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 Michael Savino, a partner at the law firm, Braverman Greenspun. It may come as a surprise to boards that are about to tackle repair projects, but the first step they need is to check their governing documents, and that's because there is a cap on how much can be spent on repairs that was set in their original documents.
And if it hasn't been updated, they could run into headaches if they exceed that amount. Michael, can you set the background for us and explain how this works?
Michael Savino: Absolutely. Hi Paula. So as you said, repair projects in the, in buildings in New York City occur constantly, and the board may just think that they're doing the right thing by moving forward with a repair project by hiring the proper contractors and fishing out and finding out what the repair costs are.
But like you said, it's important for them to know. What's in their governing documents, because those governing documents can contain caps in terms of how much the board can approve in terms of maintenance and repair contracts. And if they don't follow that, then they would have to get shareholder approval and may expose themselves to some sort of liability down the line in terms of lawsuit, breach of fiduciary duty, by not following the governing documents.
Like I said it's really important for you to look at the governing documents and have an understanding of what they say. And generally within the governing documents, you'll find these caps within the powers and duty section of the bylaws or within the, excuse me, or within the alteration section of the bylaws.
And recently we came across a building that had very old bylaws. They were never amended and the board has continued to operate with them. And they had a cap on maintenance expenses of $10,000, which it's, I don't have to say extremely difficult to get anything done in the city of New York for $10,000 without getting a super majority unit owner or shareholder approval.
Paula Chin: Michael, was this a co-op or condo? And do, does this problem crop up at both types of buildings?
Michael Savino: This was, this particular building was a condo, but yes, it does pop up in both co-ops and condos. And with a co-op, there's an added issue, if you look at the proprietary lease, because sometimes the proprietary release will set forth these caps, and it may or may not be consistent with the bylaws.
Let's say if the bylaws were amended, but the proprietary lease was not. And also sometimes a proprietary lease requires a greater threshold of shareholder votes and approvals to amend. So you wanna make sure that the proprietary lease and the bylaws match up with each other, and also that they're updated to sufficiently allow the board to pursue any type of maintenance that's required. Because everyone in New York City sees scaffolding on every single corner of every street here, and that's a result of the FISP projects, formerly Local Law 11, which can be costly and they have to be done in every five year cycles.
Recently we had a building where the board did their due diligence. They went out and they hired a contractor to take care of the facade issues, and the expenses ran about two and a half million dollars.
So they signed the contracts and they wanted to move forward based on the tight deadlines that they have. And they later discovered that there was a million dollar threshold within the bylaws. That created an issue because now you're looking at a million and a half of added expenses which were not authorized pursuant to the bylaws within the building and that million and a half needed shareholder or unit owner approval.
So there's a number of different things that you can do in this particular situation, and there's some added protections built into governing documents and also case law in New York. Or other words, if you're performing a FISP project where the facade is labeled as unsafe, and you have to bring that into a safe status within a certain period of time, that can be an emergency renovation.
And under the bylaws, sometimes there's leeway given to that, or you can basically take it to a shareholder vote by special meeting, or unit owner vote by special meeting and indicate that this is required work that needs to proceed forward. And that's a little more understandable and a little easier to move forward with rather than a lobby or an elevator modernization project.
Paula Chin: This condo that you mentioned, what happened there? Or is this the same building we're talking about, that had a $2.5 million project, in a 1 million threshold? And so did they get approval? How did that play out?
Michael Savino: They did get approval. They called a special meeting pursuant to the bylaws and explained to the unit owners that the facade project had to move forward, that the building had to come current for the safe status, and that it had to be done in a certain period of time, which is why they had to exercise their quick due diligence and move forward to ensure that the building wouldn't receive fines and violations, and also increase costs for sidewalk sheds.
So in that situation, it's easy to explain to unit owners. It's tough to swallow, saying, I need an extra million and a half dollars, but when you're couching it by saying that this is a necessary project to ensure the safety, it is easier to gain approval for that. And also the business judgment rule can help boards in a situation like this if you're dealing with an incredibly low threshold of expenses.
We recently had a building that had a $10,000 threshold to borrow money and also conduct alterations. In that situation, the unit owners weren't exactly the most responsive. It was hard to get a quorum at any meetings, and people didn't necessarily give proxies in. So if you have to move forward with an emergency alteration progress or a FISP project, in that situation, the board can act upon its own and say, this is an emergency.
This has to get done, and we're using our business judgment to pursue that. The risk there is obviously a suit by any condo unit owners or shareholders saying this was a breach of fiduciary duty. But in emergency renovations such as this, the board has a little extra leeway.
Paula Chin: What can boards do to avoid the problem?
Should they go ahead and amend their bylaws? And that also would require what a, a super majority vote?
Michael Savino: It depends. Once again, it all comes down to knowing what your governing docs say. So certain governing docs call for a super majority and some will call for a majority. We had a building that allowed the directors of the co-op to amend the bylaws as long as they haven't been amended previously. It's difficult to know how your people will react to this because those thresholds were put in for a reason initially, to ensure that the building had to conduct its everyday expenses and conduct a maintenance and alteration obligations. But also make sure that there was some protections for the rest of the unit owners or shareholders to make sure that the board wasn't spending out of control money on that. The problem is when you have a building that's on the older side or bylaws that have not been amended, and those numbers are artificially low, you have to recognize that. Recognize the expenses that are gonna be coming forward for the building and the future, and then proactively reach out and see if you can gain unit owner approval or shareholder approval to raise those limits to an appropriate amount.
And sometimes that's difficult if you have a building that doesn't respond. If you have unit owners that don't go to meetings, if you have unit owners or shareholders who don't return proxies, that can be a difficult task. So it's very important for boards to recognize their documents in their buildings and be proactive in reaching out and attempting to gain approval to allow them to conduct their business in a manner that would keep the building safe and move forward with all their obligations.
Paula Chin: Let's maybe address a worst case scenario where the board has reached out and for whatever reasons they can't get that approval. Are they more or less then boxed in that they could exercise a business judgment rule, but they could be taken to court and then it drags out, there's time and money involved.
Is that something that might be inevitable for some boards?
Michael Savino: For some boards and some buildings, unfortunately, yes, there are some catchalls within the bylaws that may allow an action for a board to move forward on certain expenses. But once again, that comes down to just knowing what your governing documents say and making preparations in case a situation like that occurs.
Like we said in the beginning, it's an easier sell if you have to do facade work that is a safety issue. Because that's of the utmost importance for every building in the city, because if you don't conduct that within the time period prescribed, not only is the building potentially unsafe, but you're racking up fines and violations, which will end up costing the building in the long term.
If you're in a situation like that, then business judgment can help the board there move forward and say this was absolutely necessary. The financial health of the building was at play, and also the safety of people who were walking the streets is at play. But if you are a building who needs to modernize a lobby or modernize some common areas and amenities, that's a tougher sell in terms of moving forward with a project that exceeds what the bylaws say.
Because at that point, that does leave a board more exposed for a breach of fiduciary duty suit. So if you have a $500,000 threshold within the bylaws and you undertake a million dollar lobby renovation project, there will likely be questions from the people living in that building. And the necessity and the urgency to conduct that type of work just isn't there.
So business judgment likely will not save a board in that situation. So it's very fact specific. And it really comes down to preparation, knowledge of your governing documents, and also an understanding of your building and the people who are living in there. So if you know that you don't have a lot of responsive individuals, no matter the size of the building, you can start reaching out through a managing agent or just walking the hall and having conversations with people, informing them.
This is something that has to be done for the health of the building. We wanna move forward with this and we're gonna present a bylaw amendment and it's important for you to vote on it. So it's very important for the board to, like I said, recognize all of these factors when they're making a decision in terms of how to spend their money.
Paula Chin: So as with many challenges, it's all about communication and taking the temperature of your residents. Is that right?
Michael Savino: Absolutely. Absolutely. And some are more difficult than others in terms of getting everyone on board with it. So I would say that if there is something that is coming up and you know that there's a certain renovation or alteration that has to move forward, start planning in advance.
So it's just as important to take the temperature of the building and see if this is something that can be approved if needed rather than just going out and hiring a contractor and forcing it down the unit owners or shareholders saying that we hired a contractor, this is what they're gonna do.
And at that point, you risk not only lost time, but lost expense of reaching out and hiring something that may or may not be able to be successfully pushed through a board meeting.
Paula Chin: Michael, this has been really informative. Thank you so much for joining us. Thank you.