things has to do with noise, fumes and smoke. Most house rules do have a provision for noise, but it just doesn’t work anymore. To say that 80% of your floor has to be covered and exclude hallways and kitchens and closets doesn’t make sense. And having a floor covering is not enough. You should have a half an inch of padding underneath any floor covering. People don’t realize when they look at their house rules that they were originally written some 40 years ago. Guess what? In those days, nobody had a stair climber or other machines that make noise and pound the floor.
As for changing the house rules, in every co-op lease that I have ever seen and every condominium set of bylaws, it says specifically that the board can create house rules for the general welfare or health or safety of the residents. Now, I must say one thing though. In a co-op the house rules are part of the lease, so you can really cover anything — how to use the lobby, hallways and your apartment.
With a condominium, it’s a little different, because house rules can only cover the common areas. For example, if a condo board wants to ban dogs, they really can’t say you can’t own a dog in the house rules, because that’s really using your apartment and not a common area issue. We had a case about this many years ago. So be careful. Co-op house rules can be much, much broader than the condominium house rules.
Could you give an example of a bylaw change that could come back and bite the board?
Well, one that I saw really come back and bite a building was at a co-op that changed the bylaws 20 years ago to allow the board to remove a director. That’s pretty extreme and you hardly ever see that. And by the way, the general rule is that shareholders can remove a board member for cause. But if a board wants to remove someone, you have to put that in the bylaws or in the certificate of incorporation. What’s happened here is that there were two warring factions on the board, and all they ever did was they removed each other claiming cause, which they defined as being unreasonable and not cooperating. It’s a mess, and it still remains a mess. If you have anything like that, think twice about it.
That said, it’s harder to operate a co-op or a condominium in 2021 when you’re looking at rules, bylaws and procedures that were written in 1965. It’s a different world. Boards should be reviewing their governing documents every couple years, just like a will, because things change.
FROM THE COURTS April 9, 2021
Winnie Tsui v. Chou, 2021 NY Slip Op 31221(U) (N.Y. Sup. Ct. 2021)
Condominium unit-owners brought this derivative action against the sponsor alleging that its principals improperly maintained control of the board of managers and engaged in self-dealing by hiring an affiliated management company. This case was determined by a careful reading of the condominium’s bylaws, which set forth what rights the sponsor did and did not have to elect managers to the board. The sponsor acted in contravention of the bylaws and, therefore, it was determined that it did improperly control the board. The court’s decision included a schedule for future elections and what seats the sponsor could designate and/or vote for.