Serving on your co-op or condo board can be a terrific experience, but it can turn into a personal nightmare if you or your board acts improperly. There are many legal protections, however, and Geoffrey Mazel, partner at Hankin & Mazel, provides an overview of what they are and the precautions you need to take. Habitat’s Emily Myers conducts the interview.

Key Takeaways for Board Directors:

1. Basic Protections

· Board members are protected through multiple layers including NY State statute, case law, and co-op bylaws

· The Business Corporation Law provides indemnification for board members

· The Business Judgment Rule offers protection when acting within authority, in good faith, and following proper procedure

2. When Protection May Not Apply

· Intentional wrongdoing or acts without authority

· No-bid contracts without proper board approval

· Discrimination against protected classes

· Conflicts of interest that aren't properly disclosed

· Actions that violate the proprietary lease

3. Best Practices for Avoiding Liability

· Hold proper board meetings with minutes and formal votes

· Consult legal counsel before making sensitive decisions

· Disclose any conflicts of interest and recuse when necessary

· For purchaser rejections, ensure:

· Full board review and vote (not just committee approval)

· Documentation of legitimate reasons for rejection

· Proper minutes and record-keeping

4. Potential Consequences

· Personal financial liability

· D&O insurance may defend but not indemnify in certain cases

· Punitive damages in discrimination cases aren't covered by insurance

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Peter Massa, Partner, Armstrong Teasdale, is interviewed by Habitat Magazine's Bill Morris.

• A legal landmark. The business judgment rule has been around in corporate law for a long time. The theory is that board decisions will not be second-guessed by the courts — provided they’re made in furtherance of the corporation's legitimate interest and in accordance with the recommendation of the corporation’s professionals and the governing documents.
• It’s not failsafe. The caveat here is you generally don't have business judgment rule protection if you're acting in bad faith, outside of the board's authority and against what your governing documents say, or if you’re not following the advice of your professionals.
• Case in point. I represented a condominium that had fireplaces in the apartments. When it was discovered that the chimneys weren't properly lined and fireproofed, engineers told the board it had to get this done because it’s a life-safety issue. The board was facing potential litigation on two fronts — one group didn’t want to spend the money because the fireplaces had never been a problem, and another group threatened to sue if the board did this because it was going to be a big assessment.
• What should the board do. The board should rely on the advice of the engineers. If someone sued, the board’s decision would be upheld because of the business judgment rule. While that case didn't go to litigation, that's how it would be applied. If you can show in court that you were trying to do what was best for the corporation or condominium — even if it was wrong — courts generally will grant you broad leeway.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Leni Morrison Cummins, Partner, Cozen O’Connor, is interviewed by Habitat Magazine's Carol Ott.

It all starts when sponsors decide how they’re going to allocate expenses between the residential and commercial portions of the building. Real Property Law 339M gives sponsors the ability to allocate expenses based on something other than a percentage of common interest. When a sponsor is looking to market their building, they want to keep the allocation of expenses for the commercial units down. So they’ll keep an eye toward minimizing the common expenses.

Expenses go up over the years, but a board doesn’t typically have the authority to change an allocation of expense methodology without commercial unit-owner consent. And if the commercial unit-owner decides it doesn’t want to pay more, fair or not, it can refuse.

Can a true-up fix things? It depends. A true-up is an accounting of the difference between what a board budgets for the year ahead and the actual expenses at the end of that year. The bylaws will determine whether a board can legally true-up. If they say common expenses are allocated and charged based on actual expenses, it can. But if the bylaws simply discuss creating common charges based on a budget, then a true-up isn’t necessary. In practice, though, many condos true-up even if it’s not contained in the bylaws because their accountants direct them to do so.

Just make sure your managing agent understands the prescribed allocation methodology and how it’s applied. If you do see something completely out of whack, approach the commercial unit-owners and see if they will agree to something more reasonable. If not, you’re stuck with what the bylaws say.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!