Buying into a residential community like a co-op, condominium, or HOA can be a bit like selecting the political system you’d like to live under. Governance styles can range from an Athenian democracy where every member of the community is involved in decision making, to downright dictatorship wherein the board does whatever it wants with little or no regard for the community’s wishes. Most often though, the extent of a board’s powers—and their execution thereof—is set by a combination of state statute and regulation and the community’s own governing documents.
“When speaking of co-ops and condos,” explains William McCracken, a partner with New York-based law firm Ganfer Leeds Shore & Zauderer, “while they may look very similar from the outside, there is a basic, fundamental difference between them that’s most evident in the extent of the powers of their boards. A co-op is a corporation, and as such is an independent legal entity with inherently broad powers to act. Basically—to oversimplify just a little bit—a co-op board can do almost anything it wants, unless something in its governing documents says it can’t. A condominium, on the other hand, is an unincorporated association of homeowners; this is also the case in an HOA. The board of a condo is more like the elected representative of a group of independent homeowners, and they can only act to the extent that the unit owners have agreed they can. So basically it’s the flip side of a co-op: a condo board can only do something that the condo’s governing documents say it can.”
Michael C. Kim, of counsel with the Chicago-based law firm Schoenberg Finkel Beederman Bell & Glazer, explains further. “The primary context of the power of the board is determined by its organizational structure. If a condo or co-op has a corporate organization, those statutes will outline what the board is entitled to do. Having said that, these structures still allow for flexibility. There is room to follow a more broad authority—or alternatively, a less broad one—based on membership’s approval.”
Kim notes that there are co-op and condominium properties with no statutory framework at all. “In Illinois, co-ops may have a statutory structure,” he says, “but they don’t have to. If they organize as a trust in Illinois, there’s no regulation requiring that they must operate in a specific way. In these cases, we look at governing documents and general principles of law when determining governing powers.”
Ellen Shapiro, a principal with Allcock Marcus, a law firm based in Braintree, Massachusetts, observes that “In an HOA in Massachusetts, the homeowner owns the home, but in a condo everything outside the unit is known as the common area, [and] is owed jointly with the rest of the condominium community. The board has the responsibility to manage and maintain the common areas. In an HOA, the board does the same, but the common elements are different. There’s no roof repairs, nor painting of exteriors or repairs of exteriors; that’s done by the homeowner. In many HOAs, in addition to owning their home, the homeowner also owns the lot on which it’s built. In many cases like this, the board is not even responsible for lawn maintenance. Even in an HOA, though, the individual owner doesn’t have the ability to impact the architectural integrity of the property. If there’s a common scheme for paint color for instance, you can’t change yours. It must be the same.”
Shapiro adds that generally, the extent of a condominium board’s powers “is to maintain and govern the common areas of the association. If something happens within a unit that impacts common areas, it gets blurry. Say, for instance, that someone’s bathrooms are not well maintained, and this failure to maintain causes leaks which go through to common areas. This problem then falls under the provenance of the board. In cases where two owners cannot resolve a problem caused by one toward the other—mold, for instance—there can be some board involvement because there are common elements in between the two owners’ individual units. It’s easier said than done, though, because again, there are blurred lines.”
The Business Judgment Rule
The legal principle from which board power and governance emanate is known as the business judgment rule (BJR). In its most simple form, the BJR affords board members the right to make decisions on behalf of their community based on sound decision-making and facts, as in any business atmosphere. As long as those decisions are made in good faith, the BJR shields boards from potential liability that may result from them.
McCracken explains: “The Business Judgment Rule is a presumption that courts will defer to good faith business decisions made by boards. Basically, it reassures board members who carry out their fiduciary duties in a serious way that courts will not second-guess their business decisions, even if things turn out badly. There are limits—the BJR won’t protect board members who have conflicts of interest, or don’t do minimum due diligence before acting, or who violate the discrimination laws, or don’t comply with contractual obligations. But, in general, it creates a very high bar of protection for board members acting in the ordinary course.
“As a practical matter,” he continues, “this means that board members who maintain minimal standards of conduct should feel free to exercise their best business judgment without worrying that they’ll face personal liability for poor business decisions.”
Kim concurs. “The business judgment rule is the accepted approach in Illinois for all three forms of ownership: co-ops, condos, and HOAs.” He cites the case of Levandusky vs. 1 Fifth Avenue. Though this case and ruling came down from the court in New York City, it is applied everywhere. The case establishes that a board of a co-op, condominium, or HOA is entitled to business judgment deference, just as any other corporate board would be.
Shapiro points out that in Massachusetts, the precedent comes out of judicial opinion in corporate law. “We have a couple of cases in Massachusetts at lower trial court levels that have adopted this rule, but not yet at appellate level,” she says. “We do include it in our pleadings though. It’s sensible. With the exception of discrimination [claims], a judge doesn’t know what a community wants and needs, so it should be applied.”
Resident Checks Against Board Power
When residents are concerned about board overreach, McCracken says that “first and foremost, they should study their governing documents. If a board is acting out of line, it’s probably because they didn’t comply with the constraints set forth in their bylaws or other documents. Shareholders and unit owners who want to investigate their boards are also helped by the fact that the courts have greatly expanded the right of access to information. It used to be that boards could be very particular about what type of information they had to turn over in response to a resident’s request, but in general it’s much more difficult to justify withholding business records now. If the shareholder or unit owner does uncover proof of wrongdoing, they can always bring a lawsuit—or start an arbitration, depending on the claim and what their governing documents say—on behalf of themselves and/or their neighbors. Short of that, they can call a special meeting or organize around getting a new board elected.”
“Courts generally side with the board,” says Kim. “They give deference to the board if the board followed the business judgment rule. If it’s a policy dispute, that’s different. That’s a political dispute. The residents can replace the board when elections are called. That’s the effective option, but it’s not easy to do. There is also a legal approach to sue the board, but that’s expensive, time consuming, and very rarely effective.”
Shapiro notes with authority that “the most important power is the power of the vote. Vote them out. There are quite often provisions in the documents where owners can call for a special election. They will need a requisite percentage of unit owners to remove and replace the board, but those who put them in office can remove them.” And that’s democracy at work.
A J Sidransky is a staff writer/reporter for CooperatorNews, and a published novelist. He can be reached at email@example.com.