Update Your Building's Governing Documents or Risk Losing Value

Boards have a lot on their plates, from local law compliance and capital projects to budgets and staff issues. They’re juggling so many things that updating and fine-tuning their governing documents gets pushed to the back burner, which boards do at their peril, since it can lead to headaches and even lawsuits. Whether it’s the proprietary lease, bylaws, house rules or general policies, “many buildings are dealing with original and extremely antiquated documents,” says Neil Davidowitz, the president of Orsid New York. “But boards often don’t get to them because they’re dealing with the emergency of the moment.”

LOWERING PROPERTY VALUES

Failure to update governing documents can have a domino effect, adversely impacting buildings in ways boards are unaware of. “I was at a fancy Upper East Side co-op sitting around the table discussing things with the board when someone asked why the apartments were selling 35% less than those at new construction condos in the neighborhood,” recalls Davidowitz, who spelled out the reasons. 

The first was the co-op’s 50% cash down requirement. “That may have had a certain high-end panache in 1984,” he says. “But in 2024 it’s going to knock out a lot of young buyers who have great income but haven’t socked away $2 million for a down payment or don’t want to.” Another reason behind the depressed apartment values was the co-op’s policy prohibiting sublets. “Let’s say someone spends $4 million on an apartment and then takes a sabbatical or has to go elsewhere for a year to take care of their elderly parents,” says Davidowitz. “They’d still have to pay the maintenance, and nobody would want that.”

Buildings that don’t allow pied-a-terres face a similar problem with potential purchasers, he adds. “If somebody closes on their apartment, moves in tomorrow and next Tuesday decides to spend six months a year in Florida, that would be permissible under the governing documents.” Boards that insist on the policy often argue that absentee shareholders don’t become part of the community. “The other rationale is operational, where people think, ‘Hey,we’re a prewar building and if someone isn’t in the apartment for months how do we know if there’s a leak?’” says Davidowitz, adding that there is a simple solution: Arrange to have building staff inspect the apartment once a week and charge a fee to the shareholder.

HOT-BUTTON ISSUES

Out-of-date documents can also affect boards much more directly — in particular, proprietary leases, which often lack clarity about where the co-op’s responsibility ends and shareholder responsibility begins. “There may not be clarity on who's responsible for what inside an apartment, like the pipes behind the wall, the flooring and the radiators,” Davidowitz explains. “There’s language in every lease, but a lot of it is without specificity, which can lead to disputes with boards.” Another area where problems commonly arise is apartment alterations. Shareholders are often shocked to learn that they have to foot the bill for maintaining and repairing all alterations that previous owners have done. But that can be remedied by including an assumption document signed at closing in which the buyer agrees to assume that responsibility.

According to Davidowitz, the biggest headache by far with old proprietary leases is a lack of clarity on who has the right to live in an apartment when a shareholder dies, “There are tons of people who believe that if they say in their will that they’re leaving the apartment to someone, that person automatically has the right to occupy,” he says. “But that’s not the case in these leases, which only give you a right to the asset. It’s actually up to the board to decide who can live there.”

CHANGING THE RULES

The process of amending your documents varies. The proprietary lease sets the highest bar, since it requires a supermajority vote of shareholders; bylaws can either be amended by the board or a shareholder vote, depending on the building; and house rules can be amended by the board. When several documents need to be updated, I present it to boards starting with the least difficult,” Davidowitz says. “Once you get the ball rolling, boards will be more likely to tackle the harder ones.”

As for making multiple changes in proprietary lease, he advises boards to present each one as a separate vote. If there are seven things that need updating and all of them are put in a new lease, shareholders who object to only one will be forced to vote against the entire proposal. “You have to make strategic decisions that will be most likely to succeed,” Davidowitz says. “It's really important to review these documents that govern interactions between residents and between the board and residents. They’re the Bible of how your building functions.”

—Paula Chin