To the Limit

For Avi Horwitz, president of the 234-unit Toulaine Owners Corporation on West 67th Street, not being able to spend large sums of money without the majority approval of the shareholders is a lesson in frustration. Currently, the board has to fund a lobby and hallway renovation. But, because the project will cost more than the bylaws spending cap of $250,000, the board has had to move incrementally, getting shareholder approval at each stage of the project.

First, the board had to negotiate the contract. Then, it had to do a design and get shareholder approval. Now, it has to wait for the contractor to start work. The project should have begun in the spring, but has been delayed for three or four months. “I don’t see the purpose of a spending cap,” complains Horwitz. “It forces us to delay the project and go to the shareholders and get their approval, so we can proceed with the project.”

What should a co-op board do when it has a big expenditure and can’t access the money without the approval of the shareholders? For some cooperatives, like Horwitz’s, how they spend money still falls within the purview of the other shareholders. Either it is written into the building’s bylaws or the proprietary lease that the board cannot spend over a set spending limit without the majority approval of the shareholders.

Such limits usually grow out of a concern over runaway costs. Several years ago, after Horwitz’s board completed an expensive but necessary window replacement, a number of the shareholders complained about the cost of the repairs. The result? When it came time for the board members to update the bylaws, one of the directors urged a spending cap, to ward off future complaints about spending. The logic of the bylaw was, “We trust ourselves, not the people coming after us,” maintains Horwitz. The vote carried four to three on the amended bylaws, including the spending limit. Horwitz voted against the changes.

According to Mark Axinn, a partner in the law firm of Brill & Meisel, spending caps “are absolutely legal, so long as they are authorized by corporate documents.”

While such limits are most frequently found in the corporate documents of a condominium, they occasionally crop up in cooperatives, too. “They will have a spending cap in the bylaws that states that the board of directors can spend up to a certain figure for capital expenditures without shareholder approval. I have no objection at all, but, from a purely logistical point of view, if a board wants to do a major capital improvement, and it has a spending cap, then they have to go out and get proxies, and that, sometimes, is a logistical nightmare.”

The president of a ten-unit Queens co-op knows what he means. She says that problems of requiring majority shareholder approval are making her think it may be time to update her cooperative’s house rules. Since the building was constructed in the 1930s, each successive board has abided by a rule that says that it can spend no more than $200 on “miscellaneous” items without majority approval by all the shareholders. Over the decades, that rule has been interpreted to read that no money over $200 can be spent on major repairs without a majority of the shareholders’ okay.

On the one hand, because it is a small co-op and most of the shareholders are retired, getting information to everyone and collecting proxies or having a vote is not difficult. On the other hand, some decisions can’t wait for everyone to vote because time is of the essence. For example, when the building’s balustrades were threatening to fall off, the board had to quickly round up all the shareholders. And, although approval was obtained, one shareholder voted against the project because she didn’t like the engineer.
What happens if a majority of shareholders refuses to authorize spending on capital repairs – or if the board can’t get enough proxies to approve the repairs? “If they can’t get approval, they can go to court,” says Richard Siegler, a partner in the law firm of Stroock & Stroock & Lavan. However, this is a hugely unwieldy and potentially expensive remedy.

A better solution, say some attorneys, is to educate the shareholders: they need to understand that the fiduciary duty of a board is to manage the property as it sees fit. “At the end of the day, the board has to run the building,” explains Siegler. “To the extent they can’t spend the money [on capital repairs], that provision would be a derogation of their duties as directors.”

Horwitz, the co-op president, couldn’t agree more. As he sees it, spending limits prevent directors from doing their jobs effectively. “If a building elects people to manage the building, and you elect based on trust and there is a fiduciary responsibility to care for the building,” he says, “it is going to cost us time and money and aggravation [to do the job correctly]. You can’t elect people you think will do the job properly and then tie their hands.”