Can your cooperative or condominium afford to repay thousands of dollars to former shareholders? It's not an idle question. After a lawsuit, the Hotel des Artistes co-op on Manhattan's Upper West Side was forced to do just that to the tune of $350,000, because a sublet fee hadn't been incorporated into the corporation's proprietary lease — even though it had been enacted by a majority of the tenant-shareholders! Or maybe you're on a board that gets sued, and you find your indemnification provision doesn't cover legal fees, forcing you to spend tens of thousands of dollars of your own money.
Both issues, and many others, could be avoided by simply examining your proprietary lease and bylaws, to make certain your co-op board or condo association and your building are operating according to their terms and that the two documents reflect modern legal practice.
These governing documents were often not created by the sponsors with a great deal of thought as to how the building would operate. They were never intended to be permanent; they were only meant to enable the sponsor to sell apartments. In many instances, they were outdated before they were used and now, after decades of defining case law, they are downright ancient.
And every outdated or incorrect provision could result in a judgment against you. Even if your condo or co-op board wins the litigation, you could still face thousands of dollars of legal fees over an interpretation of an ambiguous sentence.
Every proprietary lease and set of bylaws is different. (For convenience, we refer below to "proprietary lease," but most of this applies to condominium governing documents as well.) There are a number of similar problems in all the older documents, however, including the following:
If your proprietary lease has a remaining term of less than 35 years, you could have difficulty obtaining financing. If you let your proprietary lease expire, you cease to be a cooperative.
2. Lessor's Repairs
Is the provision sufficiently specific, or does the lease just provide that the lessor (the corporation) is responsible for anything the lessee (the shareholder) is not responsible for doing? If you get into a dispute with a shareholder over an important provision that basically says that the corporation is responsible for anything not covered by paragraph 18, will you be obligated to make expensive repairs that the shareholder should make?
3. Damage to the Apartment
Does the paragraph cover leaks from outside the building or from another floor? If not, who must pay for repairing the leak and its damage?
4. Terrace and Roofs
If shareholders have roof space, are they responsible for any damage they might inflict on the roof or terrace floor, which is part of your roofing system? If the lease isn't specific, you may have to pay to correct a problem caused by a negligent shareholder or a bored child.
5. Late Fees
Does your lease provide that the shareholder has to pay "promptly"? If not, then does the lessee have to pay the maximum fee permitted by law? If those provisions are in your lease, you may have to litigate over the definition of "promptly," and the default maximum rate of interest is 9 percent per annum. Unless your lease is more detailed, you can't collect a dime more.
6. House Rules
Does your lease contain a mechanism to enforce the house rules?
7. Use of Premises
Is your lease written so broadly that the board has no control over who can live in the apartment?
If you have a sublet fee, you can only collect it if it is specifically provided for in this paragraph. Also, can the board limit sublets?
Unless your transfer fee or flip tax is included here, then it is not legal and should not be collected. The board does not have the right to reject a purchaser unless that right is specifically contained in this provision. There is no natural right to reject purchasers – that right has to be granted to the board.
10. Repairs by the Lessee
Does the lease provide that the shareholder is acquiring the apartment in "as is" condition, or are you leaving yourself open to a claim by a buyer that the board has to prepare the apartment for the buyer? Is the lessee who replaces a building system responsible for any repairs to that system, or damage to other parts of the building? If not, you could be.
Is there a provision requiring a shareholder's alterations be approved by the board?
12. Right of Entry
If a shareholder refuses to leave a key with the superintendent and the board has to gain entrance to the apartment, is the shareholders responsible for reimbursing the board for its expenses?
Thinking of buying a co-op or condo? Already bought, and not sure how co-op/condo life and rules work? Learn all about purchasing a place and living in your new community. It's not like renting, and its not like owning a house. What's it like?