How is it possible that boards could be working off the wrong set of bylaws? Habitat talks to Michael Manzi, partner at Smith Gambrell & Russell, about what boards can do to update their governing docs.
It seems obvious that condo boards should be working off the correct set of bylaws, but sometimes they’re actually using the wrong one. How is that possible?
Condos typically go through a number of sets of bylaws and amendments. The first one is in the initial offering plan, but later people decide to make changes that have to be submitted and recorded as an amendment to the offering plan. It’s easy for people to lose track. So you’ll have one set in your files, which is the one you’re going to, because you don’t realize there’s a newer version to consult.
Is that necessarily a serious problem?
Yes, because the differences can be severe. And if you’re following an out-of-date set of bylaws, you’re making mistakes in your governance.
Can you give an example?
A classic mistake is incorrectly calculating common charges, especially with respect to the commercial units in the building. Often there’s one formula at the beginning, but a different one is adopted later on. The discrepancy in terms of dollars can be significant. I recently had a board come to me after their new managing agent discovered that the condo had been losing thousands of dollars a year because the correct amount wasn’t being charged.
How did that happen?
After some digging, I found out that for years the condo and the previous managing agent had been operating off an older set of bylaws. Originally, the commercial unit owner would not be charged based on its common interest percentage, which was close to 20 percent, but on its specific usage of various common services and common areas. But that changed when the bylaws were amended. The current bylaws plainly state that common charges are based on its common interest.
And were the current operative bylaws on file?
They were on record with NYC Registrar’s Office, which can be accessed through the Automated City Register Information System (ACRIS) website. Obviously, someone didn't have them or decided not to use them. It’s possible that the sponsor controlled the board for a few years, and then the sponsor’s managing agent continued for a few more, even after the unit-owners had taken control of the board. I think what happened every year was, "Well, this is how we’ve always done it."
So what can the board do now that the mistake has been discovered?
They need to recalculate. Ideally, you’d go back to when the problem first started, but due to the statute of limitations you can only go back for the last six years. After that, you inform the commercial unit owner or sponsor and present them with the bill. And then the fight starts.
Is it likely the board will recoup its losses?
Not if it's a lot of money. You can put a lien on the unit for unpaid common charges, which can really throw a wrench into the sponsor’s operations, in the hope it will nudge the sponsor to cut a reasonable deal. Maybe they won’t pay everything but will pay enough – and agree to the new amount going forward.
And presumably everybody will work from the current bylaws from now on?
You certainly hope that's the case. But down the line, when a board switches managing agents or lawyers, a glitch can occur and the new person might reach for the old ones instead. So, it's very important when a management company takes over a condominium or a lawyer takes over representation that they go through ACRIS to make sure they have the correct, up-to-date and recorded declaration and bylaws.