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Habitat Magazine Business of Management 2021

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PROPRIETARY LEASE UPDATES: SEIZE THE MOMENT

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Proprietary Lease Updates: Seize the Moment

Apr 02, 2021

William McCracken, Ganfer Shore Leeds & Zauderer

I'm sure every co-op board director has been advised to update their corporation's proprietary lease. Old proprietary leases may not be working so well, especially in today's environment. What are some of the most important provisions that you think need to be revisited?
 
Whenever we come into a building, one of the first things we do, and sometimes the reason why we're hired, is to look at the governing documents, and it's not just the proprietary lease, but also the bylaws and the house rules. These are documents that were made many times back in the ’70s or ’80s, and they haven't really been updated for various reasons. So, there's usually a lot that we can change and we make recommendations on that. I think what we've seen with the pandemic is there are certain things that have become more pressing. Certainly the first thing is the idea that you have to run the building in a safe way, and you can't have groups of people gathering. And so there's been a lot of attention on virtual meetings and annual meetings in particular, and how to do that safely. You have to look at your bylaws to see if that actually works. And lots of times you would have to change it.
    We've been fortunate in this in that there have been executive orders by the governor that have allowed virtual meetings to go forward. There's a temporary amendment to the Business Corporation Law that let that happen this year. But I think it makes sense to look at your meeting requirements in your bylaws to see if you can do those things safely and efficiently. There are other things, like electronic notice, which is a standard recommendation that we make. It's a little odd that you still have these things like certified mail and return receipt requested when people really operate by email. You should be able to send notices by email or BuildingLink or what have you, and that's a change that you can make to your proprietary lease and bylaws that would make sense – not just for the pandemic but in everyday life.
I want to add that as far as keeping a building safe, the other thing we look at is that you have to be able to enforce things. And so, you talk about levying fines against shareholders who refuse to wear a mask, crowding on elevators and things like that. You'd be surprised how many buildings actually don't have the capability to levy fines, and so that's something that you would probably want to consider. Then there’s guest policies. You want to make sure that the board can regulate who's coming into your building. There are issues with a lot of proprietary leases as to who's actually allowed to be in apartments. There are lots of situations where parents buy an apartment and their kids are living there, and the proprietary lease says that the shareholder and their children can be there. Does that mean they both have to be there or just the children or just the parents? That sort of thing.
 
Now, changing your proprietary lease is often a gargantuan effort because you need buy-in from your community. Do you just want to tell me a little bit what that buy-in is?
 
Every building is different, right? You have small buildings and really large ones, buildings with a lot of absentee owners, activist buildings, buildings where the residents don't seem to really care, so these are all calculations you have to make. But you have to think conceptually about the governing documents as contracts. These are things that people agreed to abide by, and so they can't be easy to amend and just changed by decree. You have to have people's buy-in, and it doesn't mean everybody has to agree, but in a co-op, it's usually a 67 to 70% supermajority that is required, and that's really difficult.
 
Very.
 
It's difficult to get people to focus on this. And one of the things about the pandemic is, at least conceptually, that it’s something where you can get people’s attention and get their buy-in to actually consider some of these good governance things, because lots of times we can make recommendations about what a building should do but it's just impossible practically to get it done under their amendment rules. You also have procedural issues. Sometimes you can do them by written consent, which is a lot easier than holding a meeting, because if you don't have a quorum at a meeting or you don't have a sufficient number of people to vote for it, you can have all the great amendments that you want, you just don't have enough people. So, if you have a written-consent provision in your governing documents, you can build up, go door-to-door and get the votes that you need over time. So these are all considerations that you have to factor in. It becomes a matter of building politics to see what's possible.
 
If the pandemic offers an opportunity to at least get people's attention, what are some other things that you would take time to codify in your governing documents, as long as you're going to make the effort?
 
Again, we make recommendations not to every building, but to most buildings we work with, to look at changes in the law that have happened over time. Remember, when these proprietary leases and bylaws were instituted, they were pre-Internet. They were done by sponsors who were looking to get out of buildings, and they weren't necessarily focused on the long term and how a building works. Now, we have a lot of experience with how these things work, and you want to adapt your building to the circumstances that you have there. But generally speaking, there are changes in the law – there have been changes in requiring smoking policies, for example – that you had to codify in your building documents. If you can't get it done by an amendment, people do it by house rules, which is less effective, but that's something you should definitely look at.
    There was a provision passed a couple of years ago on conflicts of interest, BCL 727, requiring buildings to disclose if they have any interested party transactions on the board. And one thing that board members realize is that the biggest conflict of interest that a lot of buildings have is having brokers on the board. People don't really like that, but you can't necessarily stop brokers from being on the board. Some buildings are fine with it, but if your building is not fine with that arrangement, that's something that you would have to amend your proprietary lease and bylaws to account for, because otherwise anybody can serve, at least in accordance with the bylaws.
 
In a proprietary lease that hasn't been updated, is there something about the pandemic situation where if you don't address some of the older rules, you could find yourself in legal trouble down the road?
 
Well, I mentioned fines. We had situations where you have an issue with the shareholder who's not following the rules and you have to do something. As a board, your options are fairly limited. You can't evict them from the building, right? You can call the police or the Health Department or whatever, but if you have fines, that's money that you can charge them. If you don't have the ability to do that, you get questions like, "Well, is this going to be challenged later on?" And buildings say, "Well, we're going to do it anyway," and take that risk. It would be better if you didn't have to take that risk, and you just have it in black and white that we're allowed to do X, Y and Z if you don't follow the house rules or whatever policies are instituted. Thankfully, it hasn't been pushed to litigation in any of my buildings, but you could see it definitely being a problem.

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