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Boards have control over who can access their records – but requests shouldn't be taken lightly.
AUTHORJonathan Temchin, Tarter Krinsky & Drogin
When it comes to accessing a building’s books and records, boards can sometimes run into problems where they least expect it. You recently represented a condo where that happened — but with an interesting twist.
My firm represented a condo board in a lawsuit against its former managing agent, and it’s unique. The board hired a new managing agent and requested that the former managing agent return all of the condominium’s financial records, building plans, construction plans on file, permits and things like that. The former managing agent refused, arguing that this was a scheme concocted by the new managing agent to get rid of them in a way that was improper. It was outrageous.
The condominium had to file a lawsuit and seek an injunction. The court ordered the immediate return of the condominium’s property, but the former managing agent still refused to give all the information back, and there was a contempt proceeding afterward. But it took a very long time for the board to get back the condominium’s records, which were vital documents and materials that were needed.
That case sounds like something of an outlier, but are there steps condo boards can take to prevent this from happening?
Most managing agents will not withhold the condominium’s property because of a dispute they may have with the board or with the new managing agent, but there is a lesson to be drawn here. Boards should review their agreements with their managing agents and look to see if there are specific provisions pertaining to the return of the documents immediately upon request. If it’s put in writing and it’s specific, that will manage everybody’s expectations in the event there is some kind of dispute down the line.
What about when shareholders or unit-owners are seeking the board’s records? What information do they have the right to review?
That’s based on several sources. First, there are the written documents, either a co-op proprietary lease or the condo bylaws. Second, there are statutes governing what information has to be disclosed to shareholders and unit-owners. And the third is common law. Each has a different standard and has different types of information that must be made available.
For written documents, whatever the parties put into the agreement has to be made accessible — balance sheets, income statements, annual reports and sometimes board meeting minutes. The written documents will typically include language that says that these records have to be made available during reasonable business hours on reasonable notice.
As for statutes, the Business Corporation Law gives shareholders rights to the same information. For condos, the Real Property Law says boards have to maintain detailed records of the receipts and expenditures on the operation of the property and make them available for inspection, but there’s nothing about meeting minutes.
What about common law?
The standard under common law is that shareholders and unit-owners have the right to access any book or records provided that the request is made in good faith and for a proper purpose. You can’t access this information if you want to use it in some improper way, like gaining a competitive business advantage. But you can get information if it’s to evaluate board misconduct and things like that.
Where the litigation comes in is whether the specific records someone is asking for is related to their purpose. If it’s to allege board misconduct, you’ve got to be pretty specific on what you believe the misconduct is and how the specific record you’re seeking relates to that misconduct. Often the board says, “Well, what you’re asking really has nothing to do with what your purpose is, and it’s not good faith,” and that’s where lawsuits come into play.
What’s the takeaway for boards here?
You have to take these requests seriously. Condo and co-op boards don’t often put much thought into shareholder and unit-owner access to books and records and don’t necessarily appreciate the distinctions between what they’re entitled to under the governing documents, statute or common law. And that can get really troublesome. Most of the problems we are dealing with are when boards don’t consult counsel initially and make determinations that are difficult to unwind.
WHO’S SUING WHOM
Unit-Owner Must Have Valid Reason for Inspecting Condo’s Books
In this litigation regarding the validity of a condominium’s election for the board of managers, the plaintiff seeks access to certain of the condominium’s books and records. Reiterating the standard that the requesting condominium owner must demonstrate that the inspection is being made in good faith and for a valid purpose, the court punted the issues over to the Special Referees Part to hold a hearing to determine whether that standard was met.
Frankel v. Bd. of Mgrs. of the 392 Cent. Park W. Condominium
April 16, 2021