Bruce A. Cholst, Rosen Livingston & Cholst

Rosen Livingston & Cholst, Partner

Bruce A. Cholst

The client’s tale. I was consulted by a condo board president perplexed by his inability to identify on any given day who was residing in his building. He exclaimed: “I have no idea who is living in which unit, whether they are owners, tenants, guests, or visitors, or how long they are supposed to be in residence. It’s a security and administrative nightmare!”

His condo’s bylaws contained the standard right of first refusal provision that requires unit-owners to give the board “first dibs” on any sale or rental of their unit at the same price they would have received from the outside purchaser or tenant. Under the terms of a right of first refusal provision, any sale or rental of a unit without giving the board its “first dibs” is voidable through legal action by the board.

I told my client that effective administration of the first refusal rights through maintenance of proper records of who is selling or renting to whom (along with a “Permission to Enter” system to monitor the flow of guests) would let the board maintain an accurate count of building occupants. The board had never previously enforced its first refusal rights. Of the 44 units in the building, only 11 were occupied by their original purchasers. Purchasers of the other 33 units had sold or rented without giving the board “first dibs.”

I explained that the board had three options. First, it could sue the 75 percent of unit-owners who had sold or rented in violation of the condo board’s rights, then void their transactions and ignite a building-wide civil war. Second, it could sue one violator and hope that the example would motivate all others to comply. The final option was a general amnesty program, in which the board would communicate with all unit-owners by means of both a newsletter and an informational meeting, reserving the right to sue but also explaining the security nightmare arising from non-compliance with the process.

The board went for the amnesty program, and after two general meetings, three newsletters, and follow-up personal meetings and phone calls to absentee owners, the board procured 100 percent compliance with its request for ownership and occupancy information and, even better, has experienced no subsequent first-refusal violations.

The lawyer’s take. When boards face a controversial building-wide issue such as this, their first resort should be to communicate with shareholders and unit-owners to explain their rationale. In my experience, once shareholders and unit-owners understand that the board is not acting arbitrarily in its restrictions, they will nearly always accept the restriction rather than resist. The threat of litigation can (as was the case here) always be kept as the board’s ace in the hole if the attempt at communication fails. The point is to make communication the first resort and litigation the last.

Case closed. Communicate before you litigate.