Condo Coop HOA

Last year, a new law (effective January 1, 2018) was passed unanimously by Senators throughout New York aimed at cooperative and condominium board member conflicts of interest and transparency regarding them.  Hopefully boards and/or their managers have been complying and are ready to make their first report to shareholders/owners.

The first new requirement was that condos and coops must give each board member a copy of the applicable law at least once annually.  For an incorporated condominium, Section 715 of the Not-for-Profit Corporation’s law and for incorporated coops, Section 713 of the Business Corporation Law.  Those sections could be confusing without explaining to board members what an ‘interest in a related party transaction” is when it comes to condo board members’ interests and what a “substantial financial interest” of a coop board member is.  If those standards were implicated, a conflict of interest disclosure should have been made.  

In addition to providing the right documentation to board members at least annually, board members have to provide an Annual Report to the coop shareholders or condo owners representing that either there were no actions taken by the board that fall within Section 519-A of the Not-for-Profit Corporation Law for the incorporated condominiums or within Section 727 of the Business Corporation Law for incorporated cooperatives.  The Annual Report must be signed by each of the board members.

 If there were such actions by the board during the year, then the board must provide information on any contracts made, entered into, or otherwise voted on by the board that were considered related party transactions in the case of incorporated condominiums, or where one or more of the board members were interested.

Further, the Annual Report has to include a list of all contracts voted on by the board including information on the contract recipient, contract amount and the purpose of entering into the contract, the record of each meeting including board member attendance, voting records for the contract and how each board member voted on such contracts, and the date of each vote on each contact and the date the contract would be and remain valid.  

Based on this new law, in order to prepare the Annual Report, minutes on votes on contracts have to identify which board members were in attendance for a vote and how each board member voted.  

Unfortunately the lawmakers didn’t provide the consequences of noncompliance.  We will have to wait for the inevitable lawsuits to start and Court will have to decide the appropriate consequences of noncompliance.  

In a lawsuit where a board and its members cannot point to good record keeping and Annual Reporting in compliance with the new law, they will likely find themselves on the wrong side of liability and perhaps unable to establish the applicability of defenses like the often cited Business Judgment Rule.  Boards and management to be proactive in complying with this new law.

Since this is a new requirement, it may be prudent to consult counsel at least for the first reporting cycle and certainly if there is any question as to whether there is a conflict of interest requiring disclosure.  The best course seems to be to err on the side of transparency unless there is another legal reason not to do so.

Click here to read this significant law change.

A reminder to all co-op and condo boards: you have until August 28, 2018 to comply with Local Law 147, which requires owners of multi-family buildings to adopt and post a smoking policy by that date.

The policy must be in writing, must be posted in a conspicuous place in the building, and must be part of any purchase, lease, renewal lease, or sublease package. In co-ops or condos, the policy must be adopted into house rules or bylaws.  Depending on your governing documents, you may need a shareholder or unit owner vote to adopt the policy the board decides on.  It is important to evaluate your governing documents and know what you need to do to accomplish your goal.

The failure to adopt a smoking policy could result in monetary penalties from the NYC Department of Health. Owners or boards in control of multiple-unit dwellings must memorialize such a policy in writing to provide residents with the ability to make an informed decision about the levels of risk of secondhand smoke in a particular building.

Boards that have not already done so should deliberate and consult their managment and attorney so that they will have a policy in place, distributed, and on display before the August 28 deadline. Some coops and condos may already be in compliance with their existing smoking policies, but it is important to confirm in view of the potential sanctions. The second step is advising shareholders and unit owners to include the smoking policy in any lease, sublease, or apartment purchase contract they enter into.

New York Courts sometimes take hard positions on lawyers which can significantly impact their condo, coop and other board clients.  Clients sometimes need a “do over” and if they wait too long, they may be trapped in the attorney-client relationship with fees spiraling out of control.  Seeking independent advice early on can give boards the clarity and control they need.

In one recent decision, a Supreme Court Judge was asked to award a coop $464,164 in legal fees that their attorneys incurred in defending them to victory. There was a provision in that coop-tenant case where the winner could recover reasonable legal fees from the loser and the Court had to decide if the fees were reasonable.  This Judge explained the billing by the Greenberg Traurig firm where multiple attorneys were working on the case and some charged as much as $1,000 per hour. The Judge also noted that this case was not a complicated one, but rather could have been dismissed simply on the ground that the case was time barred.

The suit was by five residents of Seward Park Housing Corp., who were upset over a decision by the coop’s board to switch to a valet parking system. The residents filed a summary proceeding, seeking to annul the board’s decision.  The Judge determined that the lawyers over-lawyered this case and ran up an unreasonable amount of legal fees.   According to the Judge, the nearly half-million-dollar fee request was not in the context of “industrial or technological behemoths battling each other for market supremacy, but in the context of a handful of middle-class cooperators upset with a board of directors’ decision.”

After all, the Judge said, these days, $464,164—more than twice the salary of a New York State Supreme Court justice—could buy a one-bedroom coop apartment on the Upper East Side with a doorman and onsite parking garage; a one-bedroom co-op in Bay Ridge with a live-in super and high ceilings; or “your very own private house in suburban Elmont, Nassau County, just over the Queens border.”

The Judge awarded only 38 percent to the coop, leaving the balance of $287,781, for the coop to pay to their attorneys.  That’s a lot of money.  With the $175,000 that the Judge did award, he emphasized that with that, you could buy you a 55-foot yacht, equipped with multiple staterooms; a salon/galley/dining area; a washer-dryer; and stall showers.”  He considered that reasonable, but what is unreasonable is the board having to now require the coop shareholders to pay the remainder, over a quarter-million-dollars shortfall.

It’s way too late to push the re-do button and reconsider having a large law firm where lawyers charge $1,000 per hour, dealing with a condo, coop litigation like this one.  The Seward Park board is probably wishing that they could have a do over, but the time to have done that is long gone.

Click here to read the Decision.