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Ron Gitter

Ron Gitter

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Why We All Can't Get Along: Personal Freedom Takes a Hit

Posted: 05/19/11 02:43 PM ET

Two recent developments beautifully illustrate that free will can be significantly limited when living in a co-op or condo. The ownership of an apartment comes with many benefits and amenities, but the co-op or condo owner is required to submit to rules that sometimes are not even expressly stated or come into existence after the apartment is purchased.

The Business Judgment Rule

As highlighted by Frank Lovece in his May 13th Habitat Magazine piece on a recent co-op case involving the board's refusal to allow a shareholder's refinancing to go forward, co-op boards are well protected against lawsuits questioning their decision making by a corporate law concept known as the "Business Judgment Rule." As articulated in Levandusky vs. One Fifth Avenue Apartment Corp., a 1990 New York Court of Appeals case, when a board acts "in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes," its decisions are not subject to judicial review. As long as the board satisfies those tests, whether or not the board is acting in a reasonable manner is irrelevant.

A Higher Authority

In the case discussed in Frank Lovece's article, the board refused to execute the "recognition agreement," a standard loan document required by the bank in order to facilitate the refinancing, even though the proprietary lease and by-laws did not give the board the right to take such action. Despite the fact that there was substantial equity to support the line of credit, the court held that the co-op board's decision was justified under the Business Judgment Rule, as the board was entitled to deny the shareholder's request in order to avoid encumbrances against the shares.

Proceed with Caution When Fighting with Your Board

Cases such as Levandusky, as well as the decision discussed above, are object lessons on how time-consuming, costly and out-of-control a dispute can get between a shareholder and a co-op board. An apartment owner considering a lawsuit against his or her board should read the lower court decision in Levandusky and the subsequent appeals in that case to understand the risks involved and the potential for success. Unless you can prove arbitrary and capricious or illegal behavior on the part of board or its members, and have the financial wherewithal to maintain a lawsuit over a significant period of time, the chances of success are often twofold: slim and none.

The Ultimate Air Purifier

It's hard to sympathize with smokers when it comes to limitations placed on smoking in public places. Nobody misses the "smoking section" of an airplane (try to conceptualize that one today). But what about smoking in a private place, such as your own co-op or condo? Apparently, one Upper West Side condo believes that the right to prohibit a unit owner from smoking in his or her own apartment trumps the actual property rights associated with ownership of the apartment and the unit owner's lifestyle. In Vivian Toy's May 12th article in the Times, under the theory that there is no constitutional right to smoke, the unit owners, by the supermajority required in the governing documents, voted to ban smoking in the building. From a health perspective, the decision is understandable, predictable and was inevitable on the au courant Upper West Side. But what about the unit owner with an unpopular habit, who is now a prisoner in his or her own home? As we learn time and time again, the purchase of a co-op or condo comes with express and implied covenants that the unit owner will submit to the jurisdiction of the co-op or condo board as well as to the rules and regulations that may be implemented after one becomes a resident.

Revisiting The Rule of One

Years ago I promulgated the "Rule of One": If you have a problem that only impacts your apartment, nobody cares...

Ask anyone who has had a leak that only affected that unit and you will hear the tales of how long it took to get it fixed, if it ever was. But the Rule of One has taken an interesting turn. The co-op or condo population can now determine behavior within the privacy of your own home. In essence, it appears to be an expansion of the Business Judgment Rule to cover actions by the unit owners, not just by the co-op or condo board. It doesn't matter if the population's decision is reasonable or unfair to the few parties impacted by the decision. As long as it's in the best interest of the co-op or condo population as a whole, the individual's personal habits can be sacrificed for the good of the community. It's the philosophical equivalent of Survivor for co-ops and condos: you get can voted off the island. Whether the courts can or will intercede in these building-wide decisions is yet to be seen.

Residential Reality: Understand the DNA of Your Co-op or Condo

In addition to price, location, amenities and a variety of other factors, a potential purchaser should be simpatico with the personality of the co-op or condo under consideration. Whether a board is stuffy or laid back to a fault, is often revealed in the board minutes and should be investigated carefully by the purchaser's attorney as a part of pre-contract due diligence. Moving into a building that doesn't match your lifestyle or world view can be stifling. Make sure you're comfortable with the club that would have you as a member...

For more, see "Reading the Tea Leaves: How the Minutes Reveal a Building's DNA."

 

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