Creating Beneficial and Legal Community Rules Staying Within the Law

Creating Beneficial and Legal Community Rules

Every co-op or condo has rules and regulations that have been put in place to define the board’s authority and limitations of power, as well as outline the rules for the community, residents or shareholders. And although the governing documents are intended to work in the best interest of everyone in the building, they sometimes pose problems. Especially, when rules are amended or created and they conflict with each other, create problems for residents, or are against the law.

Where Rules Come From

Before a community has a set of rules in place, they’ve likely evolved over time. Many rules are somewhat standard, but some are created in a response to the unique needs of the building or HOA. In drafting a co-op or condo’s original rules and regulations, most developers and sponsors rely on their attorneys.

“Attorneys who regularly do this work start with standard rules that they are comfortable with, send them to the sponsor and ask the sponsor to review and comment. Some sponsors are very hands-on and will be very involved in that process, while others will simply follow their attorney’s lead,” says J. David Ramsey, a partner at Greenbaum, Rowe, Smith & Davis, LLP, in Woodbridge.

Attorneys will often start with a set of rules they’ve used before and then revise as appropriate for the project. Rules and regulations are rarely drafted from scratch. According to Stephen M. Lasser, an attorney in the New York office of the Lawrenceville, New Jersey-based firm of Stark & Stark, “even though a specific format is not required, the rules and regulations contained in most offering plans are very similar. This is because many lawyers have an ‘if it ain’t broke, don’t fix it’ attitude. In other words, many lawyers copy the rules and regulations from prior offering plans rather than starting from scratch. This works out well most of the time, but can be problematic if the form they copy is not updated to address issues that are unique to a particular association or changes in laws and technology that may affect an association,” says Lasser.

For example, the rules and regulations might have been drafted prior to cell phones, and therefore fail to address an issue which might affect a particular building, such as talking loudly on a cell phone in the lobby. Rules and regulations set forth years ago can be especially problematic for residents, associations and boards in older cooperatives and condominiums.

“Many developers [and their attorneys] use boilerplate and canned documents,” says Stuart J. Lieberman of Lieberman & Blecher PC in Princeton, and that often puts the association at a disadvantage. “What happens is… the developers’ lawyers put together [documents] that are very often inadequate. And yet, they’re very often hard to change, because some of the organic documents that these associations have a required 75 percent vote to change them. So, the developers often do a disservice to the people that ultimately live in these places, by putting into place documents that very often have material problems with them and will be rather costly to change. A lot of these documents are really not written as well as they should be and they’re not customized the way they should be.”

Co-ops, Condos, HOAs

Despite their differences, co-ops and condos do have some similarities when it comes to rules and regulations. Generally speaking, though, “the co-op has more control because the entire building, including the apartments, is owned by the co-op corporation,” says Ramsey. “But that’s just a starting point. Much depends on the governing documents. There are condominium master deeds that provide the board with extremely broad rule-making authority and others that are more limited. Typically, though, in a cooperative the board is granted very broad rule-making authority, broader than what we would typically see in a condominium.”

“The rules and regulations for cooperatives and condominiums are usually very similar and typically can be amended by a majority vote of the board,” adds Lasser. “One major difference is that cooperative rules and regulations often include a detailed purchase application and qualification process for prospective purchasers while traditionally condominium rules and regulations do not.”

As condos continue to grow in popularity, a number of condo boards have adopted regulations that require purchase applicants to submit detailed information, much like co-op board requirements. “This has been done in order to give condominium boards more control over who purchases in their buildings and to gain more information about purchasers in the event they default in their common charge payments,” says Lasser.

In general, co-op rules are generally easier to enforce than condo rules because of the greater influence co-op boards exert over their buildings and shareholders.

“Most co-op proprietary leases provide that if an owner violates a rule, he or she is in default under his or her lease,” says Lasser. “Therefore, a co-op can start a proceeding in housing court to evict a shareholder who violates a rule. The threat of eviction is a powerful incentive for co-op shareholders to comply with rules.”

By contrast, Lasser continues, the relationship between condo associations and condo unit owners is more custodial. Condo boards cannot opt for an eviction proceeding in housing court, and most often are limited to just fining owners who violate the rules. If a steep fine isn’t enough to correct the behavior, Lasser says a condo board can seek injunctive relief in court—though he warns that “Starting a lawsuit is much more expensive, and may not be a cost effective way to curtail less serious rule violations.”

In New Jersey, Lieberman points out, “there are homeowner’s associations… there are condo associations, and there’s other kinds of hybrids.” The difference, he says, is that condo associations are governed by the Condominium Act, where as homeowner’s associations are “generally governed by some state laws that apply to multiple dwelling units and also corporate law, but not the Condominium Act.

“However, there’s a law that’s presently pending before the legislature that will make everybody bound [by the same laws],” he says.

When Rules and Regs Backfire

Even the most well intended rules can land a board in hot water. Particularly troublesome are rules that might come across as discriminatory in any way.

“What we as attorneys worry about are those scenarios where a ‘protected class’ under federal or state law (including race, sex, national origin, religions, sexual preference, handicapped, etc.) is disproportionately impacted by a rule— even if the purpose of the rule was not to create a discriminatory impact,” says Ramsey.

He notes that swimming pool rules dealing with children must be drafted extremely carefully to avoid claims of “familial discrimination” or discrimination against families with minor children.

“Other rules—while not unlawful per se—might be considered improper if they alter the intent of a restriction in the master deed or a term of the proprietary lease,” says Ramsey. “So for instance, let’s say an HOA’s documents state that each shareholder or owner may maintain one pet in his or her apartment or unit, and those documents do not give the board authority to further limit that by rule. But say the board decides that pit bulls are too aggressive to be allowed in the association. The board would be treading on thin ice to adopt a ‘no pit bulls’ rule, because the governing documents don’t grant the board the authority to further define a household pet.”

Boards should make sure they are not exceeding the authority given to them under other governing corporate documents. As in the aforementioned pet situation, a breach of authority might occur when a board creates a new fine, penalty or late fee that is not authorized under the governing documents.

“Courts have held that monetary obligations—which are only authorized by a board enacted rule—are not enforceable. If an improperly enacted rule imposing a monetary obligation is challenged and overturned by a court, the association may be responsible for reimbursing the aggrieved shareholder or unit owner. This can potentially be a very expensive mistake,” says Lasser.

Rental tenants and subtenants have also become a very prevalent topic of board concern. As Ramsey notes, in many communities, tenants or subtenants are seen as having a negative impact on the community, particularly when a large percentage of the people living in the association are renting. In the current economy, this is especially relevant, as a growing number of owners and shareholders are choosing to rent out their units as a source of income.

“Boards are considering all types of rules to deal with these issues,” says Ramsey. Some may be acceptable, but when rules start to tread on an owner’s right to rent his unit, or new rules add prohibitions and limitations that are not found in the master deed or proprietary lease, the board may be taking away a right that they are not authorized to take.”

Avoiding Conflict

So with so many nuances and periodic changes in the law, what’s a conscientious, well-meaning association board to do? There are many resources and professional associations available, but when in doubt, it’s usually best to consult your attorney.

Association law has many intricacies and subtleties, and it is essential that every board have competent, reliable legal counsel who can help them navigate their way through them all. Ramsey notes that time spent with your association’s attorney now—or whenever there’s a legal decision to be made—can save enormous amounts of time and money later. “A quick e-mail or phone call to the co-op’s or condo’s attorney can save much time and maybe help show how a particular goal can be achieved in a different and lawful manner,” he says.

Sometimes, an action might not be illegal, but that doesn’t mean it’s a good idea to act in certain ways. It might be legal, but it might not be prudent. Shareholders or residents might choose to challenge such decisions, and the board could end up in court.

In addition to your attorney and managing agent, professional organizations can provide guidance and help boards stay up to speed on pertinent legal issues. The Department of Community Affairs in New Jersey is a very good resource. “The Community Associations Institute (CAI) and the National Association of Housing Cooperatives (NAHC) can provide some guidance, particularly on issues where federal law requires a particular set of rules or guidelines,” says Ramsey. Examples might include rules regarding the flying of the American flag, or installing satellite dishes.

“It is helpful to read trade publications to keep up to date with trends and legal decisions affecting the industry,” says Lasser. Rules and regulations are set forth for the benefit of everyone in the community. As such, it behooves the board to have a clear understanding of and stay within the law when amending, enforcing or creating rules and regulations. Consulting with the association’s attorney, other professionals and staying current with professional organizations and trade publications are a board’s best defense against potential lawsuits, which no co-op or condo wants–or needs–to endure.

Lieberman adds that “a lot of times, board members—who are volunteers—don’t understand their legal obligations and the type of fiduciary responsibility that they have, and what they need to do to legally fulfill that responsibility. Often boards will do things in good faith that aren’t necessarily consistent with the bylaws or organic documents of the association or state law—especially when lawyers are not at their meetings.”

As a result, it’s very important that associations understand that what they do has to be legal, and that there’s almost always a law or a rule or a statute that governs them. Not paying attention to legal matters could result in some very serious consequences, including fines, lawsuits, and expensive judgments against the association. Often, a board’s only defense is to get more educated—and with a good attorney, a conscientious approach to governing the association, and a commitment to upholding the law, that’s possible.

Stephanie Mannino is a freelance writer and author living in Erie, Pennsylvania.

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