Paula Chin: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Paula Chin with Habitat, the New York City magazine for co-op and condo board directors. My guest is Brandon James, partner at the law firm Borah, Goldstein, Altschuler, Nahins & Goidel.
There is sometimes a thin line between work that constitutes building maintenance when boards don't need approval from shareholders or unit owners as opposed to major alterations and improvement projects when boards do need that approval. Brandon, you were recently involved in a case where a board learned this lesson the hard way.
Can you tell us about it?
Brandon James: Yes. For most condominiums and even some co-ops, the organizational documents for the condominium or the co-op, as the case may be, will sometimes contain certain restrictions on the type of work that a board can do with or without unit approval and or the financing that they're allowed to take out.
Again, either with or without unit owner approval. And we'll dive into that in a little bit more detail in a minute here, but just on this topic generally as to work that a board can do and financing that they can obtain. There was recently a decision by the Supreme Court in New York County that addressed these exact issues specifically.
The case was Bricker versus the Board of Managers of Vogue Condominium, which involved a condominium building here in Manhattan on Central Park West wherein a group of unit owners sued a board seeking an injunction to stop a balcony rail replacement project that the board had approved and was about to undertake.
So as a bit of background on this case leading up to this balcony rail replacement project and the unit owner's challenge of same, the condominium board had undertaken a number of projects over the period of several years: an elevator cab modernization, a cogen project. They renovated hallways.
They installed an HVAC system and the building's laundry room. Now, all of these projects where unit owner approval was required, they obtained it. However, where they ran into a wall with their unit owners was when they sought to now do a facade restoration repair project that included balcony railing replacement.
So in this specific case, the condominium's bylaws had two notable restrictions. One, the board was not allowed to spend more than $25,000 for any addition, alteration, or improvement to the common elements without the unit owner's approval. And they were also not permitted to borrow more than $50,000 for any purpose without the unit owner's approval.
So again, they had undertaken some projects, received that approval where they needed it and now they were embarking on this. Local law 11 FISP facade repair project. And as part of that project, they intended to replace all the balcony railings on the building. And in order to finance this project, they were seeking to obtain a loan of $6 million.
So obviously that required unit owner approval. They put this to unit owners for a vote. And notably, as part of that unit owner informational package, they explicitly said that a vote in favor of the financing was also a vote in favor of replacing the balcony railings. The unit owners ultimately voted against the loan but the board decided to proceed with the project anyway.
And in order to pay for it, they increased an existing assessment that was already implemented in order to pay for some of those aforementioned projects. Then there was also talk of new assessments once that one expired. Obviously, $6 million is a significant size project, especially with no financing.
So when the board decided to proceed with this project, even though the unit owners had voted against the loan, and by argument extension, the project itself, for the balcony railings specifically, a group of unit owners brought the lawsuit, seeking the injunction to stop the project.
Paula Chin: Now, in this case, doesn't a board have the authority to do maintenance and repairs on common areas, which I presume the, obviously the facade and the balconies were? Did they, did, why did they need that approval?
Brandon James: Yeah, so for the vast majority of condominiums, their bylaws will provide that. The board cannot borrow or take out a loan above a certain amount without unit owner approval, which we saw in this case.
The $50,000 threshold. I'd mentioned for a lot of condominiums, these bylaws were written decades ago, and these thresholds are often very low now in today's dollars as a result, it's typically anywhere from $25,000 to $50,000. Obviously, nominal amount for today's capital improvements. For more modern condominiums,
what we're seeing, especially new developments is their bylaws include adjustments such that each year this threshold goes up either based on CPI or some other index, so that it increases over time to adjust for inflation. But for buildings like the Vogue condominium, you know they have this $50,000 threshold, doesn't matter what the money's being borrowed for, you have to get unit owner approval. And then hand in hand with that a lot of condominiums will either have in addition to this financing or even in lieu of it language that says that the board cannot perform alterations, additions, or improvements above a certain threshold, oftentimes without unit owner's approval.
Now, note, that's distinguished from repairs, maintenance, and or replacement of the common elements, and we'll talk a little bit later about. Where to draw that line and how to make a determination as to which category the project falls. But ultimately, for buildings that have these restrictions, the board has to go to these unit owners to get approval for these types of projects where it does fall under this alteration, addition, or improvement category.
Again, exactly the case we saw in this Bricker vis versus Vogue condominium. Even though the loan had been voted down. The board took the position that the rail replacement constituted a repair, maintenance replacement as opposed to an alteration, additional improvement, and they could still proceed even without the financing.
And it was exactly this classification of the work that was in dispute in that case, with the unit argue unit owners, arguing that the rail replacement was an additional alteration or improvement that required unit owner approval.
Paula Chin: What happened in court? What side did the did the court decision come down on?
Brandon James: The court ultimately sided with the board and they determined that the rail replacement project was in fact a repair, replacement or maintenance that did not require unit owner approval, and because it was undertaken by the board in good faith and for a legitimate purpose and otherwise pursuant to their authority under the bylaws, it was ultimately subject to protection under the business judgment rule, meaning it would've been inappropriate for the court to intervene to grant the injunction ceasing that project. Now, notably the primary piece of evidence that was cited by the judge in rejecting the plaintiff's injunction to stop the project was an engineer's report that had been obtained by the board that recommended replacing the railings in order to stop water infiltration and subsequent surface cracking on the concrete of the balconies.
So it wasn't even that they were saying necessarily that the railings themselves were in bad condition, but by virtue of replacing them, it would prolong the useful life of the other portions of the facade and balconies. Notably, as part of their argument the unit owners put forth some prior engineers reports that had been obtained by the board several years prior to this final one that recommended it, saying that the railings were safe and structurally sound; in other words, did not need to be replaced.
And they also argued that the board had some, interest individually in pursuing this. There were 413 units in the building. Only about half of them had balconies, but five of the seven board members owned units that had these balconies. So a majority of the board obviously stood to benefit from this.
And also there had been a lot of talk between the board and the unit owners about the aesthetics of the railings. They actually put out several options. The unit owners got to vote on which one they liked the most. So they weren't replacing the railings with, something of the same style and design.
It was actually a different design that had glass now involved in it as well. So there was this argument that, this was being done for aesthetic purposes, which would've supported the plaintiff's position that this was, an alteration addition or improvement as opposed to repair or maintenance.
Paula Chin: Even though the courts came down on the side of the board, it sounds like this was clearly a case that could have gone either way. What is the lesson here for other boards?
Brandon James: Yeah I think absent obviously that final engineers report that provided the basis for replacing it to prevent the water infiltration I certainly think it's likely that the court would've sided with the unit owners and determined that this was something that did require unit owner approval. But for other boards I think first and foremost the best piece of advice to be proactive here is, before you embark on, on performing any major project like this, the first step is to work with the building's attorney to identify what restrictions, if any, are in the bylaws or proprietary lease for co-ops or other organizational documents that might require unit owner approval. Again, this is especially true for condominiums. They often are the buildings that most often have these types of restrictions and doubly so where there's financing involved because again, the vast majority of condominiums do have restrictions as it relates to the board's authority to borrow money.
So to the extent that the bylaws do contain distinctions between alterations, additions, improvements versus repair, maintenance or replacement, obviously the next step is trying to determine under which category the project in question would fall. As a general rule of thumb if you're maintaining the status quo, then, more often the work is gonna be a repair or maintenance. So to go back to this case in particular, if they were replacing the railings with something of the exact same style and design, I certainly think that would've been much harder to argue that this is an addition, alteration or improvement.
However, where you're modifying or expanding upon the common elements, then certainly there's an argument to be made there that the project does constitute an alteration edition or improvement. And one example, a project I worked on some years ago was a condominium that had a spa facility for its unit owners and they were undertaking significant renovations of the spa.
The pool required major repair work. That was a large part of the project, but then they were also adding on to the spa increasing the size of it, certain amenities in it. And so for a project like that, this came up as part of the discussions. Obviously the argument for the pool is that this is a repair replacement or maintenance, you're fixing something that's already there, but then on the other side of the project, whether you're expanding the spa and adding additional floor space and new amenities, then I was of the position of that case and I advised the client as much that would constitute an addition, alteration or improvement, which then may be subject to certain other unit owner approval requirements.
So this example is somewhat obvious in looking at the two ends of the spectrum for this one project. But there can certainly be gray areas as we saw in the Bricker versus Vogue condominium case. Even where the installation of an entirely new style of balcony railings, it was deemed to repair because it was intended to prolong the useful life of the concrete balconies and the facade itself.
There is certainly subject, there is certainly room for argument here subject to interpretation. Again, my best piece of advice for boards would be work with your attorney and your team of professionals, your engineer, to reach a determination and ultimately, grounds, supporting that determination as to where this project falls.
Paula Chin: Just taking one step back, Brandon, would you also advise boards to revisit their documents in terms of the dollar figures, the thresholds for which you need approval? Since, as you said, many of these documents are very old.
Brandon James: Yes, most certainly. Now, one common problem most every board runs into is just even obtaining a quorum at a meeting to hold elections.
I'd say more often than not, unless the unit owners are very up in arms about how a building's being run, you typically don't get a lot of participation or attendance at those meetings. And the quorum for elections is obviously a lower threshold than what it would be to amend organizational documents, which typically requires super majority of 66 and two thirds, whether again, you're talking about a co-op or condominium. So I do certainly think it's something that is worthwhile to do. Otherwise you're handcuffing the board based on figures that are very outdated and nominal in today's dollars at the same time, I think a board needs to recognize that.
Unit owners are generally gonna be adverse to something that could potentially increase their carrying cost. So I think it's a delicate situation the way you have to approach it, and I think the way you have to ultimately structure it. To go back to what I said earlier about the way most modern day bylaws and where I have worked with boards to amend this language, the way we typically do it now is to set a value that increases over time.
Again, most often tied to CPI. So that way, 20, 30 years from now, you're not having to go back and amend it yet again, because the threshold you picked in 2023 dollars is no longer helpful in, 2050 dollars. So I do think it is a worthwhile endeavor to modify this. I've seen buildings where the board had to go to unit owners to get approval for this.
Just like in this case with the VO condominium. And didn't get it either because they didn't get sufficient response. I think that tends to be more often the case or just the people, the unit owners or shareholders voted against it. And virtually every single one of those instances that I've been involved, the projects still proceeded through alternative means of funding it, most often, common charge maintenance increases and or assessments that, required unit owners to pay a larger sum of money over a shorter period than if they had approved financing or been able to obtain the financing. It would've been spread over, at least a 10 or 15 year period. A lot of times the financing can be beneficial in the long run.
And even for those buildings where a majority of the unit owners had indicated they were to support it. We didn't get a sufficient response to actually get it approved. I think it's important to also educate unit owners and shareholders as to why these changes need to be made and also the potential benefits for them.
And especially if you have a building where not only do they have the approval over the loan, but also the work being done, whether it's an alteration addition or improvement. If you're saying to them, we can get this loan, but we can only use it for repairs, replacements, or maintenance. I think that's more logical to unit owners, more acceptable than the thought that the board could go out and take out, a six figure loan to construct some new addition or improvement that maybe the unit owners don't feel is necessary or desired. So when you constrain the ability to take a loan in a higher amount, but constrained by the type of work you're gonna be able to use it for, I think it can be a net win for everyone.
Paula Chin: Brandon, this has been really informative.
Thank you so much for joining us.
Brandon James: Thank you very much for having me, Paula. It's always a pleasure.