Is it a problem for a co-op to be operating with their original governing documents? Lisa Smith, partner at Smith Gambrell & Russell, explains the dangers to Habitat.
Many co-ops and condos are still operating with their original governing documents from the 1980’s. Is that a problem?
Well, it's not necessarily terrible, but it is better to bring your documents into the 21st century. A lot of the terminology in those documents is antiquated or no longer applies. Also, many of these buildings used the same form of proprietary lease and bylaws, and it’s not “one size fits all.” For example, it may not include things that now exist in the building, or it doesn’t address unexpected issues that have come up over the years.
It’s understandable that boards might not want to deal with the problem, since leases are unintelligible unless you’re a lawyer. What typically motivates a board to bite the bullet?
It's usually triggered by some event. For example, building might be getting hit with a lot of repair issues – like water damage in shareholders’ apartments – but can’t determine who’s responsible because the lease language isn’t clear. Or it could be something as simple as directors not showing up for board meetings, and they decide they need a bylaw amendment specifying that you’re off the board if you skip several meetings in a row.
A lease is a very fat document. When it comes time to make changes, does the whole thing have to be updated?
There are buildings that want to amend the entire lease or redo all their bylaws, which is very challenging. It’s much easier to sort of triage amendments. Pick the ones you need to do right now, and table the others for a later date.
How do you help boards prioritize?
I'll look at the documents, put together a proposal of everything that could be possibly be amended and go through the list with the board. Some amendments we’ll discard, and others we’ll just tweak a little. Then I try to narrow it down to about six or 10 at the most, because you’ll have to send them out to shareholders. So let alone getting the board to digest it and understand it – now you have to get a supermajority of shareholders or unit-owners to approve the changes.
After you send out the proposed amendments, what’s the next step?
I have an informational meeting to explain what we're proposing and why. Sometimes shareholders have great ideas, and it’s important to get their input and make them feel engaged, rather than being dictated to by the board. Sometimes the board will go back and tweak the amendments before they’re put to a vote. Afterward, I usually prepare a letter for the managing agent to send out that says, "Congratulations. Enclosed are the copies of the amendments that have passed,” and ask the owners to keep them with their proprietary lease or bylaws.
Do owners vote on each amendment or on the entire slate? What if you presented a slate of, say, 10 amendments and only six of them pass?
I generally recommend doing it à la carte. I try to put together a brief, one-page cover letter for shareholders, and then I’ll attach the actual legal language and redline the changes to help them decipher it. Usually by having a layman's explanation, they're like: "Okay, that sounds good. I can get behind that." And hopefully they vote yes.
If you’re selling your apartment in a building where amendments have been made, do you give all the documents to the new owner?
Presumably, but they can always get a copy from the managing agent. Usually the purchaser's attorney has gone in and done due diligence and read the full lease before they went to contract, so they’ll know there were some amendments there. Some buildings will do a fully amended and restated lease where they'll actually put the amendments in and reprint the whole thing. It's a lot of paper, and it's a lot of mailing, but some people do it.
At the end of the day, is it worth it for a board to look at their leases and bylaws and proactively make changes before problems arise?
Absolutely. In fact, it's probably easier to do it proactively rather than as a reaction to something. You have the benefit of time, and it doesn’t feel so imperative. It allows you to come up with a better game plan.