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Courts Hold Cooperative and Condominium Boards to Strict Scrutiny

02/10/2015 | By: Marc J. Luxemburg, Esq. | Winter 2015 Newsletter
Cooperative and condominium boards consist for the most part of resident shareholders or unit owners who are managing the operation of their own homes. As a consequence, many boards tend to function in an informal manner, and do not thoroughly document decisions that may be reach ed at board meetings concerning the operation of the building.

The courts, however, treat cooperative boards as if they were operating a commercial business and, for the most part, hold boards to very strict standards when it comes to documenting decisions. The failure of a board to properly document its decisions can have unfortunate consequences.

For example, in one recent case, Board of Managers of the Claremont Greene v. Vanderbilt Mansions, LLC, the board of a condominium sued the sponsor for construction defects, a claim that is very common in new construction condominiums. The board did not take any minutes to indicate that the decision to bring the suit was taken at a meeting of the board at which a quorum attended and that a majority of the board had voted in favor of the resolution to commence the action. The court held that even though there was no statutory requirement that a resolution be passed or that a vote be taken, the bylaws required that the board act as a board within the constraints of the by-laws. Given that there was no evidence that a meeting had been held or that a vote had been taken to authorize the suit, the court dismissed the lawsuit on the ground that the plaintiff lacked the capacity to sue.

In another recent case, 300 East 85th Street Housing Corp. v. Dropkin, a cooperative sued a shareholder for non-payment for the sum of $12,000. The cooperative relied on the rent ledger for the apartment showing monthly charges and monthly payments, which left a balance in favor of the cooperative. The court held that the evidence was insufficient because the cooperative did not document its aggregate cash requirements, or the proportionate share of the maintenance allocated to the shareholder on a per share basis. The rent ledger by itself did not show that the cooperative had complied with the proprietary lease in terms of allocating the maintenance. Accordingly, the case was dismissed.

Another area where boards must be careful about their documentation relates to liquidated damage clauses in contracts, particularly alteration agreements and/or AIA contracts for Local Law 11 or other work. Frequently, these contracts contain damage provisions requiring the shareholder or the contractor to pay damages if the work exceeds a specified time-of-the-essence deadline. However, frequently, such payments are described in the agreement as a “penalty” instead of being properly referred to as “liquidated damages” or “compensatory damages.” The law is that a “penalty” is not enforceable. Accordingly, even though a payment may be intended as compensatory damages or liquidated damages, if it is in fact described in the agreement as a “penalty,” it will not be enforced. This was recently demonstrated in the case of Phoenix Construction v. 70th Street Apartment Corp. This case concerned a contract for roofing and façade construction. The contract called for a time limitation of four months after which there would be a “penalty” of $250 a day. The contractor ran over the deadline by 302 calendar days which amounted to $45,500. However, the court held that since the provision specifically stated that it was a “penalty,” it was not liquidated damages and it was not enforceable. The same concept applies to fines for violation of the rules, which should be described as “violation fees” or “improper use fees,” and not penalties.

As these cases demonstrate, the bottom line is that careful documentation by a cooperative and condominium board is required to make sure that the board’s rights are enforceable in court.

About the author: Marc J. Luxemburg is a partner at Gallet Dreyer & Berkey LLP. His practice focuses on real estate transactions, cooperative and condominium law, and real estate litigation. Mr. Luxemburg represents numerous buildings and sponsors in the New York City area. He is the President of the Council of New York Cooperatives and Condominiums, a non-profit membership organization with more than 2300 cooperative and condominium members, which provides educational activities and monitors legislation which affect its members. He has taught numerous seminars on the legal aspects of operating cooperatives and on the role of the Board of Directors. Mr. Luxemburg can be reached at mjlh@gdblaw.com.