Don’t Be Sandbagged by Your Aging Documents

Outdated cooperative and condominium documents are a lawsuit – and a lot of expense – waiting to happen. Of all the warning signs, these are the easiest to recognize and address. There are many reasons why the corporate documents should be reviewed, and they can be summed up as follows:

Changing laws. The laws that affect co-ops and condos have changed dramatically since most of them were formed.

Boilerplate. When many offering plans were written, the sponsors and their attorneys were primarily focused on selling apartments and were not concerned about the subsequent operation of the building. Consequently, many of the plans (and leases) reused the same material, regardless of its relevance.

Government review. Between the 1970s and 1990s, the New York Attorney General’s Office, which reviews and accepts the offering plans, was less vigilant than it is today. Also, there were no offering plans in the 1960s, so if your association was formed prior to the early 1970s, no government agency ever examined the documents that your board has been utilizing. They may have legal holes in them.

A simpler time. When your co-op or condo was formed, the aggregate value of the apartments was a fraction of their value today, there were virtually no amenities that could be the source of liability, no one sued co-ops, and there were virtually no condos. Litigation did not become widespread until the 1980s.

Indemnification. If your co-op’s indemnification provisions have not have been amended since 1988, the personal assets of board members could be at risk. That’s because the New York State Legislature significantly enlarged the indemnification that was available to board members in 1988, but it takes an amendment to the bylaws to obtain the benefit of the law. Failing to update the bylaws in the last 28 years would be a huge mistake, but few of the co-op bylaws that I currently review have been amended, and no one suspected that they were at risk.

Case law. What if your board did not pay attention to Two Trees v. Febland, which outlawed transfer fees? Or you ignored the amendment to section 501(c) of the Business Corporation Law, which permitted transfer fees under certain conditions? You could be forced to eliminate and then refund fees that had been previously collected, which happened to one board at a cost of $350,000.

Conversely, look at the “Lessor’s Repairs” provision of your proprietary lease, which limits what the lessor is responsible for doing in the building and apartments. That provision can be found in paragraph 18, which is an inch long and so vague that it could be interpreted to mean absolutely anything.

Such ambiguities may not matter until you have a leak or flood and the insurance company interprets the lease language to mean that your claim is denied. Under those circumstances, your shareholders are going to have to be assessed to rebuild someone’s apartment. Even worse, what if it was a Picasso that was damaged by the leak? (That has actually happened.)

What about requiring your shareholders to maintain their own insurance? This is such a common practice that you’re in for a shock when there’s damage in an apartment and you discover that it’s the corporation’s expense because you wrongly assumed that everyone had insurance.

There are other problems. I once had a client who was rejected as a purchaser. When I reviewed the corporation’s proprietary lease I found that the board did not have the power to reject purchasers, which they had assumed that they had because they were a cooperative. Unfortunately, that right does not exist in the abstract. It has to be contained in the proprietary lease.

Many boards believe they’re entitled to be reimbursed for legal fees spent enforcing the rules against a shareholder or a subtenant. But if there’s no specific language in the proprietary lease calling for the corporation to be reimbursed, then it will not be paid. Similarly, many boards fine late-paying owners only to discover that the late fee and interest were not properly assessed or collected, and therefore cannot be recovered by the corporation.

There are also the inevitable typographical errors. Or the barely read document containing ambiguities that could be interpreted against the corporation or condominium by a judge.

Reviewing the documents may seem unnecessary because your co-op has not had any problems. But if just one of the above problems occurs, the cost of dealing with it will far exceed the minimal cost of updating the corporate documents. It’s that thing your mother used to advise: an ounce of prevention.