When Can Condos Act Like Co-ops?

I’m on a condominium board. My understanding was that, as such, our power is very limited. I’ve heard of condos restricting more actions by the unit-owners or would-be buyers, and acting more like cooperatives. Have times changed?

Twenty years ago, there were few condominiums in New York, but in the last decade all of that has changed and virtually every building that becomes owner-occupied is a condo. Unfortunately, New York’s 1964 Condominium Act, the oldest in the country, has only been amended in minor ways and is thus outdated and not sufficient to handle the operating problems for large, complex condominium buildings. This has placed a great deal of pressure on condo boards to figure out how to efficiently operate their buildings. Although it is generally believed that the board of directors of a cooperative has more power than the board of managers of a condominium, in the last few years, that has shifted and condo boards, while not as powerful as co-op boards, have been able to exert increasing power. To a large extent, this is the result of the recognition of courts that, in order to operate and manage the condominium, the board needs more power than thought necessary when the act was enacted almost 50 years ago. The areas of commonality include:

Decision-Making and Responsibility. A key ruling came in Levandusky v. One Fifth Avenue Apartment Corp., a unanimous 1990 Court of Appeals decision in which the court held that “as long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the boards’, and indicated that the Business Judgment Rule applied to both cooperatives and condominiums. Although the case involved a cooperative, the dicta included condominium boards and, since that time, the courts have been applying the cooperative law to condominiums where applicable.

In February 2008, in DiFabio v. Omnipoint Communications Inc., the Westchester County Supreme Court held that a unit-owner lacks standing to challenge a lease of the common elements by the board, although, the unit-owners could bring a derivative action on behalf of the condominium.

Earlier, the court gave the board wide latitude to make controversial decisions. In November 2006, in Pelton v. 77 Park Avenue Condominium, the Appellate Division, First Department, dismissed a $23.5 damage claim against the board of managers for refusing to build a ramp to assist a unit-owner with muscular dystrophy (although the board was prepared to build a wheelchair lift). The court held that the decisions to operate the building were subject to the Business Judgment Rule.

Power to Impose Limits. This direction continued in 2005 when the Court of Appeals essentially held, in Demchick v. 90 East End Avenue Condominium, that a condominium board could have whatever power the unit-owners wanted to grant it provided the power or authority was contained in the bylaws. This power included the ability to approve purchasers and limitations on the sale of units. This was the first judicial interpretation of Real Property Law, Section 339-v.2(a), which provides that the bylaws may contain “provisions governing the alienation, conveyance, sale, leasing, purchase, ownership and occupancy of units.”

Financial Matters. In January 2008, the New York County Supreme Court in Branscombe Investments Ltd., et al. v. Board of Managers of the Olympic Tower Condominium held that although the board “is obligated to keep records of its meetings...a failure to do so does not necessarily compromise a board of managers’ authority to act.” The court also upheld a bylaw provision that I wrote, in which the board had the right to be reimbursed for the condominium’s attorneys fees for any action brought by a unit-owner, purchaser, lessee, which was determined to not have been brought in good faith. This followed Raimondi v. Board of Managers of Olympic Tower Condominium, which upheld the right of a condominium board to enforce an agreement that said the condo association has had the right to a 7.5 percent portion of the profit on the sale of a unit as a condition for waiving its right of first refusal to a purchaser. The court noted that the board “was well within the scope of its authority and did not deviate from the procedures contained in the bylaws regarding the exercise or waiver of its first right of refusal.”

More changes came in late 2007, when the appellate division of the First Department in Board of Managers of Greentree at Murray Hill v. Golub held that a unit-owner “was not entitled to withhold payment of common charges owing to the board of managers because of a water leak within his unit, nor was he entitled to a stay of this action for unpaid common charges pending resolution of a related action for property damages.”

These court decisions, taken individually or together, demonstrate a desire by the courts to provide condominium boards with sufficient authority to operate their buildings in a way that is in the best interest of all the unit-owners. This is not always easy because of the different interests of the constituencies owning the units.

For example, those who own their units as investments do not want any limitations placed on their right to lease, while those who reside there want fewer short-term leases because it changes the character of the building. Placing any limitation on the unit-owners would require an amendment to the bylaws, which is not easy to achieve, but it demonstrates the conflict that exists.

Similarly, unit-owners want to freely alter their units, but the board is concerned about the effect structural alterations will have on the remainder of the building and the ability of the other unit-owners to enjoy their units in peace and quiet. Under the Levandusky and Demchick doctrines, if the board is given the authority via the bylaws, they can utilize it. It would also appear that, as long as the board members do not push the envelope too aggressively, the courts will allow them to act in a way that they believe is in the best interests of the condominium.