Michael Savino, Partner, Braverman Greenspun in Legal/Financial
Repair projects are a constant feature of co-op and condo management, but when upgrades are needed the first step is to consult the governing documents. This is because there are often set limits regarding the funds a board can approve to spend on annual maintenance and repair projects. If the board wants to exceed these caps, majority — or in some cases supermajority — shareholder approval is needed. If approval isn’t sought, caps are exceeded and the governing documents are not followed, the board may face a lawsuit claiming a breach of fiduciary duty.
Ensuring document consistency. These scenarios can arise in both co-ops and condos. But in a co-op, there may be caps in the proprietary lease, which may or may not be consistent with the bylaws. For example, the bylaws may have been amended, but not the proprietary lease. Or the proprietary lease may require a greater threshold of shareholder votes. It’s important to ensure consistency in the documents to allow boards to pursue necessary maintenance.
Unreasonably low thresholds. The thresholds are clearly there for a reason — to ensure funds are accessible and have protections in place to prevent the board from overspending.
However, in buildings where the bylaws are very old and have never been amended, it’s possible there may be a very low cap on maintenance expenses of around $10,000. This would mean projects exceeding that figure would require the approval of a majority or supermajority of unit-owners or shareholders. Under the bylaws, sometimes there is leeway for emergency projects where the building is deemed unsafe. The business judgment rule can also help boards in these situations, especially if the building has an incredibly low threshold of expenses. However, there may be the risk of a lawsuit accusing the board of a breach of fiduciary duty.
Facade project case study. A threshold scenario recently played out for a condo doing a major facade repair project. The board hired a contractor and the expenses ran to about $2.5 million. Contracts were signed and the project was set to move forward on a tight deadline. Then, the board discovered the bylaws had a $1 million cap for repairs without unit-owner approval. This particular condo dealt with the situation by calling a special meeting, pursuant to the bylaws. The board explained the situation to unit-owners and gained the necessary votes to approve the work.
Updating bylaws. While a board may use the business judgment rule to justify emergency facade repairs above the bylaws’ threshold, a lobby renovation that exceeds a cap may leave a board exposed to a breach of fiduciary duty lawsuit. If it makes sense to change the funding threshold in the bylaws, it’s worth reaching out to unit-owners or shareholders through a managing agent and informing them of the necessity of a bylaw amendment. Advance planning for scheduled maintenance is always important, but if you do not have approval from shareholders to do the work required, the project can be delayed— which can make the project more expensive.