LEGAL/FINANCIAL

Affordable housing is beginning to look like an endangered species in New York City. To make sure it doesn’t go the way of the dodo, a City Council task force has proposed eliminating property taxes for the city’s 1,271 limited-income co-ops in exchange for tighter rules – including strict limits on the income of buyers and the price at which units can be sold.
 
As reported by The Wall Street Journal, the task force’s proposals sprang from a pair of yin-and-yang trends: distressed limited-equity co-ops fell behind on their property taxes by $7 million in fiscal 2014, while successful limited-equity co-ops have been selling for as much as $1 million – and, in one case, more than $2 million – effectively removing them from the city’s stock of affordable housing.
 
“The current situation both imposes more taxes than we think are necessary and leaves the public with far too weak guarantees of long-term affordability,” said Councilman Mark Levine, co-chairman of the task force, which also proposed requiring limited-equity co-ops to hire outside property managers. “It is crying out for reform.”

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A 40-story residential and retail tower will fill the sky of Brooklyn Heights – if shareholders from a co-op that owns the site accept a big money proposal from developers.
 
Residents of 75 Henry Street, a prime 33-story co-op with 370 units, received a letter this week from their board outlining the development plan that includes demolition of the Park Plaza Diner (a neighborhood institution) and a row of retail stores that sit on the co-op’s property.
 
According to the letter, the low-rise restaurant and retail buildings would be replaced by a 40-story residential condominium and new retail spaces that would dwarf neighboring buildings.

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Smoking bans within individual units are legally enforceable. Certain condominium associations that we represent have amended their bylaws to ban smoking within individual units as well as within the common areas. Since courts have already ruled that secondhand smoke is a legal nuisance, condo boards usually respond aggressively to owner complaints about smoking odors. However, these boards determined that there were issues. Even if they could locate the source of smoking odors, it could be difficult to hold the offending owner fully responsible for allowing the smoke to infiltrate into other units because of the construction of their buildings. In addition, engineering solutions were potentially costly and not guaranteed to resolve the problem. To avoid the cost of investigating, arguing, and resolving recurring smoking complaints, the boards proposed a general ban on smoking within units, and the unit-owners resoundingly agreed. One unit-owner sued the board, claiming that the bylaw amendment unconstitutionally infringed on his rights of privacy and exceeded the powers of the condominium. After reviewing relevant case law, the court signaled to the owner that he surrendered certain rights by joining a condo association, and that the association owners did have the right to amend their bylaws to ban smoking. The unit-owner agreed in court to comply with the ban and to pay a substantial portion of the association’s legal fees. But despite his agreement, the owner has continued to violate the smoking ban. As a result, the association has been compelled to file a motion for contempt. The owner now faces substantial monetary fines and may ultimately have to sell or vacate his unit.
 
Takeaway
 
Any rule needs to be enforced to be effective. Associations need to be prepared to enforce a smoking ban to protect the interests of its owners. Smoking is not considered a disability under the Fair Housing Act or the Americans with Disabilities Act, for which a “reasonable accommodation” must be made. However, the power of a smoking addiction can apparently overwhelm an addict’s best efforts, even when faced with a court order.

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A board was contemplating changing to an oil-to-gas dual-fuel conversion system and was apparently solely relying upon the suggestions of a contractor. We had certain concerns about proceeding without having an engineer review the proposed scope of work or provide specifications. We had a formal project agreement in lieu of a signed proposal, and we did not have a designated warranty. The project also lacked requirements for the oversight of the project and monitoring of critical stages, as well as payment approvals. The property manager did not have the requisite experience to supervise.
 
We were finally able to convince the board to utilize an experienced engineer to review the scope of work, and recommend changes regarding the monitoring of the project. We also negotiated major changes together with an extended guarantee from both the contractor and the manufacturer.
 
Takeaway
 
Use your professionals! This board was headed toward potential trouble in this project by not wanting to employ professionals (until we convinced them otherwise) and neglecting to have the right documents drawn up.
 
Contractors and managing agents are generally experienced and can coordinate the execution of a project. Nonetheless, it is recommended that the board engage an engineer and attorney to either prepare and/or review the specifications to be utilized by a contractor, especially with respect to the replacement and/or retrofitting of the existing heating plant; or to assist with coordination and scheduling with the contractor/plumbers and Con Edison; and, most importantly, to monitor and supervise the project to ensure the contractor has actually performed in compliance with the specifications and the building code. When approving requests for payment to the contractor, the managing agent may be very qualified and competent to perform the oversight services, but in retrospect is neither a technical expert nor an engineer, and it is preferable to rely on another experienced expert.

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Can co-op owners successfully apply for a reverse mortgage?

That's the question put forth to Ronda Kaysen in her latest Ask Real Estate column. A reader writes, "I know people who have [reverse mortgages], but I was recently told they are unavailable on co-ops." What's a shareholder to do? Kaysen explains what a reverse mortgage is and talks to two professionals, giving the submitter a firm -- if perhaps unhappy -- answer to their query. 

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We represented a co-op where a shareholder engaged in repeated violations of the co-op’s house rules and proprietary lease provisions. The violations included noise issues; odors; leaving the gas of the stove on; and leaving food cooking in the oven unattended on multiple occasions, which caused a fire and smoke to fill the hallways. Because the incidents were spaced apart over months and even years, we recommended that the board seek to terminate the shareholder’s proprietary lease because of his “objectionable conduct.” Legally, the board could do so if the shareholder or occupants of the apartment repeatedly violated the house rules or the shareholder was deemed a person of dissolute, loose, or immoral character.
 
In this particular co-op’s proprietary lease, the board was allowed to terminate the lease based on the shareholder’s objectionable conduct, as opposed to other leases that require a vote of the shareholders. This did, however, require strict compliance by the board with the terms of the proprietary lease and the bylaws. Ultimately, a special meeting of the board of directors was called, at which the shareholder was given an opportunity to be heard and respond to each allegation of objectionable conduct. At the end of the meeting, the board voted on whether to terminate the proprietary lease. Ultimately, the shareholder agreed to sell the apartment and if it was not sold by a prescribed date, the shareholder agreed to leave and never return. The shareholder also agreed to and did repay the co-op for all legal fees expended.
 
Takeaway
 
When a shareholder repeatedly violates the co-op’s house rules and other governing documents (provided they are significant violations), boards should consider taking an aggressive approach by availing themselves of the provision entitling the co-op to terminate the lease. This approach will force the shareholder to resolve the matter or face eviction.

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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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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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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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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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