Ask the Attorney

My co-op is on the Upper East Side of Manhattan. Every couple of years, we need to undertake a capital improvement project costing well over $100,000. We rely on our managing agent to make arrangements. The agent secures specifications from the cooperative’s engineers and then entertains bids from contractors who present standard American Institute of Architects (AIA) contracts incorporating the specifications. We haven’t had any major problems so far – other than some tolerable cost overruns and delays. But now we are getting ready to undertake a $1 million facade renovation project. Is there any reason we should alter our approach for this very expensive capital project?

For co-op boards, few tasks are more fundamental than taking care of their buildings. So when the bad news occurs that a major capital repair is required, boards dutifully submit to the inevitable, focusing mainly on what needs to be done, when this should occur and how it should be financed. They rely on the managing agent to contact the building architect or engineer who produces specifications that are used to solicit bids. Then the board picks a contractor, who presents a contract and then (with homage to Robert Frost’s poem, “The Road Not Taken”), “two roads diverge” in the asphalt jungles of New York City.

The “road less traveled” is where somebody wakes ups and realizes that, “We better have the lawyer take a look at the contract.” Instead, on the more- traveled road, the board figures the co-op is somehow insulated from legal danger by the sheer magnitude of the money being spent for the project. “So do we really need to add to the misery with thousands of extra dollars – and delays – of having our lawyer review the supposedly standard, fair, and pristine AIA documents that most contractors happily present, all packaged and ready to go?” But, as in the poem, I strongly suggest taking that road less traveled and call your lawyer early and often. There’s way too much here at stake to not do so.

“On yeah, sure,” you’re thinking. “He’s a lawyer looking out for himself and other lawyers looking to make an easy buck reviewing perfectly acceptable contracts.” Worse yet, we lawyers raise issues regarding matters that probably will not occur and, in the process, will delay the signing and the project start while prices increase and the building further deteriorates. So come clean, you say, and admit that a lawyer review is simply not necessary at least in most cases.

I’d like to be the good guy and say, “Go for it,” but every time boards are wise enough to get us involved, especially at an early stage, I can unequivocally say that we add significant value for the co-op mainly by resolving ambiguities and omissions in advance when the co-op has maximum leverage.

Here’s what I mean. Even the most well-meaning, honest and capable architects, engineers, and contractors inevitably produce arrangements containing ambiguity, omissions, and unintended provisions. They just are not trained or oriented the way competent attorneys are to anticipate controversies and resolve them in advance. And, sure, even with lawyer review, there will be controversies from things that arise whether reasonably foreseeable or not. But if a co-op can reduce those potential areas of controversy, from, say, 20 to 5, then I say that a co-op should travel that road.

So, you say, what’s wrong with the AIA, which, after all, was drafted to fairly balance rights and obligations between the owner (co-op) and the contractor? It deals with every conceivable issue, you say. Think about it. The so-called AIA (the contract), in its various incarnations, was drafted by the American Institute of Architects. So, first and foremost, the AIA (the contract) is designed to protect the architect members of the AIA (the organization).

What’s wrong with that, you say, so long as the owner (co-op) is treated fairly? Well, I concede, somebody has to first draft it, and whoever that may be is only human, and therefore biased. But should the owner (co-op) be content with architects as the proper allocators of rights and obligations between owners and contractors, or for that matter between owners and architects. I say, not always. The AIA (the contract) is designed to severely limit the architect’s responsibilities whether or not a separate agreement is used between owner and architect. So in some cases, the owner takes the burden and in others it is the contractor, but it is seldom the architect. The co-op lawyer’s job is to push the responsibilities back toward the contractor, and in some cases the architect (or engineer if used instead of an architect), by way of a supplement to the AIA. A review of the usual provisions in play regarding this is for another column.

The other co-op lawyer’s function is subtler. Even when boards do take the road less traveled, they unfortunately take the right turn at the last minute. That means, we lawyers usually get a call from the managing agent stating that the sidewalk bridge is up, the permits are pulled, and could we please, pretty please, review the million-dollar façade restoration contract before next week’s immutable commencement date? And by the way, make sure you keep the charges below a couple of grand. At this point, we lawyers start to think that we wish the board took the road more traveled. Because we know that the lawyer usually cannot gather and review all the ancillary documents; discuss and review any issues with the architects, board and agent; and draft and negotiate the inevitably required contract supplement in 48 hours for $2,000.

So, my final word to boards is to decide to take the road less traveled before you reach that last fork in the road. The lawyer’s minimal but continual input from the start can help assure that the business/legal parts of the specs are complete and acceptable; that the bids are properly solicited, considered, and awarded; and, last but not least, that there is ample time to make sure that the AIA is fair and complete for the given project and that a proper contract supplement tips the balance of rights and obligations in the direction of the owner (co-op). Because as Frost ends, that could make “all the difference.”

The apartments in a 300-unit cooperative building turn over rapidly. We have 10 to 20 sales per year. This puts a great strain on board members in charge of interviewing candidates. It even takes time at the monthly board meeting to discuss the recommendations of those conducting interviews. We end up rejecting about 20 percent of the candidates. When this happens, the selling shareholder sometimes gets very angry and threatens to sue. He demands to know the precise reason for the rejection, but our attorney tells us to not tell. Are there any ways that we can strengthen the process, minimize the board’s conflicts with sellers, and still avoid lawsuits by disgruntled sellers and purchasers?

For apartment transfer issues, co-ops no doubt aspire to the Clinton-era military rule of “Don’t Ask, Don’t Tell.” But Bush-era co-op “nation-building” (or “building-building”) foot soldiers simply will not toe that line. And the courts strain to preserve a Cold War era balance of power. For the present, ever-rising values appease sellers and restrain buyers. But in the near future, if prices soften, co-ops may need a better way to win the peace.

What does all this mean?

Well, for almost half a century, there’s been Weisner v. 791 Park Ave. Corp., that New York high court clarion of co-op cohabitation: “There is no reason why the owners of the co-operative apartment house could not decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders’ meetings, their management problems and responsibilities and their homes.”

And for most co-ops since their inception, there’s been proprietary lease paragraph 16(c), which typically provides: “There shall be no limitation. . . on the right of Directors to grant or withhold consent, for any reason or for no reason, to an assignment [i.e., an apartment transfer]”

Finally, there’s the almost 15-year-old Levandusky v. One Fifth Ave. Apt. Corp., in which New York’s highest court graced co-op boards with the protection of the “business judgment rule,” which bars judicial inquiry into their decisions – however “unwise or inexpedient” – provided they are “taken in good faith and in the exercise of honest judgment in lawful and legitimate furtherance of corporate purposes” and are consistent with the board’s “fiduciary duties” to the co-op and its shareholders.

So, boards, if you take equal parts of Weisner, the lease language, and Levandusky, mix it well and wisely, and you’re all set. You can’t go wrong. It’s no harder than agreeing on the latest lobby renovation. And just in case you get sued, you always have your directors’ and officers’ insurance. Actually, you’re right, transfers, as well as lobbies, are not that simple. In fact, reviewing apartment sale applications is fraught with traps.

Let’s start with “don’t ask, don’t tell.” Boards would like to decide and be done with it. We’ll tell you whether you’re approved but that’s the end of it. Don’t ask us why and don’t try to generate leaks to find out why. But this doesn’t always work. Co-op board confidentiality is rare, particularly when there are so many players with a big stake in the decision. Sellers have board friends, brokers know managing agents (sometimes they have common employers), and buyers have their contacts. All of them may lose if a buyer is rejected. So they’re all going to ask. . . and ask and ask. And things happen. Nefarious rumors fly.

Co-op lawyers instruct boards to prop up the “don’t tell” side. “Absolutely, unconditionally do not give the reason for rejection,” they say. I’ve told hundreds of boards, “Remember Weisner and the lease and Levandusky. You don’t need to give a reason so long as you have a good one.”

“Huh?” they say or think.

“Well, if you get sued, you’ll need a reason and your conversations and minutes can be read in discovery. You know,” I continue, “nature abhors a vacuum – and so do courts. So if you have no reason, the court’s imagination can wander toward any weird theory. One appellate court recently rejected as ‘pretextual’ a board’s reason for a rejection. I think that means the court concluded that the board made it up after the fact. So make sure you have a reason, but just don’t tell, at least for now. Or maybe you want to reconsider and just approve a marginally acceptable buyer.”

But then again, maybe you don’t. After all, you are acting in good faith in rejecting the applicant and you are not in violation of any anti-discrimination laws and there’s no self-dealing? You’re quite confident of this? So go for it. Just say, “no.”

In a rising market, a seller probably won’t sue. In the months since the contract, his apartment has likely appreciated well beyond the additional carrying charges and expenses he’ll incur finding a new buyer. And he’ll definitely be more careful next time regarding the buyer’s qualifications. The rejected buyer also probably won’t sue unless there is blatant discrimination. The buyer was probably tapped out on the bid in the current super-heated market and has little money left to prosecute a litigation, which in any case, is not the best way to introduce yourself to residents of your new home.

So the rising market smoothes over the rejection rough spots. But boards beware. The state’s highest court has evolved from the Weisner days, and even from Levandusky. In 40 W. 67th St. v. Pullman (involving termination of shareholder’s ownership rights based on objectionable conduct), the appellate division relied on Levandusky and even cited Weisner for the “settled notion of co-ops as a voluntary association of individuals who agree to compromise their rights to obtain the benefits of living in a cooperative type of community.”

But New York’s highest court affirmed in Pullman – at least regarding “tenancy terminations” – in a manner not quite as generous to boards: “Levandusky cautions that the broad powers of cooperative governance carry the potential for abuse when a board singles out a person for harmful treatment or engages in unlawful discrimination, vendetta, arbitrary decision-making or favoritism. We affirm that admonition and stress that those types of abuses are incompatible with good faith and the exercise of honest judgment.”

My advice to boards is to enjoy the current insulation that the ever-rising market provides, but realize this may not be forever or even for very long with interest rates heading up each month. Now is the time to tighten procedures and get ready for tougher times in considering transfer applications. You may soon need an exit strategy.

I read the article “Ask the Attorney” in the November 2004 issue of Habitat.  I am a board member and was asked to seek answers that will hopefully help us to successfully address some issues we face with just a couple of unit-owners. We have a small building (12 units) and the owners run the operations of the building. Our house rules require that all units maintain floor covering over at least 80 percent of the floor to reduce noise. All but two units have complied even though they have repeatedly been asked. What remedy do we have to accomplish this, especially since these unit-owners are also very noisy and they disturb the peace of those below them?  What legal recourse, if any, is available to us?

Also, one of the same noisy tenants has been late to pay his monthly common charge at least twice. He refuses to pay the $25 late fee. What can we do to get him to pay it? He has ignored all attempts to collect.

Finally, we have tenants who do not follow the house rules on containing their trash in the trash receptacles outside. As a result, raccoons get into the trash and make a mess in our back yard. We are thinking about fining each tenant whose trash is overturned and is not cleaned up within 24 hours. Is this an appropriate means of trying to remedy this problem?

To understand your board’s rights, you must carefully review your condo bylaws. A condo board’s major weakness compared to a co-op is that there is no co-op proprietary lease for the board to threaten to terminate and no co-op shareholder-tenant for the board to threaten to evict. So if a condo unit-owner is not following the rules or causing a nuisance, the condo board must sue to enjoin the misconduct and for any damages that may have arisen.

But many condo bylaws do not authorize the board to impose fines or to recover legal fees and expenses for suing to enforce non-monetary breaches of the bylaws or rules and regulations. If yours do allow for fines and legal fees, then I recommend a lawyer’s letter to the violators explaining the consequences of their ongoing breaches, followed by a lawsuit, if they do not comply. If your bylaws do not provide for fines and legal fees, then I recommend first amending the bylaws to so provide, which usually requires the affirmative vote of unit-owners owning of at least two-thirds of the common interests. Then your board will have a stick that should be sufficient to motivate all but the most intransigent owners to comply without the need for your board to resort to litigation.