What Boards Can (and Can’t) Do

Are there limits to co-op and condo boards’ authority to develop or revise house rules? That was the central question the court faced in Olszewski v. Cannon Point Association Inc. Cannon Point is located in Lake George. There are two 24-unit condominium associations (Cannon Point I and II) and a homeowner association (HOA). All three are governed by separate, but similar, declarations and bylaws, and all are managed by boards. The communities have several common areas, such as a clubhouse, basketball courts, a beach (with docks and boat slips), and tennis courts. The common areas and common roadways are managed by the HOA board.

In March 2014, the HOA board sent a notice to all owners that it had adopted new house rules and regulations. Many of these imposed restrictions on owners who wanted to lease their properties, including a requirement that no unit could be rented for a period of less than two weeks. In addition, renters could not be given access to the clubhouse, and those who rented for less than 90 days could not have guests or pets. Further, the HOA imposed a rental fee and administrative fee to those who sought to lease their units.

William Olszewski, a unit-owner, felt that these new rules were unfair. He sued, arguing that the rental restrictions violated the bylaws of all three entities, each of which provided that “any home may be conveyed or leased by its owner free of any restrictions….” According to Olszewski, the newly adopted house rules were not really house rules but, rather, amendments to the bylaws. Because only a supermajority of unit-owners could amend the bylaws, Olszewski claimed, the rules could not be enforced.

Coming From the Court

The court agreed. Condominiums are hybrids, it said, and although an owner had an individual unit, he or she also had a percentage of common elements. Once a condominium is created, its administration is governed by the bylaws, which are an agreement among all of the unit-owners. They are contracts and, as such, must be reviewed and analyzed using principles of contract interpretation.

Contracts are to be interpreted based on the parties’ intent, which is determined from the document itself. A written agreement that is complete, clear, and unambiguous will be enforced according to its plain meaning. The contract must be read as a whole, and all provisions should be reconciled. Importantly, courts may not add or excise terms – thereby making a new contract – in the guise of interpreting the agreement. The court then looked to the entirety of documents. The bylaws did provide that homes could be conveyed or leased “free of any restrictions.” There also were provisions that gave boards the right to “make reasonable rules and regulations and to amend same from time to time . . . Such rules . . . may . . . include reasonable limitations on the use of the common properties by guests of the members as well as reasonable admission and other fees.”

The court reconciled these provisions and concluded that boards had the right to put forward rules “provided such rules and regulations do not conflict with or purport to impair a right expressly granted to the individual homeowners” under the bylaws. The rules and regulations here were in direct conflict with the right to sell or lease “free of any restrictions.” Accordingly, the boards could not adopt the rules, because to do so would render meaningless the bylaw provision guaranteeing the right to convey or lease units “free of any restrictions.”

The court added that boards can indeed adopt rules. When people purchase into a condominium-type structure, they give up certain rights and privileges and subordinate to the interest of the group as a whole. However, rules cannot conflict with rights given in the bylaws.

Reading the Ruling

House rules are a funny thing. Many co-ops and condos begin with a standard form. It’s probably best not to adopt a standard form without carefully considering whether specific rules are applicable to the circumstances of your cooperative or condominium. And because the rules are incorporated into a proprietary lease or bylaws, violating them can cause the default of a governing document. The rules should clearly state what is intended, and not just be copied from another building’s.

This is an issue boards and their attorneys face frequently. We believe this court clearly laid out the issues. When people buy into a planned community, they give up certain of their individual rights and interests for the benefit of everyone. But people also purchase knowing that the lease or bylaws form a contract, which can be amended by a supermajority of owners, not by board fiat. So while a board’s right to adopt rules is important, it cannot alter the contract that the owners signed when they purchased.

Some rules are clearly not consistent with the bylaws or proprietary lease. Boards must look closely. Does the proposed rule conflict with the bylaws or other governing documents? If so, should the board propose it to the owners as a bylaw or lease amendment, rather than face opposition? Considering these questions in advance can avoid acrimonious and costly challenges down the road.

Attorneys:
For Olszewski: Walsh & Walsh
For Cannon Point: Goldberg Segalla

Richard Siegler is counsel and Dale J. Degenshein is special counsel at Stroock & Stroock & Lavan.