Refreshing the Rules

It’s not an exaggeration to say that boards that fail to modernize their bylaws do so at their own risk. Not only do bylaws lay the groundwork for good governance, having clear, up-to-date provisions and following them consistently can help insulate a board if it is sued. There’s a right way and a wrong way to amend your bylaws, and it’s essential to understand the particular process for your co-op or condo so you don’t misstep. Here are the key points you need to know.

BYLAWS 101

Co-ops and condos have several different governing documents that stipulate how they can be run. The bylaws are probably the most important of these, setting out the rules and regulations underpinning the business operations, governance and procedures for decision making. They relate to the authority of the board, including membership and qualifications, and also address annual elections, meeting rules and issues relating to stock transfers. 

A co-op’s bylaws can be found in the original offering plan (along with the proprietary lease and house rules). All shareholders are given these documents when purchasing apartments. In a condo the bylaws are part of the condo declaration, which is the legal document filed with the state. In New York City, these documents can be found in the city’s online registry, or ACRIS. They address not only administrative procedures but also issues concerning individual apartments. “Condo bylaws cover everything from the collection of common charges, defaults, permitted uses of units, sales and leases, and rights of first refusal,” explains Kenneth Jacobs, a partner at the law firm Smith Buss & Jacobs. “In other words, many of the things that would be part of the proprietary lease in a co-op.”

PROTECTION UPDATE

If your bylaws have not been updated, you can probably assume that the interests they are protecting are still those of the original sponsor or developer. Adding to this, changes in business practices and state law could mean that your bylaws have changed from a document that supports your volunteer activity to one that leaves you open to unwanted lawsuits. 

Updating the indemnification provisions, which protect board directors from substantial liabilities, addresses this. “Bylaws are sometimes silent on this, leaving co-op boards to rely on the business corporation law for indemnification,” says Jennifer D. Miller, a member at the law firm Cozen O’Connor. The business corporation law, or BCL, is the main New York state law that governs how most co-ops must operate, but you can amend your bylaws to be more specific to protect the board, Miller says. 

The same applies to condos. While indemnification language borrowed from the BCL is sometimes included in condo bylaws, “there can be gaps,” Jacobs explains. Even though boards generally have directors and officers insurance to provide a defense if a lawsuit is filed, bylaws should be amended to allow for reimbursement for personal judgments and litigation expenses in the event of a lawsuit.

“That way,” Miller adds, “if board members had to pay out of pocket, the board would give them the money upfront.”

ELECTIONS & HOUSE RULES

The election process is governed by the bylaws, and one typical update requires shareholders and unit-owners to be residents in the building for at least two years before they can run for the board. This would ensure some familiarity with the building, and would keep complaining newcomers off the board for a period of time.

Because the legal landscape for holding annual meetings has changed from in-person only to either virtual or hybrid versions — the temporary amendment to the BCL that allowed all-virtual meetings was made permanent in 2021 — co-ops should check their bylaws to make sure there is no conflict with the BCL, and consider amending them if there is. The Condominium Act also now permits all-virtual meetings, so condo boards should do the same, says Lloyd Reisman, a partner at the law firm Belkin Burden Goldman. 

Another amendment for co-op and condo boards to consider is their authority to impose fines for violations of house rules. “That’s become a hot-button issue,” Reisman says. “I’ve even seen condo boards think about putting in language that if you’re late in paying common charges or violating bylaws or house rules, they will deny access to nonessential amenities and services by disabling fobs for the laundry or fitness rooms.”

CHANGE CHALLENGE

Co-op bylaws actually lay out exactly how amendments should be made. In some cases, board directors can change bylaws with a majority vote; more commonly, amendments must be approved by shareholders by either a simple majority or supermajority vote. In condos, however, all bylaw amendments typically must be approved by two-thirds of unit-owners, and some buildings require as much as three-quarters.

There are proven strategies that can help your board succeed when it embarks on a bylaw change. “The first thing is evaluating your audience, so to speak, so you can figure out how to best present the proposed amendments to them,” Jacobs explains. “I would certainly avoid springing any bylaws changes on shareholders or unit-owners just before an annual meeting, especially if the changes might be controversial.”

Explaining to owners why a particular amendment is important to the building will also help ensure success. “That could be a town hall meeting, through an informal newsletter, or just picking up the phone and calling your neighbors,” Miller says. “You need to do some pre-work.”

Once groundwork about the proposed changes is done, you’ll have to send out formal notices about the amendments. Be sure to consult your governing documents to make sure the required process is followed. Failure to do that could result in challenges from owners or nullification of the vote itself. “The bylaws will dictate how far in advance the notice of the vote to amend the bylaws needs to go out,” Miller adds. “And oftentimes, you are required to include a copy of the proposed changes.”

HOW OFTEN TO AMEND?

There’s no set rule on how often or when to update bylaws. “It might not be a bad idea to do it every time the board changes attorneys because a new set of eyes sometimes provides a new perspective,” Reisman says. “Otherwise, every three to five years is probably a good period of time, since statutory changes do pop up periodically that might require a change here and there. Beyond that, amendments are most frequently need-driven. The board is running up against some limitation in its power or some issue in the building that needs to be addressed.”

Whatever the timetable, it’s important that boards don’t overstretch by trying to do too much. “We have seen boards try to rewrite the entire set of governing documents, reorganizing and rearranging all provisions while simultaneously removing provisions and adding others,” says Justin Buchel, a partner at the law firm Schneider Buchel. “When the proposed modifications are too exhaustive, residents won’t read them. They won’t be able to focus on the important issues and therefore will unlikely vote to support them. Even though it may seem like a worthy venture to revise and modernize all your governing documents, the better approach is to zero in on the few items that you really want to change.”

[SIDEBARS]

RACHEL MILLER-BRADSHAW

Secretary

Fordham Hill Owners Corp.
The Bronx

Nine buildings, 1,118 units

I moved here in 2006 and joined the board in 2017, which is when I learned that some of our nine members weren’t paying their maintenance on time. They had a very harsh attitude about shareholders who were in arrears, but were hardly setting a good example themselves. Board meetings were very contentious because there was a group of troublemakers who aggressively antagonized other members and got all stirred up over issues like how we would comply with various local laws and pay for the projects, even though our finances were very sound. There was no healthy, productive back-and-forth debate.

Another problem we were facing involved elections and who could run for the board. We had shareholders who, say, came here in January, our election was coming up in June, and when the call went out for nominations in March, they were saying they wanted to run. Often, they were rabble-rousers who tried to manipulate new shareholders into supporting their personal agenda.

Even though the bylaws could be amended with a majority vote of the board, we wanted our shareholder community to be involved. So we created a committee. People reviewed other corporations’ amendments and read a lot of articles on business corporation law, immersing themselves in information about all things bylaws. They gave the board feedback on how we could apply what they learned to the specific nuances of our building.

By this time, the troublesome board members had been voted off the board, and we were able to approve the amendments. Now the bylaws specify that board members, like everyone else, have to pay maintenance by the 10th of the month, and if they don’t, they are automatically expelled. Of course, this is barring unique circumstances, because we’re not tyrants.

We have a formal code of conduct for board members. Before, we didn’t have anything solid in place to back up our code of conduct, which was just something in writing that had no real weight and couldn’t be enforced.

And lastly, shareholders have to be here a minimum of two years before they can run for the board. You also have to disclose if you’re a real estate broker and agree not to sell your apartment during your tenure on the board, because we want to ensure that there are no board members with inside information on sales.

It’s all working pretty well. I always look at bylaws as somewhat like the U.S. Constitution — sometimes there are certain things that are ambiguous. We’re the largest private cooperative in the Bronx, and most of our board members belong to minority groups. The old bylaws just did not suffice for us. Now everything is much more clear-cut.

Bradshaw’s comments have been edited and condensed for clarity.

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JIM DOLLE

President

The Simone, 35 McDonald Ave. 

Brooklyn

Five stories, 35 units

The condo’s original bylaws were drafted by the sponsor in 2005 and were very biased against the board in terms of our authority. The sponsor, who still owned three units in the building, or almost 10%, had veto power over almost any action, so we couldn’t make decisions in the best interest of the condo. We also had structural problems like major water leaks and overall substandard work. The sponsor had not installed a hallway ventilation system according to code, which left us with a lot of violations. So we sued. The litigation lasted 10 years, partly because there was one board member — we have five — who really opposed mediation. The case eventually did go to mediation, and ultimately the sponsor agreed to pay $1.25 million to do the necessary repairs.

With the lawsuit out of the way, we were finally able to tackle the bylaws and ended up revamping all of them. Board members don’t necessarily understand all the language that needs to be in these documents, so we relied on our attorney to put in provisions that are critical to running the building. In terms of governance, we added board member term limits so people wouldn’t feel obligated to keep serving year after year, and we continually bring in fresh ideas. We added staggered board terms so that there would always be some continuity from one year to the next. Other changes concerned elections, like clarification of how share ownership is tabulated per unit for proxy voting.

Six of our 35 units are occupied by non-owners, so we created leasing provisions that regulate what unit-owners are able to do. And there was the issue of building loan approvals. Condos have to get a supermajority of unit-owners to approve loans above a certain limit. We never had a set limit, and established one at $500,000. We don’t have any outstanding loans or anticipate needing one in the future, but we would still probably go to the unit-owners for approval, even if it’s under the limit.

Amending the bylaws also required two-thirds owner approval. For us it was a two-step process. First, we had to amend the bylaw so that the sponsor no longer had veto power and the board had authority to move fully forward with the proposed changes. Both times, the board lobbied the entire building to get the votes we needed. Our board is pretty much composed of people from each floor, so they were able to talk to their neighbors. We held two preliminary Zoom meetings with unit-owners to discuss the amendments and answer any questions, which really helped solidify support. Going into the vote, we were confident we had more than the two-thirds we needed.

We’re actually looking at other amendments in the next six months, or maybe even sooner, to impose a flip tax and a tax for subletting, both of which we don’t have now. Amending the bylaws has been a very positive experience and was a pretty painless transition. The board now has the authority it needs to address critical issues without overstepping our privileges.

Dolle’s comments have been edited and condensed for clarity.