A Board's Fiduciary Duty Is to Everyone

Subletting is an attractive option, particularly in condos, so how can it get out of hand?

It’s the board’s financial responsibility not to saturate the building with sublets. Once the building hits a certain level, lenders will not lend in that property. If it goes over 50 percent, Fannie Mae and Freddie Mac for sure will look at the building as a rental rather than as a co-op or condominium.

How does a board combat a high percentage of sublets?

A co-op board gets to decide how many sublets are allowed, but condominiums don’t have that stopgap. So a condo board should enlighten the unit-owners as to what is going on finan-cially, let them know that once sublets hit the 50 percent mark, lenders are going to back out. They won’t even lend for capital-improvement projects.

So a condo board can’t simply put a cap on the number of sublets?

They cannot put a cap on it because condominium apartments are real property, so unit-owners are free to sublet them. But a condo board can impose penalties to dissuade unit-owners and investors from just buying apartments and renting them out.

Have you had a personal experience managing a condominium where this was a problem?

Yes, I manage a building in Brooklyn that was 98 percent owner-occupied, and now the building has transferred into 50 percent sublets. We’re having a problem getting financing for the property, and unit-owners are having real trouble selling their units.

Is there a remedy for that?

The remedy would be to impose penalties on people who sublet their apartments. The only way to do that is for the board to let unit-owners understand that all of their values are dropping, and they should only sublet for a certain period of time and then put their apartment on the market. That way the building returns to being a condominium instead of a rental.I

n the Brooklyn building, were you able to do that?

I was not successful. We brought in counsel at the annual meeting to advise all the unit-owners as to the situation. We tried to change the super-majority required to change bylaws from 67 percent to 50 percent, so that the board would have an easier time changing the sublet policy. But a couple of board members were subletting their apartments, and acting in their own interests instead of in the best interests of the building, they got the rest of the unit-owners who were subletting to come around to their position. So the unit-owners voted down changing the bylaws, which would have enabled the board to change the sublet policy.

What’s the lesson here?

A board member’s fiduciary responsibility is to operate the building in the best interest of all shareholders or unit-owners. In this case, two of the five board members voted against the new mechanism for changing the bylaws. They acted in their self-interest because they are making thousands of dollars a month subletting their apartments. They lost sight of their basic fiduciary duty, and that’s definitely not a good situation.