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Condo-Co-op Helpline: Cooperative and Condominium Boards and the Business Judgment Rule: Time for a Change?

There is a quiet, but real crisis developing in New York City among cooperative and condominium apartment buildings: aging buildings requiring costly capital maintenance. Aging buildings, façade safety programs, unreasonably and unfairly high property taxes on co-operative and condominium unit owners compared with single-family homes, increasing demands for costly improvements to mechanical systems to deal with climate change, poor planning, managing agents fearful of presenting “bad” news and an overall lack of professionalism on these boards are catching up with unit owners in a financially painful way. The question now is how to motivate both boards and managing agents to plan more effectively and be more transparent.

At present, cooperative and condominium boards can shield themselves from liability based on the “business judgment rule.” This rule holds that, as long as the board is acting: 1) within the scope of the authority granted by the governing documents, 2) in good faith and 3) in the “best interests” of the building, a court will not make any determination with regard to the decisions made by the board. The rule will not shield a board that is operating outside the specific parameters of the governing documents, nor will it shield unlawful acts.

However, the “business judgment rule” may be too broadly applied to boards whose members are not real estate professionals, are not familiar with the building codes and/or do not investigate conditions, but rather rubber-stamp recommendations from managing agents.

It is not at all clear that cooperative and condominium boards, however well-meaning and well-intentioned, have the required skills and knowledge to have a shield on their decision making. For example, the board at Surfside’s Champlain Towers South might well have saved the lives of 98 individuals if they had closed and drained the pool and installed sup- porting timber in the garage and/or accelerated the repair program.

Lack of transparency is part of the issue. Co- operative and condominium boards should be required to disclose material property conditions to unit owners annually. These disclo- sures should include the estimated remaining life cycle for all roofs, facades, windows and major mechanical systems like hot water heaters, boilers and boilers. Capital budgets for ma- jor maintenance items should be part of the mandatory annual disclosures to unit owners.

Additionally, board members should be made liable for attorney fees in lawsuits from unit owners when board members have failed to be transparent, breached their fiduciary duty or otherwise acted beyond the scope of their authority. In no event should the rue be available for defense of boards or board members who do not fully, fairly and in a timely manner advise unit owners of the financial consequences of omitting to perform critical maintenance.

Similarly, property managers and managing agents should be held to account for lack of transparency. Managing agents should be obligated to timely and accurately report to all unit owners any significant information on building systems, including: roofs, facades, windows and major mechanical systems like hot water heaters, boilers and boilers. That in- cludes requiring every managing agent to pro- vide every unit owner with a copy of all FISP (Façade Inspection Safety Program) reports.

Maintenance should be managed and planned. In part, maintenance that is deferred is much more expensive than doing routine maintenance along the way, usually because deferred maintenance is accompanied by damage to a building. Some major projects may be broken into small parts and performed periodically to better manage costs.

Unit owners cannot make intelligent decisions about building issues without access to full and accurate information. The “business judgment rule” is not promoting the necessary transparency. It may have to be modified to require mandatory disclosures, backed up by the risk that the board members and managing agents will be not have the “business judgment rule” to shield them from liability for poor process.

This column presents a general discussion. This column does not provide legal advice. Please consult your attorney for legal advice.

Carol A. Sigmond
Greenspoon Marder LLP
590 Madison Ave., Suite 1800
New York, NY 10022
( 212 )524-5074