Ken Jacobs, Smith Buss & Jacobs
The ownership of a condo unit is governed by three main things: the allocation of that space, the voting rights of the owner of that space, and then finally the rights to alter that space. If the unit is a commercial space, specific issues crop up. Let's start with allocation.
In condos, all unit-owners pay a share of the expenses of operating the condominium. That share is based on your percentage of common interest in the condominium, but the law allows special allocations for different types of units. Commercial unit-owners focus on their contributary share, which is the percentage paid of the building’s operational expenses. That is not set in stone. If the condo’s governing documents say your contributory share can change from year-to-year based on the determination of what share of expenses you actually ought to pay, and commercial unit-owners look at that on a category-by-category basis, then the share will change.
Frequently, the bylaws go through each category and state what percentage the commercial unit-owner will pay. And then it may provide that if there's a dispute between the residential owners and the commercial unit-owner, it will be resolved by arbitration.
Regarding repairs and maintenance, the commercial unit-owner might say, "I don't want to pay for any portion of redoing the hallways or the lobby or the elevator. I don't use them. I'm only going to pay my percentage of common interest in the general common elements – the roof, the exterior walls, the sidewalk.”
Does this create problems for the condo board?
It can. As you can imagine, the determination of allocations of expenses by the sponsor is not necessarily oriented toward having the commercial unit-owner pay its 100% fair share. It's more like, “How much can I place on the residential units without costing me money in terms of the purchase price?” Second, if the use of the commercial-unit changes, like for example it becomes a restaurant or a laundromat, its use of water and sewer may increase, and now the residential units are subsidizing these charges for the commercial unit. So I would urge boards to look at the allocations, and if you have flexibility to determine the allocations year- by-year, keep track of that. That way you won’t end up subsidizing the commercial unit-owner.
Let's move on to voting. Most commercial unit-owners are granted a seat on the condo board. How does the voting get parsed out?
Again, you need to look at the documents. Some declarations and bylaws say that the commercial unit-owner has a seat on the board, and that's it. The commercial unit-owner can't cast a vote for anybody else. But a lot more give the right to the commercial unit-owner to cast his votes for other members of the board. If the commercial unit is a professional office in a 100-unit condo, that doesn't make much of a difference. But what if the commercial unit is 10, 15, 20% of the percentage of common interest in the condominium? Now all of a sudden the commercial unit-owner is a kingmaker, and his vote will usually determine which of the residential candidates actually wins. So there's a great temptation for candidates to suck up to the commercial unit-owner and say, "Vote for me, and this is a position I'm going to take."
If a large commercial space changes hands and a different tenant moves in, say a dental office or a laundromat, suddenly the water usage is changing and the new tenant wants to reconfigure the space. How are the decisions about alterations governed?
Really what we're talking about is the rights of the commercial unit-owner. Usually, the commercial unit has the right to sell, lease and make alterations, as well as other rights intended to make sure that the rest of the board, especially the residential owners, can't interfere with its operations. The board may have passed regulations intended to control the operations in the building, to make sure it complies with the law and with good construction practices. If the commercial unit-owner ignores those regulations, it can cause real problems for the condo. So I recommend that the boards work the modus operandi out as soon as possible with the commercial unit-owner. Make sure that he understands that he has to comply with reasonable regulations of the condo intended to govern how work is being conducted.
Is there a lesson from all this?
The commercial unit-owner is a unit-owner in your condominium, and there are plenty of places where you and he share interests. I'd recommend that rather than immediately confronting the owner, try to understand what he’s concerned about, and whether you can make an adjustment that will enable him to remain in operation. Problems with the commercial unit-owner undermine the stability of the building. They lead to a bad reputation in the neighborhood among brokers. Yes, you have to protect your rights and make sure the quality of life in the building is maintained. And if that means confronting the commercial unit-owner about abuses, then definitely do that. But keep in mind the board’s long-term interest is in making sure the condo is running smoothly.
So boards should negotiate before they litigate?
Yes, generally speaking. That doesn't mean you don't have the iron fist inside the velvet glove. But negotiation is definitely better than litigation.