G Is For Governing Document (Co-ops)

The ABCs of cooperative governance are spelled out in a few basic documents. These include:

• Apartment lease (proprietary lease or occupancy agreement).

• Bylaws.

• Certificate of incorporation.

• Defined building policies (house rules and operating policies relating to such matters as shareholder alterations, guests, pets, and storage rooms).

State and local laws, as well as case law, further define and delineate what each board may or may not do. Regardless of the professional experience and knowledge that incoming board members may bring to the table, these documents and the basic lessons of cooperative governance, which can be gleaned from their pages, should be reviewed before the first vote is undertaken by the newly constituted board.

Board members (whether new or seasoned) should be equipped with a full set of the cooperative’s ABCs and should develop a working familiarity with these documents so that, as situations arise, they know where to turn for answers. A board member who acts in ignorance of the cooperative’s governing documents does so at his or her peril.

A cooperative is an entity with a split personality. For some purposes, a cooperative is treated as a corporation, which is governed by a board of directors that has been duly elected by its shareholders. Most questions relating to corporate procedure can be answered by consulting the certificate of incorporation or the bylaws.

When the cooperative acts in its role as landlord, however, the proprietary lease and the house rules define the mutual obligations of the cooperative and its shareholders and should be consulted with respect to questions arising during the routine operation of the building and/or relate to shareholder behavior.

Certificate of Incorporation

The certificate of incorporation, often referred to as the charter, establishes the existence of the cooperative and makes the cooperative corporation (as opposed to the individual shareholders) the operative entity. The certificate also sets forth the legal name of the cooperative (which should be used in contracts and other official documents); delineates the purposes for which the cooperative has been organized and its powers; sets forth the amount of authorized capital stock; and may also define the basic structure of the cooperative (including the number of directors who sit on its board), as well as provisions relating to voting and procedures for amendment.

Bylaws

The bylaws regulate the internal workings of the cooperative. They set forth the procedural requirements for the operation of the cooperative and delineate the powers of the directors and officers.

Other important bylaw provisions describe voting and amendment procedures; define a quorum; specify the notice and agenda requirements for annual meetings; and set forth the procedures and requirements for the issuance and transfer of shares and the calling of special meetings of shareholders.

While board members need not memorize each bylaw provision, the articles or sections relating to the annual meeting of shareholders should be consulted each year before sending out the requisite notice and proxies. The board should be clear as to what matters must be put to a vote of the shareholders; what constitutes a quorum; and how shareholder votes and/or proxies are tallied for the election of directors and/or other matters (such as amending the bylaws).

This is one area of cooperative governance where a thorough understanding and a strict adherence to the relevant bylaw provisions are the board’s primary defense against shareholder challenges. For example, the board should be clear as to what is required: straight voting (i.e., each shareholder must cast all of his or her share votes for each open seat on the board) or cumulative voting (a shareholder may cast all of the share votes at his or her disposal for only one candidate – or spread these votes among several candidates).

If the bylaws permit shareholders to accumulate their votes in favor of preferred candidates, the board should understand the mechanism of cumulative voting. The board must also take note as to whether shareholder votes are tallied differently for matters other than the election of the board as well as for those situations, such as amending the bylaws, where the vote of more than a simple majority may be required.

Proprietary Lease

The proprietary lease gives each shareholder the right to occupy his or her apartment and defines the rights and duties of the cooperative as landlord and the shareholder as tenant. Although in many respects similar to a typical residential apartment lease, the proprietary lease is much more. The proprietary lease permits the board to set and assess monthly apartment maintenance; delineates who is permitted to occupy the apartment; assigns responsibility for various apartment and building repairs between the cooperative and the shareholder; and defines the restrictions on and rules for subletting and/or assignment.

It also may permit the board to impose fines and fees such as late fees, sublet fees, and flip taxes. In addition, every proprietary lease will afford the cooperative a right of access to shareholder apartments to, at a minimum, inspect the unit; cure shareholder defaults; and to make or facilitate repairs.

While most proprietary leases possess a lengthy term, a board should be particularly mindful of the expiration date. If it is less than 30 years away, shareholders (as well as the cooperative itself) may experience difficulty in obtaining financing and an amendment to extend the lease term may be in order.

Many of the proprietary leases currently in use are “one size fits all” – that is, form leases that were inserted into offering plans by the original sponsor of the cooperative to sell units and without any consideration of the practical application and utility of each lease provision to the building and its particular features and systems.

For example, buildings with central HVAC systems may find themselves with a lease that nowhere mentions those systems. Buildings with no terraces may have a lease with a terrace clause – or vice versa. As a result, most proprietary leases engender more questions than answers.

Even so, each board member should strive to develop a working sense as to what the lease permits and what it does not. Here, the guidance of legal counsel may prove invaluable in assisting the board to understand the proprietary lease and to preemptively identify ambiguous provisions or areas in which the lease is otherwise silent – before a particular problem or issue arises.

In addition, every board should, at some point, review its proprietary lease with legal counsel to ascertain whether the lease, as currently written, should be amended in light of the legal issues, practical concerns, and shareholder expectations affecting the building.

Most importantly, boards should be aware of the types of controversies which repeatedly arise in their building, particularly in the area of building/apartment repairs, and seek to clarify the respective responsibilities of the cooperative and its shareholders to minimize disputes and their potential costly consequences.

House Rules and Regulations

Most proprietary leases contain a provision that vests wide discretion in the board to promulgate rules and regulations for the use of the apartment and the building. These are typically referred to as the house rules. Under the terms of the proprietary lease, each shareholder is obligated to comply with the cooperative’s house rules although the board has no reciprocal obligation to enforce them. Thus, most proprietary leases provide that the cooperative is not responsible when other shareholders violate the house rules.

In contrast to the bylaws or the proprietary lease, which often require a vote of a super-majority of the shareholders for amendment, the house rules are, in most cases, easy to change and may be created, amended, or repealed by a simple resolution of the board with a subsequent written notice of the change sent to all shareholders.

Common house rules include keeping the stairways, halls, and emergency exits free from obstruction; disposing of garbage; restricting noisy activity to certain designated hours of the day; prohibiting offensive odors from emanating from the apartment; limiting or prohibiting pet ownership as well as rules relating to the installation of dishwashers; washing machines; window awnings; and terrace plantings.

If the proprietary lease specifically authorizes the board to impose fines, these may be enacted and implemented in the house rules as well.

The ability to make and enforce house rules is a powerful one; however, boards must understand that their powers in this regard are not unlimited. And it is here that the need for a working familiarity with all the cooperative’s ABCs comes full circle. While house rules may be enacted to clarify existing lease provisions, they may not be used as a means to alter the basic corporate structure of the cooperative or vary a shareholder’s financial obligations and contractual rights as expressly set forth in the proprietary lease.

Thus, a board seeking to exercise its governing muscle through the promulgation or fine-tuning of its house rules should, at the outset of the exercise, have a thorough grounding in the cooperative’s ABCs so as not to overstep its authority and expose its action to shareholder challenge and costly legal review.