House Rules: How Much Power Do Co-op Boards Really Have?

At 1025 Fifth Avenue, the co-op board of directors had passed a rule in the 1990s that new tenants could no longer install window air conditioners, but only through-the-wall air-conditioners. This was for aesthetic, not structural, reasons; the board wanted the units flush with the exterior wall.

A tenant-shareholder who had just purchased Apartment 12B was granted permission to install a through-the-wall air conditioner. However, his neighbor downstairs in 11B had an awning installed just below 12B's window. In order to install the through-the-wall A/C, the awning, which had been up for some 50 years, would have to be removed.

Although there was no ban on awnings, and a number of tenant-shareholders had similar awnings, the proprietary lease stated that use of the terrace was subject to "all applicable provisions of this lease." Later, the lease stated that the "house rules may regulate and control the use of any roof or terrace…" The house rules specifically noted that "no awning…shall be used except such as shall be approved in writing by the [board]."

The board of directors sent a notice to 11B and informed him that the awning would have to be removed. The shareholder, Horowitz, refused to comply, and brought this action against the board. The court decided Horowitz was right, and that he could keep his awning.

Awning of a New Era

But that decision was overturned on appeal. The appellate division found that "irrespective of whether it was permissible at the time it was installed, the cooperative's house rules presently prohibit the awning."

More often than not, in these types of cases, the shareholder will claim the cooperative has waived its right because it has not objected in the past. However, the appellate division determined that "the cooperative's right to require [the awning's] removal is preserved by the non-waiver provision in the proprietary lease." Thus, even though the awning had been on the terrace for decades, the fact that the board had never objected does not prevent the board from objecting at this time. The appellate division also cited the major case Levandusky v. One Fifth Ave. Corp. (1990), which affirmed by co-ops are protected by the Business Judgment Rule .

The proprietary lease typically contains a provision that grants the board the very broad power to create rules and regulations for use of the apartment and for the building itself. These are referred to as the house rules.

Although very broad powers are assigned, are these rights unfettered? Can the board make any rule it wants? This question has confronted courts for decades. However, though the court decisions sometimes seem to be inconsistent, there are a number of rules that a board should follow so as to assure the enforceability of their rules and decisions.

How to Enact a House Rule

The Horowitz decision reinforces that boards must be careful when enacting and house rules. There should be a formal vote at a board meeting, and the results specifically noted in the minutes. Every change should be communicated to the shareholders. It would not be far-fetched for a judge to invalidate a house rule because the shareholders knew nothing about it.

A house rule must also promote the lawful and legitimate interests of the cooperative. To this end, it might be advisable for your board to include in the minutes the purpose of the change. Furthermore, any advice from architects, managers or other professionals might be referenced in the minutes (and a report or opinion might be annexed).

A house rule should be applicable to all shareholders. A rule that applies only to one particular shareholder, even if not specifically named, or a rule that is selectively enforced might be seen in an unfavorable light by a judge.

These concerns are equally applicable when a shareholder asks you to consent to a request. Consent or denial are both decisions of the board, and the business judgment rule applies to either. Therefore, the question of "good faith" may arise. For example, if three consecutive bathroom alterations were approved, all having been made by board members, and a shareholder's request to do a similar alteration is then denied, a judge would undoubtedly admonish the board for its lack of good faith.

Always consider the theory behind Levandusky: As long as you act for the purposes of the cooperative, within the scope of your authority, and in good faith, the rule will stand. The one exception to this rule is when the lease provides that the board's consent shall not be unreasonably withheld.

A respect for formalities often goes a long way toward preventing, or winning, a litigation.

Attorney Andrew Brucker is a partner at Schechter & Brucker .