While essential to the successful operation of all cooperatives or condominiums, the contents of governing documents are often only glossed over by otherwise well-intentioned boards members and managing agents leading to potential pitfalls. As a result, co-op and condo attorneys often suggest that boards at least revisit—and in some cases memorize—the various components of this all-important and varied document.
Co-op vs. Condo
The first step is differentiating between cooperatives and condominiums, explains Steven Troup, a partner with the Manhattan-based law firm Tarter Krinsky & Drogin LLP. With cooperatives, the bylaws govern how the cooperative corporation conducts business such as voting on directors, voting on officers and meeting conduct. “The proprietary lease governs the landlord-tenant relationship between the co-op corporation and its shareholder-residents, transfers, subletting, respective responsibilities for maintenance and repairs to individual apartments as well as common areas,” says Troup. “The certificate typically does not contradict either document, but it needs to be reviewed to ascertain that if there are any contradictions, the certificate of incorporation trumps.”
When it comes to condominiums, the bylaws set forth the rules of the road on all issues. “Contrary to a co-op, there is no landlord-tenant relationship between the condo’s board of managers and unit owners,” says Troup. “The declaration is the instrument filed with the county clerk by the sponsor and sets forth the precise property comprising the common elements and units.”
While the governing documents are different, there exist overlaps or provisions common to each, explains Thomas D. Kearns, a partner with the New York law firm of Olshan Frome & Wolosky LLP, “bylaws include notice provisions for meetings, the officers to be appointed, the number of seats on the board of directors for co-ops or board of managers for condos,” he says.
Common Questions Answered
While some board members are conversant in legal terms and definitions thanks to years of experience, or because of their own professions, others—especially new board members—are often playing catch up ball making the first weeks and months on their board an educational experience. For example, a common question is: What’s a proprietary lease, and why is it called that? With a secondary question: Why don’t co-op owners get a deed like condo or single-family homeowners do?
“It’s called a proprietary lease because as a stockholder the entity that owns the building that stockholder is entitled to possessory rights. Those rights are set forth in the proprietary lease. It is really no different than any other lease except entitlement to it arises by virtue of the lessee’s rights as a stockholder,” says Jeffrey M. Schwartz, an attorney with the New York-based law firm Wolf Haldenstein Adler Freeman & Herz LLP. “Co-op owners do not receive a deed as the actual building is owned by the co-op. It received the deed to the entire property and then it issues shares and leases granting ownership and occupancy rights.”
To further explain the difference, Troup says it’s important to remember that when cooperatives were created in New York in the late 19th century, a person did not own his or her own apartment. “Only the wealthy bought co-op apartments and not until the 1920s or so were middle-and working-class co-ops formed, often by labor unions. The co-op boom began in the early 1980s,” he says. “By the end of that decade, conversions to condominium became much more common than co-ops, and that remains true today. Proprietary shareholders-lessees do not get deeds because technically a co-op apartment is not real property but personal property. Condos, on the other hand, are real property.”
Another common question that is directed to counsel is with regard to an offering plan. Specifically, do cooperatives have offering plans, or just condominiums? “Offering plans are required by New York’s securities laws. The sale to the public of a group of apartments is considered a securities offering. Both new co-op developments and new condo developments are covered by the same securities laws and require an offering plan,” says Kearns.
Often board members and residents are curious if offering plans have a bearing on a buyer once the first generation of residents has moved into a newly-constructed building. As a result, Kearns says there is a common misconception about to offering plans. “People frequently use the term offering plan when they mean the actual governing documents and it can be confusing. For example, ‘The offering plan does not have a flip tax’ in an improper use since the plan was originally issued by the builder and the actual governing documents may have been amended by a proper vote of the shareholders or condo units owners.”
To check the terms that govern a particular cooperative or condominium, Kearns suggests checking the actual (up to date) governing documents. “Once the builder or converter sells all of the apartments, the offering plan need not be updated,” he says. “It is a handy reference tool for future buyers and lenders but once out of date it can’t be relied upon.”
Schwartz adds that offering plans are required to be filed as interests in cooperatives and condominiums constitute securities under New York law. As such, under the securities law (the Martin Act), property owners are required to make certain disclosures when selling units. “The disclosures required are set forth in Part 23 of Title 13 NYCRR—Regulations Governing the Conversion of Real Property. The disclosures vary depending on whether the building will be a co-op or condominium, whether it is occupied or vacant, and whether it is new construction or rehabilitation,” he says. “The plan continues to be a guide even after the first generation of residents has moved in—especially if the sponsor continues of own units. Once the sponsor sells all of its units the plan starts to become obsolete and operationally the governing documents described above will control.”
Purchases and Disclosures
A gray area exists for buyers in the process of purchasing as to when they receive or read the existing governing documents, explains Troup. “There is no legal requirement for a re-seller to provide such documents, but the standard form contracts provide that the buyer has either read the governing documents or waived the right to do so.” He continues. “If buying from the sponsor or designee of a sponsor, the offering plan must be delivered to a potential buyer not less than three days before a contract may be lawfully executed. In subsequent resale’s, it’s near-universal practice for a buyer’s attorney to review all governing documents, financial statements and board minutes prior to advising his/her client to sign a purchase contract.”
From a buyer’s perspective, they should have an attorney that is well-versed in vetting otherwise cumbersome governing documents. Often times there are red flags that can be overlooked by an untrained eye. “They should pay attention to assignment and sale rights and whether the document looks typical,” says Kearns. “Any special risks highlighted in the front of the offering plan. For operating buildings, recent financial statements should also be reviewed to look for unusual expenses or disclosures.”
In some cases, longstanding owners may have initially reviewed the governing documents but might not have a copy or know where to obtain the latest, updated file. They are not without options, including submitting a Freedom of Information Law (FOIL) request to the Attorney General’s office. “Usually the managing agent has copies and will provide copies for a fee. Brokerage firms and some title companies maintain libraries of offering plans,” says Troup. “If these efforts fail, the seller should ask his/her neighbors, especially those on the board, if they have copies of the documents which may be photocopied.”
Whether it is deemed that a governing document was poorly drafted or somehow incomplete, there are requirements for changing the document, explains Schwartz. “In order to alter the operating documents, practically all require a vote of shareholders in the case of a co-op and unit owners in the case of a condominium. Some allow the board to modify provisions but most do not,” he continued. “If an amendment is being proposed to any of the operating documents, a draft of that amendment must be distributed to all owners. An amendment can be effectuated by written consents from the requisite number of owners required to pass or by calling a meeting, typically at least 10 business days notice and obtaining the requisite consents at the meeting.”
In most cases, the requirements to amend operating documents are between 66 2/3 and 75 percent of the owners. “Often amendments that adversely affect a sponsor or a commercial owner cannot be effectuated without their consent,” says Schwartz. Before a board embarks on a campaign of change, it is suggested to visit with retained counsel to ensure best practices are in place.
“Such a board should consult experienced legal counsel on these issues. Wholesale or piecemeal amendments may be made providing the requirements set forth above are strictly followed,” says Troup. “Defective documents invite litigation which as we all know is expensive, time-consuming and outcome-uncertain. If irregularities are found, competent counsel will be able to guide the building through to resolution.”
W.B. King is a freelance writer and a frequent contributor to The Cooperator.