Planks and necessary repairs – Corporate / commercial law

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What happened at Surfside is a tragedy. No question. What was the cause? Almost everyone is pointing fingers and we may never know for sure – this is likely the result of a series of failures by various individuals, agencies, and laws. Among the possible causes in the news articles are governance failures – both that the council waited too long to make necessary repairs and that homeowners objected to the assessment the council was seeking to impose. Indeed, according to these reports, a petition challenging the assessment was pending at the time of the collapse.

These governance issues are not unique to what happened in Florida. These are issues that face many condominium boards (and some co-op boards) in New York City and elsewhere in the country. If an appropriate professional tells a board that there are unsafe conditions or repairs that must be done For the safety of residents, can council have repairs done without the approval of the unit owner, which may be nearly impossible to obtain? It depends on the documents for that building.

There have been numerous attempts in Albany to introduce legislation to give unit owners or shareholders so-called greater rights which, under the guise of encouraging transparency, would in fact give shareholders or owners of units. units – none of which have a fiduciary duty to the entity – control over, if not a veto, board decisions. This even though it is the board of directors that has a fiduciary duty to act in the best interest of the entity and not in the interest of a particular owner’s portfolio. A recent example is Senate bill 4595/2021 (there is no corresponding bill in the Assembly). There, the sponsors of the bill seek to pass the Cooperative Shareholder Protection Act which, among other things, would require shareholder approval for all non-urgent capital improvements that cost more than $ 50,000. . While emergencies are ruled out, the proposal would seriously limit a cooperative council’s ability to act. For example, a roof replacement (which could easily cost over $ 50,000) may not be an emergency (yet), but it can be smart. And if shareholders had the right to stop the project, those who don’t live on the upper floors might not want to spend the money – they might perceive the problem as not impacting them (yet).

The Florida Bar Association has now organized a task force to make recommendations for legal reform to address the governance issues that have been exposed. As practitioners in the field of co-op and condominium representation, we urge the New York legislature to avoid compounding an already existing problem by further limiting the power of a board. In fact, most, if not all, condominiums already have limits on the powers of the board in their constituting documents. We propose that a fairly straightforward “fix” to the New York Condominium Act (Section 9-B of the Real Estate Property Act) would have a significant impact on the ability of a board of directors to act in circumstances. situations where the health and safety of the building and its residents are at stake.

The condominium bylaws tell unit owners that the “business of the condominium must be governed ”by the board. In other words, a board is elected and those who are elected make operational decisions. And, as such, the board has a fiduciary duty to act in the best interest of the condo – not that of a unit owner. However, almost all of the condominium regulations we’ve seen contain a provision, often titled “Changes, Additions or Improvements to Common Elements”. to common elements ”, but prohibits a board from spending more than $ X in a year without the approval of a qualified majority of unit owners. The dollar amount varies widely, from $ 10,000 to $ 500,000 or more.

And although the above provision does not apply to “repairs”, we have also seen regulations that explicitly include repairs within the monetary limit, so that the board could not, without the owner’s approval. unit, authorize virtually any work for any reason (even to preserve safety) if the cost exceeds the amount specified in the specific regulations for that building. We recognize the importance of checks and balances – no one wants a board that goes wild, spending its unit owner’s money on what some might consider frivolous projects. But isn’t it important that a board be authorized to act when it is imperative that it do so?

There is another obstacle in the regulations. Assuming boards can do the necessary work, how are they paid? The board might impose a special membership fee, but this is not always a practical solution. If unit owners are unable or unwilling to pay, collection efforts – often in the form of foreclosure or financial action against the defaulting owner – are time consuming and costly. The council can still borrow money, can’t it? Not necessarily. Each regulation is different, but many of them provide that the affirmative vote of a qualified majority of unit owners is required if the board wishes to borrow more than a specific amount. It is often, but not always, the case that the loan is secured by common charges (RPL 339-jj), or whether it is a traditional mortgage secured by a unit owned by the council, often the resident manager’s unit.

One can then wonder why a council does not simply change its bylaws to give it more powers. It cannot – any amendment to the statutes requires a qualified majority vote of the common interest and the number of apartments (RPL 339 (v) (1) (j)). Any lawyer who practices in the field, and anyone living in a condominium, knows that it can be difficult to achieve a quorum of unit owners at a meeting, even if the quorum is well below the 50 mark. %. Obtaining the consent of a qualified majority can be almost impossible.

For these reasons, we urge that the Condominium Act be amended to invalidate any regulatory provision that would prevent a council from acting when necessary to do so, including the right to borrow money for these purposes. specific. There is a precedent for such a law. The Office of the Attorney General has recognized the concerns we raise for many years, albeit in a somewhat different context. There are often provisions in condominium bylaws that prevent a council from acting without the developer’s consent during its first five years provided the developer owns a home. Among other things, boards cannot impose assessments, make changes to common elements, or even enter into certain types of contracts without the approval of the developer. But – at the insistence of the Attorney General – these provisions contain an important exception. Boards may, without Sponsor’s approval, take action to comply with the law (including any government authority), to comply with insurance requirements, to remedy a breach, or to protect against an imminent threat to the preservation of the building or the health and safety of its residents. There is no reason why these same exclusions should not apply for all purposes.

We also note that while this is rare, we have encountered co-op bylaws with language similar to condominium – that boards can only spend more than $ X with shareholder approval. In cooperatives, any provision that prevents a board from acting is likely a violation of Section 620 (b) of the Business Corporations Act. It requires a unanimous shareholder vote to “restrict” the board “in its management of the affairs of the company”. The restriction must be in the certificate of incorporation and must be voted on by all existing shareholders – new shareholders must be made aware of the provision. However, these restrictions exist and the shareholders have attempted to invalidate the action of the board on the basis of them. We recommend that the New York State Legislature amend the Business Corporations Act to clarify that co-op boards cannot be restricted in processing essential expenses, as we define them above.

What we offer is a small, but vital item category. No governing document should prevent a board from acting when it is essential to act. Yes, if the board members have the power, they will also have the responsibility, and therefore the responsibility. But isn’t it better than being caught in an impenetrable cycle where nothing can be done?

Reprinted with permission from the July 12, 2021 edition of the New York Law Journal. © 2021 ALM Media Properties, LLC.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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