Foundational Documents for Co-ops & Condos The Words That Get it Started

Foundational Documents for Co-ops & Condos

From the Magna Carta to the U.S. Constitution, written documents have helped shape the way people live and interact with one another for centuries. The fundamental documents that establish co-ops and condos have that same importance in building a well-oiled, well-functioning community albeit on a smaller scale, of course. That is why it is so important to ensure that these materials are up-to-date, accurate and fully reflect the co-op, condo and people who live within it.

The Words

Before the first beams are raised or the first unit converted, co-ops and condos need some basic documents drawn up and in place for the community to become a reality. For condominiums, that document is the condominium declaration. “The condominium declaration is the master deed and along with the bylaws, it is recorded in the county in which the condominium property is located,” says Dennis H. Greenstein, a real estate partner at the Manhattan-based law firm of Seyfarth Shaw LLP. In addition, the individual condominium unit owners are given deeds to their units, as well as a percentage of the common elements of the community. These include pools, driveways, lawns and other recreational interests.

“The condominium declaration states the percentage of common interests allocated to each of the units,” Greenstein says.

Attorney Steve Troup, a partner at the law firm of Tarter Krinsky & Drogin LLP in Manhattan, adds that the declaration “must be recorded by the sponsor, and is frequently amended one or more times. The bylaws must be attached as an exhibit to the declaration. In order to amend the by-laws, the revised by-laws must be recorded to be effective. The (declaration), bylaws…and offering plan constitute the governing documents of a condominium.”

For homeowners’ associations, the declaration “is essentially a declaration of easements, covenants, restrictions and conditions and generally covers the common areas and not the house/unit,” says Greenstein.

The HOA is governed as a not-for-profit with a declaration, bylaws, house rules and certificate of incorporation, says attorney Marc Schneider, managing partner of the law firm of Schneider Mitola LLP in Garden City, with offices in New York City.

Co-ops come into existence “by filing a certificate of incorporation with the Secretary of State in Albany,” Greenstein says. “Unlike condominiums where the owner receives a deed to the unit, the owner of the apartment receives a stock certificate evidencing ownership of the shares allocated to the apartment and an appurtenant proprietary lease which is in many ways similar to a rental lease.”

Along those lines, “in a co-op, the board is essentially the landlord,” says Schneider. “The proprietary lease governs who is responsible for repairs—the corporation or the lessee.”

Condos and co-ops, say Troup, are “similar in that the certificate of incorporation, bylaws, proprietary lease and offering plan comprise the governing documents of a co-op.”

And who develops these documents that lay the foundation for the creation of new co-ops and condos? “The sponsor of the offering plan generally creates these documents and most are in the offering plan filed with the New York State Department of Law—the attorney general’s office—in Manhattan.” He adds that there are some very rare circumstances in which an offering plan may not be required but those are few and very far between.

“The offering plan—for a condo or co-op—must be filed with the Attorney General before any units may be offered for sale. Typically, an offering plan is prepared and filed very early on in the development process,”

When it comes to approval from the attorney general’s office, it is important to keep in mind that they are “approving to sell the units, not approving the offering plan,” says Schneider. “They are only accepting the documents for filing. It doesn’t get you out of a claim if there is an issue with the document.”

Accuracy is Everything

As with anything made by human minds and hands, there is the potential for error in these foundational documents. Sometimes these mistakes are literally just typos or transpositions. “In a lot of offering plan documents, there can be a lot of scrivener errors,” says Schneider. For example, in one paragraph it may say that the board will be comprised of three members and in the next paragraph it can say ‘more than three members and less than five.’”

Additionally, says Greenstein, “there are situations where there is a typographical error in the number of shares for a cooperative apartment or in the common interests of a condominium unit. In most instances, they can be corrected without a problem if caught early in the conversion process.”

And sometimes documents just outlive their accuracy. “Offering plans become basically obsolete when the project is sold out,” says Troup. “Although if there is a conflict in the plan and the other governing documents, a court will look at all of them and not just the bylaws or proprietary lease. Many co-ops and condos continue to be governed by the original bylaws and, in the case of a co-op, the proprietary lease.” Sometimes these documents can be more than 30 years old.”

The Who’s, What’s and Wherefores

In addition, it is important for residents and boards to remember by who and for whom these documents were originally drawn up. “Keep in mind that governing documents are prepared by the sponsor and its counsel and protect the sponsor, often more so than the co-op or condo.”

Sometimes obsolescence is caused simply by the passage of time and the resultant changes in laws or even just society. “Changes in laws and case law decision are common and in some instances cause the documents to be outdated,” says Greenstein. “Also, some provisions are not clear and the ambiguities cause disputes which may lead to litigation.”

He adds an example. “The ‘Use’ clause in co-op leases and condominium bylaws sometimes are not clear and may fail for example to define ‘immediate family’ as the permitted occupants.”

Amendments may be required to clarify and update. For example, says Troup, “buildings often amend to clarify repair/maintenance obligations as between the board and unit owners; change procedures on voting for directors/managers and/or the number of directors/managers on the board; broaden board powers on getting rid of objectionable unit owners; adding mediation and/or arbitration clauses; subletting policy; or adding a flip tax.”

Understanding the Consequences

Finding or living with errors in the foundational—and often forgotten—documents can do more than just create inconveniences for residents and shareholders. There can also be financial ramifications. Following through with his earlier example, Greenstein says “if the number of shares or common interests are incorrect, the monthly charges for a co-op apartment or condominium unit, for example, would be incorrect because they are calculated based upon such allocations.”

Problems also may arise between residents and management—and the foundational documents may not be in a good enough condition to settle the question from the beginning. “If a condo unit should have an exclusive right to use a limited common element such as a terrace or roof area but the declaration failed to include it, then the unit owner may have to seek a court determination to declare whether or not the unit has such right if the condominium board refused to recognize such exclusive use,” says Greenstein.

Other issues arise because of conflicts between those initial documents and local and state statutes. Homeowners associations, for example, are governed by not-for-profit corporation law. For example, says Schneider, one common conflict happens in HOAs where a foundational document will say that if a board vacancy occurs, the board can fill that vacancy and that person can remain there until the end of the unexpired seat’s term. “But if you look into not-for-profit law, it says they can hold that seat until the next annual meeting,” says Schneider. “That provision is inconsistent.” The law trumps the HOA document, hence they would have to put that board member’s seat up for election at the annual meeting.

Other potential problems, says Troup, include “long, expensive and time-consuming litigation with unit owners where sticky issues of governing documents interpretation might require a trial.” And that is not to mention the “general unhappiness of unit owners with their boards,” he says.

Staying Out of Trouble

When it comes to important documents like these, it is imperative to seek out professional help and guidance. “It is prudent to have the documents reviewed by the building’s counsel,” says Greenstein. “Many of the boards we represent have created a committee to review them and then discuss with us. We have guided many of the co-op and condo buildings through changes.”

“An experienced co-op/condo lawyer,” says Troup, “is able to provide a detailed analysis of the governing documents and recommend changes. It is crucial, however, that the board effectively communicates its experiences with inadequacies of the documents to counsel so that the revisions may be specifically tailored to each building and the recommended revisions are not just cookie-cutter Band-Aids.”

Before proposing major changes, however, “make sure the amendments are consistent with the law,” says Schneider. “Use counsel when interpreting the documents so that you can be sure that what looks acceptable is actually permissible.”

With the right expert advice and a willingness to review sometimes forgotten documents from time to time, boards and residents can ensure that the words and rules on which their communities are built will stay up-to-date and accurate for generations.     

Elizabeth Lent is a freelance writer and a frequent contributor to The Cooperator.

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