Can Shareholders Challenge a Co-op Board's Assessment?

The board at a Riverdale co-op recently levied an assessment of $500,000 that must be paid over the next three years — an average of $5,000 per shareholder. The board says the assessment was needed to pay for repairs and new city mandates, but it was vague about how the $500,000 figure was calculated. The proprietary lease and bylaws give the board the power to set maintenance payments and cash requirements, but they don't give the board specific power to impose assessments. Is it possible for shareholders to challenge such an assessment?

You might be out of luck, replies the Ask Real Estate column in The New York Times. Courts allow co-op boards significant power to manage a building’s finances, especially when it comes to maintenance and compliance with city codes, through a legal principle called the business judgment rule. It states, in essence, that the courts will not second-guess a co-op board's decision, provided it's made in good faith and for the well-being of the corporation.

Even if the governing documents don’t use the word “assessments,” the board still has the right to raise money to keep the building in proper order, as long as it is acting in good faith, says Joseph Colbert, managing attorney at Colbert Law. “Courts are unlikely to overturn a decision solely based on terminology,” he says. “They prioritize the board’s underlying authority and the purpose of the (assessment).”

The inclination to go to court to block the assessment might not be the wisest course. “If there is a basis for a challenge, it is best to aim for an amicable resolution rather than running into court to embark on a protracted and costly legal battle,” advises Debra Guzov, founder and partner of her eponymous law firm.

Start by approaching the managing agent to request the minutes from the board meeting in which the assessment was discussed and adopted. Guzov says the minutes can offer insight into why the board believes the assessment is necessary and how the $500,000 sum was calculated.

If the minutes don’t offer the clarity you seek, you can ask the managing agent for specifics on how the money will be spent. You can also ask to review contracts that were executed to complete the work, to see how much it will cost, though you might not automatically be entitled to see them. Check your bylaws for guidance.

There's strength in numbers, so if your neighbors are concerned, too, enlist them and make your inquiries as a group. The business judgment rule gives co-op boards significant power, but shareholders are not powerless when it comes to making sure the board is fulfilling its fiduciary duties.