Co-op and Condo Boards Cannot Overreach on Fines and Late Fees

William D. McCracken is a partner at the law firm Moritt Hock & Hamroff. This is an edited version of his article that appeared in the June 21, 2024 issue of The New York Law Journal.

Just as governments need to deter misconduct and punish rule-breaking, co-op and condo boards rely on fines and late fees to keep their houses in order. But there are limits. This article explores three questions boards need to address before imposing fines and late fees.

1. Does the board have authority to impose fines and late fees? The first step is to look at the relevant governing documents — generally the proprietary lease for co-ops, and the by-laws for condominiums. While co-op and condo boards function similarly in many ways, fines are treated very differently. In condominiums, because the board does not own the apartment units, it does not have the power, as co-op boards do, to evict a misbehaving unit-owner from the building. Thus, fines and late fees take on an outsize importance for condo boards, and almost every set of condo by-laws will grant condo boards express authority to issue them.

Cooperatives will sometimes have the authority to issue fines and late fees written into the proprietary lease, but not always. Some co-op boards take the position that because they have authority to set cash requirements and issue house rules, they have the inherit authority to levy fines in the event that shareholders break the rules. In one court case, a board unilaterally adopted a house rule giving itself the power to issue late fees for delinquent maintenance payments rather than trying to amend the proprietary lease. The court found that the board “exceeded its authority in attempting to change the type of penalty by the procedure of adopting a house rule rather than amending the proprietary lease.”

2. Is the rule itself enforceable? Co-op and condo boards are often accused of overreaching. One court case involved a condo board's master plan to replace all windows in the 100-year-old building — and impose fines on unit-owners who failed to comply. However, the the declaration and by-laws made clear that the unit-owners, not the board, owned those windows. Once the replacement plan was struck down by the court, the fines for noncompliance with the plan went as well.

3. Are the fines and late fees unenforceable penalties? It's difficult to determine whether a fine or late fee is so large and unreasonable as to “shock the conscience,” but case law gives some guidance. In one case, an appeals court held that fines of $500 per day for violations of the building’s guest policy were “confiscatory in nature.” On the issue of late fees, courts have consistently referenced the criminal usury statute to invalidate late-fee provisions that exceed 25% per annum.

It should also be noted that co-ops, which have a landlord-tenant relationship with shareholders, are subject to further restrictions under the amended Housing Stability and Tenant Protection Act, which prohibits late fees greater than 8% of the co-op’s monthly maintenance charge.

Because co-op and condo boards have a mandate to govern, fines and late fees will always be attractive tools for keeping their house in order. But as the above court cases show, boards must avoid the temptation to overreach.