Peter Massa, Partner, Armstrong Teasdale, is interviewed by Habitat Magazine's Bill Morris.

• A legal landmark. The business judgment rule has been around in corporate law for a long time. The theory is that board decisions will not be second-guessed by the courts — provided they’re made in furtherance of the corporation's legitimate interest and in accordance with the recommendation of the corporation’s professionals and the governing documents.
• It’s not failsafe. The caveat here is you generally don't have business judgment rule protection if you're acting in bad faith, outside of the board's authority and against what your governing documents say, or if you’re not following the advice of your professionals.
• Case in point. I represented a condominium that had fireplaces in the apartments. When it was discovered that the chimneys weren't properly lined and fireproofed, engineers told the board it had to get this done because it’s a life-safety issue. The board was facing potential litigation on two fronts — one group didn’t want to spend the money because the fireplaces had never been a problem, and another group threatened to sue if the board did this because it was going to be a big assessment.
• What should the board do. The board should rely on the advice of the engineers. If someone sued, the board’s decision would be upheld because of the business judgment rule. While that case didn't go to litigation, that's how it would be applied. If you can show in court that you were trying to do what was best for the corporation or condominium — even if it was wrong — courts generally will grant you broad leeway.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Leni Morrison Cummins, Partner, Cozen O’Connor, is interviewed by Habitat Magazine's Carol Ott.

It all starts when sponsors decide how they’re going to allocate expenses between the residential and commercial portions of the building. Real Property Law 339M gives sponsors the ability to allocate expenses based on something other than a percentage of common interest. When a sponsor is looking to market their building, they want to keep the allocation of expenses for the commercial units down. So they’ll keep an eye toward minimizing the common expenses.

Expenses go up over the years, but a board doesn’t typically have the authority to change an allocation of expense methodology without commercial unit-owner consent. And if the commercial unit-owner decides it doesn’t want to pay more, fair or not, it can refuse.

Can a true-up fix things? It depends. A true-up is an accounting of the difference between what a board budgets for the year ahead and the actual expenses at the end of that year. The bylaws will determine whether a board can legally true-up. If they say common expenses are allocated and charged based on actual expenses, it can. But if the bylaws simply discuss creating common charges based on a budget, then a true-up isn’t necessary. In practice, though, many condos true-up even if it’s not contained in the bylaws because their accountants direct them to do so.

Just make sure your managing agent understands the prescribed allocation methodology and how it’s applied. If you do see something completely out of whack, approach the commercial unit-owners and see if they will agree to something more reasonable. If not, you’re stuck with what the bylaws say.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Benjamin Flavin, Partner, Braverman Greenspun, is interviewed by Habitat Magazine's Carol Ott.

Lessons for Co-op & Condo Board Directors

• The benefits. HDFC co-ops were created to provide affordable housing for people who may not otherwise be able to enter the New York City real estate market. There are also certain tax benefits that lower the cost of owning an HDFC apartment.
• The regulatory agreement. Most modern HDFCs have a regulatory agreement with New York City that outlines the financial regulations they’re subject to. I think this can be very difficult for boards because sometimes the agreements are not very clear.
• Take flip taxes, for example. These are often determined when the HDFC was created. Many modern HDFCs have a 70/30 flip-tax ratio — 30% of the sale’s profit goes to the HDFC, and 70% goes to the shareholder. But older HDFCs have a 60/40 flip tax, where 40% of the profit goes back to the city, and the shareholder gets 60%. The HDFC is totally left out of the mix.
• Where to locate documents. Many of the documents, like the co-op’s certificate of incorporation, can be obtained from the state. Things like the deed and regulatory agreements are recorded publicly and can be found on ACRIS. And the proprietary lease, bylaws and other such documents can be found in the offering plan in their original form.
• Keep current. One of the most important things for HDFC board members is to understand their co-op’s governing documents. They’ve changed over the years, so if you’ve read something or heard something about HDFCs you should go read your particular documents and find out if whatever you’ve heard applies to your particular co-op.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Lessons for co-op and condo board directors

Evan Richman, Partner, Fleischner Potash is interviewed by Habitat Magazine's Carol Ott.

What happened. In 2021 there was a disputed board election between two slates of candidates at a Port Chester condominium. Right before the election, the board issued a notice to all residents in the building letting them know that this meeting was going to be held virtually. It stipulated a new requirement that in order to vote in the election, each resident or member had to first authorize the email address from which they would be sending their directed proxy. The board provided an email authorization form, which required the member to list their name, unit number and a designated email address from which they would be sending their proxy. Each member had to sign and date it, then send it back to the managing agent.

At the annual meeting. A number of proxies were submitted that had no prior email authorizations. The accountant who was overseeing the election then found that there were not enough authorized votes to constitute a quorum. Since there was no quorum, there could be no election. The board that was already in office continued for another year, and the side that had submitted the proxies challenged the election.

In court. The challengers argued that the email authorization form wasn’t reasonable and shouldn’t be permitted under the new amendments to the business corporation law, which were added during the pandemic. The court, however, said that the board was required to take steps to verify who these individuals were and that the board was required to impose safeguards. It held that this simple email authorization form was indeed a reasonable requirement and was valid under the statute, and the court dismissed the case.

Going forward. This is very significant because it appears to be the first New York case in which a court is interpreting the verification requirement under the newly enacted statutes. As co-op and condo boards now shift from in-person to virtual electronic meetings, they will need to impose some type of reasonable safeguard to eliminate fraud or misrepresentation. If a board decides to ignore this completely, it could open itself up to some type of election challenge, risk or headache down the line.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Christopher M. Tumulty, Partner, Fox Rothschild, is interviewed by Habitat Magazine's Bill Morris.

Lessons for Co-op & Condo Board Directors

• First line of defense. Boards need a first line of defense when shareholders or unit-owners want to renovate or combine apartments. The best way to do that is to have an alteration agreement in place before the work starts. This is important because the board has fiduciary obligations to make sure the building is operated in a safe and effective way. The problems that can arise include damages, work that's outside of the permitted scope, and insurance issues. The board’s architect should review the work of the shareholder’s architect because a big concern in these scenarios is protecting the building's common elements. All of this is addressed in a well-written alteration agreement.
• Roof deck gone wild. In a small condo building we represent, a roof deck was installed by the first purchaser of the top floor, but it wasn't done with any Department of Buildings permits or architectural plans. The work was approved by the board, but when the deck was installed, there was damage to the roof membrane and the waterproofing components, which allowed moisture to seep into the structure of the building. The board hired an architect and an engineer to locate the source of the leaks, but the unit-owner was uncooperative and refused to remove the noncompliant roof deck, so we had to take him to court. That case is still pending.
• Stick to the plan. The lesson is to have a plan in place and be engaged. Because while the board may think that an alteration is just happening inside one apartment or inside a space that's exclusively used by one unit-owner or shareholder, you have to make sure the work is done according to law and in a safe way. If it's not and there's no oversight, you could have issues down the line that would become expensive and potentially damaging to the building and other residents.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Dean Roberts, Member, Norris McLaughlin, is interviewed by Habitat magazine’s Carol Ott.

Lessons for Co-op & Condo Board Directors

• Duty to maintain confidentiality. If a board member is disclosing confidential information about a shareholder and that causes some harm or damage, in theory, the board has exposure because it failed to do its duty to maintain confidentiality. Or say two directors go home after a board meeting where shareholder litigation was discussed. The directors are riding the elevator, talking about the litigation but, unfortunately, the subject of the litigation is also in the elevator.
• Three step process for violators. A board can deal with violation of confidentiality in a three step process: censure, suspension and removal. Censure is a statement saying director X did this wrong thing. It can be internal to the board, with a memo of what they did, or it can be made public to the shareholders. Suspension means that a super majority of the board votes to suspend the violator for some period of time. Removal of a director is a very big step, because you’re overturning the shareholders’ election of a director. But if you have a director who is consistently breaching protocol removal is an option.
• Board rules. Oftentimes the disclosure is inadvertent, which is why boards have to be conscientious about the duty to maintain confidentiality. They need to know that if they improperly disclose or misuse private information there are clear consequences.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Stewart Wurtzel, partner, Tane Waterman & Wurtzel, is interviewed by Habitat magazine’s Bill Morris.

Lessons for co-op/condo board directors:

• Fat fees. If you’re thinking about going to court, don’t base the decision on whether you're going to recover legal fees, because even if you’re entitled, there are a lot of questions. The fight over legal fees often can overtake the underlying dispute, because sometimes it’s a much bigger number.
• When winners lose. There was a case where a condo unit-owner was illegally renting his apartment on Airbnb. The board won an injunction, but when it tried to recover its legal fees the court said the condo documents did not provide for recovery of attorney’s fees in a non-monetary default situation or it wasn’t recovering common charges. The board won in court to get the conduct stopped, but it was still out about $37,000.
• Time to revise? Check your documents before you do anything. Know going into the fight what the rules are and what your chances are. If, like many co-ops and condos, you don’t have the appropriate language in your governing documents, we strongly recommend that there be a revision to the proprietary lease or bylaws.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Justin Buchel, partner, Schneider Buchel, is interviewed by Habitat magazine’s Paula Chin.

Lesson for co-op/condo board directors:

• Burning issue: A unit-owner at a condo had a fire pit on the balcony, and people were up in arms — and scared — because there had been a recent fire at the condo. The board started legal action, but the unit-owner pushed back, saying fire pits weren’t banned in the governing documents. A cease-and-desist notice was sent explaining that the fire pit was a nuisance due to the odors, but the unit-owner dug his heels in.
• The bylaw solution: Instead of litigating the issue, the board decided to try to amend the bylaws. It’s a good idea to poll the community first so you know whether it’s going to pass. It can be informal, with board members going door-to-door to sound people out, or you can hold an informational meeting where you explain your proposal and ask if people will support it.
• A big margin is a must: You need to have a much higher percentage of yes votes than what your governing documents require. If you need two-thirds of the vote, you really need 80%, because there are always people who don’t show up at meetings, and everyone who does not vote is basically a no vote. In this case, the informal poll showed there was more than 80%, and the board won a landslide victory. So there are two takeaways: Check your bylaws to see if they need updating, and if you need to amend them, make sure you have the votes going in.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!