Warning Signs: All Things Being Unequal

Treat everyone as equals. It’s a good rule of thumb in life and essential in the running of cooperatives and condominiums. You may want to help out a friend, neighbor, or political supporter by giving that person a break on the rules. That’s human nature. But if you do that as a board member, you are looking for trouble. Every shareholder or unit-owner must be treated alike.

But sometimes issues are neither simple nor straightforward. Say a board has a long-standing policy stating that shareholders cannot finance more than 50 percent of the value of their apartments. In January, a new shareholder seeks consent to finance 75 percent, and the board refuses, citing the policy. Then in February, a longtime shareholder asks the same question and the board approves the financing. Has the board discriminated in favor of a friend or was it just changing the policy after multiple requests? Or does the board feel more comfortable bending the rules for a shareholder who has paid maintenance on time for 20 years rather than for a shareholder who has been in the building for a few months and has no track record? These are legitimate questions. The board can actually have different policies in place for recent purchasers versus long-term residents.

Here is another example. Say the board permits a shareholder to move a waste line to the other side of the kitchen for a renovation project, but does not allow another to do the same. It’s more difficult for the board to justify this type of issue. But say the board allows a shareholder on the second floor to extend the bathroom five feet, but does not allow another shareholder on the fifth floor to do the same. It may seem like the board is treating these shareholders differently. Extending the bathroom on the fifth floor, however, would violate the board’s policy of having “wet” areas over “dry” areas, while the same project on the second floor would be okay as long as nobody lives beneath that shareholder. In this situation, the board has a rational basis for treating the two shareholders differently. Ralph Waldo Emerson said it best when he wrote “a foolish consistency is the hobgoblin of small minds.”

Still, when a board rewards its friends and punishes shareholders and unit-owners whom it views as enemies, then it is acting improperly. A board cannot have one set of rules for friends and a different set for others. That is a basis for a shareholder or unit-owner to file a discrimination claim.

The issue of discrimination is crucial because the Business Judgment Rule, under which all cooperatives and condominiums operate, provides that the courts will not question the actions of a condominium board of managers or a cooperative board of directors unless there is evidence that the board was guilty of bad faith, self-dealing, or discrimination. If the board gets sued and the court determines that the board violated the Business Judgment Rule, then the members of the board could be found to be personally liable and neither the indemnification contained in the bylaws nor the Directors and Officers Liability Insurance policy will protect them or their assets.

As Professor Dumbledore said in Harry Potter and the Sorcerer’s Stone: “It’s hard to stand up to your enemies but even harder to stand up to your friends.” It is one thing to be on a large public company’s board and make decisions that will affect shareholders differently, and another to be on a co-op or condo board and make decisions that will affect your neighbors.

One of the more complicated issues related to treating shareholders and unit-owners the same involves the rights of shareholders’ subtenants or unit-owners’ tenants. A tenant or subtenant stands in place of the shareholder or unit-owner – unless the cooperative’s proprietary lease or the condominium’s bylaws specify otherwise. This is an important distinction because non-renting shareholders and unit-owners may resent renters who use amenities or otherwise have the same rights as owners.

If a board is forced to weigh the rights of tenants or subtenants vis-à-vis the owners, it places them in a difficult situation. In most instances, tenants or subtenants do have certain rights, although they never have the right to attend shareholder or unit-owner meetings or vote in elections unless the tenant or subtenant also has a specific proxy signed by the shareholder or unit-owner allowing them to attend and vote. But that would be very unusual.