Recovering Legal Fees: Who Pays when a Lawsuit Arises?

When a co-op & condo board initiates a lawsuit or is sued, the issue of who is going to pay the legal fees is always asked. The answer, unfortunately, is not clear-cut. But the first place to check is your governing documents, where the payment responsibility is outlined. In a co-op that would be the proprietary lease and in a condo the bylaws. 

Which scenarios allow for the recovery of legal fees? In both co-ops and condos, legal fees can be recovered primarily in cases where the board has sued for nonpayment of common charges or maintenance. Co-ops can seek legal fees for any breach of the proprietary lease, provided it's a material default and they are the prevailing party, meaning they are the party that wins the lawsuit on its central claims. So a co-op board can seek legal fees in situations such as a failure to pay maintenance, illegal use of the premises or objectionable conduct. For condos, it's slightly more limited. It's usually for a failure to pay common charges.

If there are multiple claims in the case, does the board need to win all of them to recover legal fees? No. The key is winning the main cause of action. So if you have six different causes of action but the main one is failure to pay maintenance charges, the co-op is entitled to recover reasonable legal fees if the court finds in favor of the co-op on the maintenance claim. Boards often can't recover all fees, but they have a duty to defend claims asserted against either the board or the individual board members and to initiate action for nonpayment of maintenance and common charges. In cases where the board isn't the prevailing party, tenant shareholders can recover their legal fees. There's no reciprocal provision that would permit a condo owner to recover fees against the condo board.

What is considered a reasonable legal fee and how is it determined? Reasonable legal fees are typically settled through agreements rather than going to a fee hearing. The time and effort that's involved in the case is an important factor when figuring out reasonable legal fees. Other factors include the customary legal fee — obviously, fees are going to be higher in Manhattan than in Queens or Suffolk County — and also whether there’s a contingency of compensation. Most lawsuits involving co-ops and condos are not taken on a contingency basis and boards are charged an hourly or flat fee. Courts will consider all these elements and come up with a determination of what’s reasonable.
If a board has directors and officers liability insurance (D&O), will that cover its legal fees? Yes. It’s essential for board members to have D&O to protect themselves. Insurance companies can provide counsel at a lower fee structure than private attorneys. You can hire your own counsel if the insurance company will permit it, but there has to be an agreement as to attorney fees.