HABITAT

LEGAL/FINANCIAL

For board members and property managers of co-ops and condos in New York City, there are legal and financial questions regarding new and old laws, accounting rules, auditing, and so much more. Here’s what you need to know to manage your finances and speak knowledgeably with your accountant and attorney.

Preparing to Refinance

Written by Patrick Niland on November 25, 2015

New York City

 

Your board is planning to refinance your building's underlying mortgage after the first of the year, and you want to make sure that you have everything prepared so the process runs smoothly. What should you be doing?

 

The first step is to convene a meeting of your co-op's attorney, accountant, and managing agent to discuss your plan and enlist their aid in collecting all of the crucial information. Refinancing an underlying mortgage is the most important decision that your board will make during its tenure. It will affect not only the monthly maintenance of every shareholder but also the market value of every apartment. It is not something to undertake alone. You should have the best advice available.

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How to Get the Most Out of a Proxy

Written by Steven D. Sladkus on November 24, 2015

New York City

 

This year, we faced a number of issues relating to annual meeting elections and specifically the use and delivery of proxies.

 

In one case, a board of managers of a large downtown condominium building faced a hotly contested election between two factions. Both factions sought and obtained numerous proxies from the unit-owners in an effort to have their slate elected. The problem, however, was that when one faction realized that its slate seemed like it would lose the election, it opted to withhold the proxies and not deliver them to the meeting so that there would not be a quorum. Without a quorum, there could be no vote and that particular faction would remain on the board.

 

In a second case, a cooperative corporation with a seven-member board of directors was also facing a hotly contested election. For many years, the same four board members consistently had outvoted the other three. After the election was held and the majority faction was re-elected, a board member in the board’s minority faction challenged the results. The challenging board member claimed that one of the board members in the majority faction failed to deliver a proxy to the election. The challenging board member further claimed that, had the board member who received the proxy actually delivered it, a new board member would have been elected and the minority faction, along with the new board member, would have controlled the board.

 

Takeaway

 

In both cases, we first needed to determine the duty, if any, of a board member proxy-holder to deliver a proxy to a meeting. We concluded that where a board member solicits a proxy or merely receives a proxy, that board member is legally bound to deliver any and all proxies he or she is holding to the election. Board members of both cooperatives and condominiums owe a fiduciary duty to the shareholders/unit-owners, and to the cooperatives and condominiums themselves. Moreover, when a proxy is given to a board member, the person giving the proxy has a clear expectation that the proxy-holding board member will, in fact, deliver it as he or she was entrusted to do. It is now part of our standard practice to remind and advise our board member clients of their obligation to deliver proxies received by them, and that failure to do so may create unwanted liability.

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Collecting Unpaid Common Charges

Written by Stephen Lasser on November 19, 2015

New York City

 

In a lien foreclosure lawsuit, Lasser Law Group successfully collected more than $140,000 in unpaid condominium common charges, late fees, and legal fees from a commercial condominium unit-owner who had not paid common charges for several years. Lasser Law Group was retained by the board of this small condominium building in the middle of 2014 to take over the lien foreclosure lawsuit, which was originally begun by a different law firm in 2013. We quickly made a motion for summary judgment, which prompted a settlement payment from the commercial unit-owner, including late fees and legal fees. Because the commercial condominium unit was large in size, its monthly common charges were also sizable, resulting in a significant budget deficit for this small building during the course of the foreclosure lawsuit. The settlement payment provided a much-needed cash infusion to the small building.

 

Takeaway

 

Common charge arrears continue to be a problem for condominium boards and property managers. It is important for boards and managers to promptly start legal action to prevent unpaid common charge balances from ballooning out of control. It is also important to retain experienced condominium collections legal counsel as there are usually a variety of legal approaches that can be taken in each case, and a lien foreclosure by itself is often not the most cost-effective approach.
Condominium boards should also review their bylaws with legal counsel to make sure they contain strong language, which ensures that the condominium can properly collect late fees and obtain reimbursement of legal fees spent suing unit-owners who fail to pay on time. Without the appropriate language in their bylaws, condominiums may have a difficult time recovering such late fees and legal fees, and this may embolden some irresponsible unit-owners to delay or withhold payment of their common charges.

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Are You Insured Against Funds Being Stolen?

Written by Tara Snow on November 18, 2015

New York City

 

This year, we have worked on two different files that concerned crime policies and fidelity bonds. In one instance, a board member of a self-managed co-op absconded with hundreds of thousands of dollars. The client advised that the co-op did have a fidelity bond and, therefore, thought that it would be at least partially covered for such a loss. A review of the fidelity bond quickly showed that to qualify for recovery, the person who committed the theft had to be “tried and convicted” in court. While the hope is that the authorities will vigorously pursue the perpetrator, it is the authorities who determine whether they will pursue the case and bring it to trial. Therefore, even though our client would be able to prove a case in civil court, it is not enough for the bond to pay out.

 

Additionally, there was other restrictive language in the fidelity bond: that only an officer of the co-op who received compensation would be covered. With this type of language, the fidelity bond offered no protection if a board member stole money (a bad recipe in a co-op that is self-managed). In another instance, a managing agent absconded with more than $100,000 of co-op funds. In this instance, the co-op had a crime policy in place. However, the insurance company disclaimed on the grounds that the principal and/or employees of the management company were not “employees” of the co-op. The carrier argued that, even though the management company was employed by the co-op, it is not an “employee,” since it is not a person. We are currently in litigation with the carrier over this interpretation.

 

Takeaway

 

Just because a co-op has a crime policy or fidelity bond in place does not mean it is affording the co-op coverage if there is a defalcation. The self-managed building had a fidelity bond for the purposes of protecting it in the event funds were stolen. The board had no managing agent and the board members had unchecked access to funds. However, the fidelity bond they purchased would never have covered theft by directors and officers coverage because they do not receive compensation.

 

Additionally, the prerequisite that a conviction has to occur before the policy could be paid out is a high bar to recovery. In short, because of the restrictions, this policy was of very little value to the co-op. In the other case discussed, the co-op had crime policy coverage. Since the managing agent has access to co-op funds, it is imperative that a crime policy cover theft perpetrated by an agent. This policy did not unequivocally state that it covers theft by a managing agent. Many policies have the managing agent covered through an additional rider to the policy. The takeaway for our boards is to use an insurance broker who is well versed in insuring co-op and condo communities and can understand the nuances of how your community is structured. Once insurance is placed, have the crime policy or fidelity bond reviewed either by the insurance expert with your managing agent or attorneys.

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Dealing with the Developer Next Door

Written by C. Jaye Berger on November 17, 2015

New York City

 

I helped a co-op building in one matter and a townhouse owner in another negotiate favorable access agreements with neighboring developers and was able to secure reimbursement for the professional services needed to review the relevant documents and drawings. In each of these cases, it was important for me to pull together the right team of people to assist the client. This included a structural engineer, a surveyor, and others. We then were able to negotiate the terms of an access agreement, which provided for a condition survey, a review of plans, insurance, vibration monitoring, and compensation for damages. Determining your property line between the two buildings can sometimes be crucial, but you cannot assume you know the property line just by looking at the property itself.

 

Takeaway

 

My advice to a board is to plan for dealing with a neighboring developer and not be afraid to make some waves. The developers are as scared of the co-op as the co-op is of them, since time spent in court is money. Developers with bank loans do not like litigation. The negotiations must be handled by a lawyer with experience in this area who can pull together the necessary team of professionals and litigate, if need be.

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Dealing with Tricky Transfers

Written by Arthur I. Weinstein on November 16, 2015

New York City

 

Bamboozling transfer agents: six attempts. This year, I have seen a record number of attempts to bamboozle transfer agents. Attempt number 1: a shareholder whom we’ll call Amy (all names here have been changed) produced a power of attorney allowing her to transfer an apartment from boyfriend Bob to Amy, without disclosing that Bob was dead and had living relatives/beneficiaries. Attempt number 2: Cindy, the executor of her mother’s estate, sought to transfer the lease and shares to a trust to permit Cindy to live in the apartment without disclosing that her sister, Daisy, had equal rights to inherit the apartment but would receive no benefit from the apartment while Cindy lived there. Attempt number 3: Ed, the beneficiary of decedent Fred, sought to sell an apartment without revealing that the federal government had filed tax liens against Fred in Florida, where Fred had lived in the last years of his life. Attempt number 4: Helen wanted her ex-husband, Ira, removed as a co-owner of their co-op. George, Helen’s lawyer (and also her father), claimed that Ira had consented to the transfer of the apartment to Helen but was not willing to sign any documents. Attempt number 5: Karen wanted the apartment transferred to herself without any documentation from her ex-husband, Larry, because, according to Karen’s attorney, photocopies of 40 pages of court documents “clearly” showed that Karen would be entitled to the apartment. Attempt number 6: Linda, the court-appointed guardian for her mother Mary, sought to transfer Mary’s apartment to Linda to reduce Mary’s assets to qualify for Medicaid, even though the powers granted to Linda under the guardianship were limited to providing for support of Mary, and contained no legal authority to dispose of Mary’s assets.

 

Takeaway

 

If any of these transfers had been carried out as requested, the co-op could have been subject to thousands of dollars of valid claims from other parties. Each of these cases involved buildings I represent and none of the transfers were done as requested because I have successfully trained managing agents to recognize that any transfer involving a decedent’s estate, trust, power of attorney, divorce, partnership, corporation, LLC, or other entity form of ownership, or in any other way “unusual” must be handled in conjunction with me as the building’s attorney. I have established a complete set of requirements for each of the described types of transfers: executors must have explicit probate court authorization to sell; federal and state waivers of estate tax liens must be produced, and legal opinions must be rendered by counsel for estates, trusts, LLCs, and other entities. All affected parties not present at closing must be adequately represented by counsel and all documents must be reviewed by me. The cost of the review and the transfer agent’s usual fees are paid by the party involved. Result: the co-op is protected against possible scams.

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Keeping Alteration Complaints to a Minimum

Written by Allen H. Brill on November 11, 2015

New York City

 

I recently represented a purchaser of a high-end prewar co-op apartment who intended to perform substantial alterations, especially to the kitchen and bathrooms. The co-op’s alteration agreement was 25 pages long with 27 additional pages of exhibits, prepared by an experienced co-op counsel over the years. Unfortunately, it had several clauses in different parts of the agreement that were not necessarily consistent and did not address the vagaries of who was living underneath the apartment being renovated or the way the building was originally constructed.

As work proceeded, numerous complaints were received from the owner of the apartment below the one being renovated. He claimed that he was being disturbed by “noisy work” being performed prior to 9 A.M. and after 3 P.M., as prohibited under the alteration agreement. The constant complaint of noisy work became a bone of contention, especially since the occupant of the apartment below worked at home and was a former officer and director of the co-op.

Because of the way the building was originally built, there also were pipes and supporting beams below the bathroom floors that the co-op said had to be replaced as part of any bathroom alteration. This, too, created an issue concerning how to address the noise being generated from this work. An additional factor that was not considered was how to address the extra time required on work that effectively was structural or replacement work. The co-op put a six-month time limit during which all work had to be performed.

Individuals purchasing apartments who intend to do major renovations must be aware of the co-op corporation, the work being performed, and the potential complaints from other unit-owners, especially those who work from home.

Takeaway

The owner of an apartment should communicate not only with the board but also the adjacent unit-owners to make sure that there are no unforeseen issues that would either affect when work can be performed or what issues might arise during the course of the renovation. In this case, since the alteration agreement did not spell out what was considered “noisy work,” it became apparent that operating power equipment or even vacuuming bare floors could be considered noisy work.

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If You Want a Successful Quorum, Hold a Raffle

Written by Bruce Cholst on November 10, 2015

New York City

 

Failure to amass a quorum at an annual meeting is hardly a unique occurrence. However, a board’s repeated inability to achieve this threshold throughout a number of years can adversely affect a building’s operation. Without a quorum, no election or other shareholder/unit-owner vote can be held. The then-serving board remains in office independently without the blessing of its constituency and no vote upon a proposed governing document revision, however essential or desirable, can be conducted.
One condominium board was so vexed by its failure during a five-year period, despite strenuous efforts at proxy solicitation to achieve a quorum, that it requested a meeting to “brainstorm creative methods” to obtain this result. I suggested a raffle with the prize being two months’ worth of common charges. Only those voting in person or by proxy would be eligible to participate. To avoid any accusation that condo funds were being used to elicit additional proxies to stack the election in favor of the “management slate,” I utilized a directed proxy form whereby the issuing owner specifically instructed the proxy-holder as to which candidates he must vote. I also provided an option to instruct the proxy-holder to vote for quorum purposes only. In this manner, the proxy-holder, even if he were supporting the “management slate” did not have the power to vote his own preference but was required to adhere to the issuing unit-owner’s voting instructions.

I issued a formal legal opinion that this process was entitled to protection from the Business Judgment Rule and was not vulnerable to legal challenge. That’s because it’s not inconsistent with the condo’s bylaws, and is not otherwise illegal, not a breach of the board members’ fiduciary duty, and it served the valid communal purpose of facilitating democratic board elections.
We achieved a quorum with 62 percent of the condo’s common interest voting at the 2015 annual meeting, and a new board was elected.

Takeaway

When confronted with a seemingly intractable legal problem, look beyond the confines and limitations imposed by legal doctrine and go outside the box for novel but practical common-sense solutions. More often than not they exist and are just waiting to be discovered.

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Flush With Cash? Reverse Assessments May Be for You

Written by Frank Lovece on November 10, 2015

Yonkers

 

Your co-op might be making too much money. Yet sometimes it really can happen: you refinance the underlying mortgage, you refurbish and sell an apartment picked up in foreclosure – and then you have issues with your nonprofit status – and also shareholders wondering why their monthly maintenance is so high if you're rolling in dough.
 
What can you do? Lower the maintenance? Maybe. But if you're Michael Barbara, the 21-year board president of Yonkers' 528-unit Bryn Mawr Ridge Coopersative, you implement a concept that appears to have had no name until he gave it one: a reverse assessment.

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Eliminating Airbnb from Your Building

Written by Eric M. Goidel on November 09, 2015

New York City

 

Airbnb rentals have become ubiquitous in cooperative and condominium settings. Not only are short-term stays illegal under New York law, which prohibits the rentals of Class A multiple dwelling apartments for periods of fewer than 30 days, but such rentals also represent a violation of most cooperative and condominium policies. We worked with a number of boards to develop multifaceted approaches to address this issue.
Management was instructed to monitor websites to identify potential violators. Doormen and concierges were reminded of their security duties and advised of the board’s determination to discipline employees who were complicit with violators. New security measures were implemented, such as installing key-fob or biometric entry systems and creating visitor log books. Security cameras were strategically placed throughout the building. Memos were sent to residents advising them that short-term sublets are illegal.
Since short-term rentals are often incapable of legal review – by their very nature they usually end before any cure period afforded under corporate documents has run – resolutions were adopted in cooperatives to declare any repeated conduct objectionable. This would entitle boards to terminate a proprietary lease upon the occurrence of multiple violations without the opportunity to cure. Where warranted, legal action was taken and upon a successful outcome, broadcast to all residents of the building.

 

Takeaway

 

Dealing with Airbnb issues is no different from dealing with most of the other governance issues that boards must address. When there is a threat to the overall purposes under which a cooperative or condominium was founded, boards must not only be reactive, but also proactive in their approach. Existing systems, policies, and practices must be carefully analyzed and critiqued. With the advice of the building’s professionals, boards must close loopholes, explore newer methods, take advantage of technology, and build better mousetraps to effectively deal with violators. To maintain control of a cooperative or a condominium requires that it be carefully and constantly monitored and managed. Perhaps the most important aspect of governance is frequent and effective communication with owners as most of them will toe the line if they are kept in the loop, properly educated and informed of the board’s rationale for its policies.

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Ask the Experts

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Learn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments

Professionals in some of the key fields of co-op and condo board governance and building management answer common questions in their areas of expertise

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