Legal Lessons: Privacy

Legal Lessons

Choosing an attorney for your building requires a series of steps. First is taking the task at hand and figuring out what legal skills are required to solve your problem. Then comes the hunt, often through word of mouth, for the lawyer possessing those skills. In the past, many boards have used Habitat’s annual attorney survey to identify potential firms and lawyers. This year, to make that resource more valuable, we have increased the scope of what we asked participating lawyers to provide. Besides the basics (fees, size, areas served, etc.), we asked them to write about typical issues or cases they have encountered and then to offer advice and comment. In doing this, we hoped to capture each lawyer’s unique thinking and tone. And we took some additional steps, too, visiting every attorney’s office and taking photos of him or her so you could see who was telling the legal tale. Digesting the advice and legal cautions will take some time, but for board directors who monitor the legal lines, it’s a good investment.

Revealing a Criminal Past

Belkin Burden Wenig

& Goldman

ISSUE How should a board weigh the potential risks of disclosing a resident’s ostensibly private past against the potential risks of not disclosing them?

BACKSTORY An Upper East Side condo board discovered by accident that one of its residents had been convicted of sexual abuse in another state several years before moving into the building and was now a registered sex offender in New York State. The board was faced with the dilemma of whether to disclose these facts to other building residents, as well as to schools in the area.

On the one hand, the board recognized that the incident had occurred nearly a decade before, in another state, and the resident had displayed exemplary behavior since moving into the building; as such, disclosing the facts might be deemed an unwarranted invasion of his privacy and would certainly interfere with his ability to continue to live in the building undisturbed; the board feared he might sue the condo for disclosing these facts.

On the other hand, the board feared the potential risks of not disclosing what it knew, should the resident commit any similar act in or near the building; the board was concerned about a potential suit for knowingly harboring a sex offender without advising his neighbors.

In the end, the board opted to disclose. That led to a negotiation whereby the board bought the apartment and the resident moved out. The board then resold the apartment. The entire transaction was approved by the unit-owners of the condominium. Factoring in closing costs, the transaction wound up costing the condo $100,000. However, the unit-owners were very pleased with the outcome and considered such sum a small price to pay to preserve their desired way of life.

COMMENT In deciding how to proceed in any given situation, boards should weigh all relevant factors carefully, with counsel. A board should assess the potential risks of proceeding and not proceeding – on both sides of each situation – and should decide, based on an aggregate assessment of what is best for the constituents at large. Sometimes doing so will wind up hurting an individual constituent, but the good of the many outweighs the good of the few. Often, the best decision is not to proceed aggressively, but to proceed slowly and deliberately. Sometimes, an outcome that winds up costing the board some short-term capital winds up being the best, and least expensive, way to proceed in the long run.

—Aaron Shmulewitz

Condominiums and Corporations

Racht & Taffae

ISSUE Can a condominium require entities owning units to provide (and update annually) organizational documentation and name and contact information of principals?

BACKSTORY In early 2006, a limited liability company (LLC) purchased a unit in a condominium from George Johnson. Sam Smith, the individual who was understood by the condominium to be the managing member and sole member of the LLC, moved into the unit and filed plans for a gut renovation of the unit. By late 2008, Sam Smith was not in residence in the unit, had not proceeded with the renovations, and stopped paying common charges. Ultimately, the condominium filed a lien for unpaid common charges and authorized us as general counsel to begin foreclosure and/or a suit for recovery of a money judgment. At this point, the condominium’s troubles really began.

When we asked management to search its files for organizational and service of process documentation for the LLC, nothing was found. We could not even determine in what state the LLC was formed. No one knew if the unit was free and clear of mortgages. The lien foreclosure search suggested that since title transfer in 2006 to the LLC, prior owner George Johnson had refinanced mortgages using the unit as collateral.

This raised the question as to who really was behind the LLC, and who really owned the unit. Digging into things further, we discovered that (1) the condominium had not issued a waiver of its right of first refusal when the LLC acquired title from George Johnson, (2) the LLC (and its title company) closed without the waiver of the condominium’s right of first refusal, (3) all of this occurred while the condominium was transitioning from one management company to another, and (4) no organizational documents were therefore ever obtained for the LLC. This leaft the condominium having to serve a number of parties (many of whom may, in reality, have no interest in the unit) in its efforts to collect the arrears, causing delays and added expense.

Throughout this process, we discussed with our client how to protect the condominium in the future from such a lack of basic information on entities owning its units. Fortunately, the bylaws explicitly give the condominium the right to request additional information about potential purchasers, so long as it’s reasonable – this is not the case in all bylaws. We thus created a list of documents that would be required as part of the waiver application when an entity was purchasing, and no waiver would be issued without those documents. This does not solve the problem of how to keep that information up-to-date as entity ownership and its management can be changed without notice to the condominium after the waiver is issued. In the short term, when the condominium sends out its annual window guard notices, it is including a form to be completed seeking this information. Our long-term recommendation is for the condominium to amend its bylaws to require entities to provide this information.

COMMENT This lack of information about unit-owners, particularly absentee and entity owners, and, in the case of entity ownership, the lack of a designated agent for service of process, has long been a problem for condominiums, but it is particularly troublesome when common charge collection efforts are needed. Condominiums need to review their bylaws and waiver application requirements to be sure that entities taking title to units are obligated to provide organizational and ownership documentation, contact information for principals, and name a local agent for the service of process, and must confirm this information annually. Many condominium bylaws permit individuals to transfer title into an entity as of right, meaning the condominium has no right of first refusal and thus no right to ask for documentation about the entity. A condominium should undertake amending the bylaws to require that on any transfer, as well as annually, entities must (1) name a local agent for the service of process, (2) provide satisfactory organization and ownership documentation, (3) empower the board of managers to impose stiff fines and withhold services should an entity unit-owner fail to comply, and (4) make the issuance of any waiver of the right of refusal full contingent on compliance. It should also include identical requirements in its leasing waiver application.

—Theresa Racht

The Cost of Fame

Stroock & Stroock & Lavan

ISSUE What can cooperative boards do when they are concerned that a shareholder (or a prospective shareholder) will cause the building to incur expenses for such things as increased security because the shareholder is a public figure pursued by the press or other crowds?

BACKSTORY It is not news that many newsworthy people live in New York City co-ops. They include entertainers, politicians, athletes, and other voluntary (and involuntary) “celebrities.”

There are occasions where the press will pursue a person if it believes that obtaining a photograph or – if they are lucky – a quote, will enhance a story. It is irrelevant whether the “celebrity” actually wants to speak to the press. Actions taken can include waiting outside a person’s residence with cameras, lights, and microphones. Often, all entrances to a building will be watched, as well as the entrance to any adjacent parking garage.

If the story is one of popular interest, there will often be representatives from several different news agencies present, each competing for a photo or a quote. When that happens, bystanders may also stop to see what is going on.

The area in front of a building can be crowded, entrances can be blocked and occupants can have difficulty entering and exiting. In these situations, we have received calls from boards and managing agents, which are concerned about the safety, security, and privacy of all of the building’s residents.

Depending on the size of the crowd, and whether it is anticipated that the press will be present for extended periods of time, we may advise that the board ask building staff to work overtime. Employees may have to be reassigned, so their regular duties may not be attended to in a timely fashion. In some instances, the board may hire private security firms to insure safety. The managing agent must also coordinate with the New York City Police Department and may be required to assign an additional agent to act as a liaison. In addition, the board has now involved legal counsel. All of this can become very costly, very quickly.

COMMENT One question co-op boards ask: can it require the shareholder who is the subject of the press’s attention to pay the costs of management, legal, security, and other expenses?

The issue is raised in two contexts – the first is when the board is considering a purchase application and has to decide whether to approve a sale to a celebrity who may be a good neighbor, but would be of interest to the press and others; the second is when the shareholder is already in occupancy.

When a board is considering a purchase application submitted by someone who is often in the press or otherwise pursued by crowds, we suggest that it consider conditioning its approval upon an agreement that the applicant pay the cost of any extraordinary expenses incurred by the co-op as a result of their occupancy. We believe this can be accomplished in the same way other conditions are sometimes imposed by boards, such as requiring that a security deposit be posted to insure the prospective shareholder’s financial obligations.

If expenses are incurred because of the presence of an existing shareholder, we suggest that the board meet with the shareholder and attempt to work out an agreement whereby the shareholder agrees to pay the charges associated with the additional expenses incurred.

We have found that the best way to address these issues is by having shareholders amend the proprietary lease so that it includes a provision requiring shareholders to pay the cost of any extraordinary expenses incurred by the co-op as a result of the presence of that shareholder or his or her guests. In this respect, the analysis should be no different than if a leak occurs as a result of a bathtub that overflowed, requiring the shareholder to pay for damage to other apartments and any common areas. If there is such a lease provision, it is clear to all – current owners and prospective purchasers – that they are responsible for these extraordinary expenses.

—Dale J. Degenshein