While essential to the successful operation of all cooperatives or condominiums,  governing documents are often only glossed over by otherwise well-intentioned  board members, residents and property managers leading to potential pitfalls.  As a result, it is often suggested by counsel that boards revisit, and in some  cases relearn, the various components of this all-important and varied  documents.  

 The first step is differentiating between cooperatives and condominiums,  explains Attorney Jennifer Alexander, Esq., a partner with the Randolph-based  law firm, Griffin Alexander, P.C. “Co-ops are governed by a proprietary lease, a certificate of incorporation and a  set of bylaws. A condominium is traditionally governed by a master deed and  bylaws. Several condos have also supplemented these documents with a set of  rules and regulations,” she says. Also, when you buy a condominium, you will receive a declaration of  covenants, conditions and restrictions (CC&R’s) along with the bylaws. The declaration will be recorded with the recorder of  deeds in your town and county, while the bylaws, which govern the operation of  the board, will typically stay within the building.  

 “While the documents are slightly different for each, they both accomplish the  same thing, which is setting the framework for how the property is going to be  managed and maintenance responsibility.”  

 While the governing documents are different, there exist overlaps or provisions  common to each, explains Attorney J. David Ramsey with the Morristown-based law  firm, Becker & Poliakoff. “For both types of organizations, the certificate of incorporation is similar.  While this document is usually overlooked because most modern certificates of  incorporation are pro forma, the fact is that some contain important provisions  concerning the powers of the governing board or of the corporation itself. In  the hierarchy of governing documents, the certificate of incorporation sits  above the bylaws and can have provisions that might otherwise be found in the  bylaws if they weren’t in the certificate of incorporation,” he continues. “For instance, recently we had a matter in which the bylaws did not expressly  give the governing board the power to take a loan. But the certificate of  incorporation did, easing the transaction with the lender.”  

 Common Questions Answered

 Often times a well-intentioned board member may hear terms they believe they  fully understand. While this may be true for some, other new board members  often play catch-up making the first weeks and months an educational  experience. For example, a common question is: What’s a proprietary lease, and why is it called that? They may also inquire: Why don’t co-op owners get a deed?  

 “The proprietary lease governs the rights and responsibilities of the tenants of  the co-op. It usually includes sections on subletting, payment of monthly  maintenance fees, use of premises, and general restrictions on activity inside  the property,” says Alexander. “A co-op owner does not get a deed because he or she does not own the unit but  rather shares in the building. The proprietary lease is different from a  traditional landlord/tenant lease in that it entitles the lessee to the  exclusive use of the specifically-identified unit in the building.”  

 Christopher Florio, an attorney shareholder with the Lawrenceville-based law  firm Stark & Stark, says it’s important to underscore the difference between the two entities when  considering the question of deeds. “While individuals own the units within a condominium via a deed, shareholders in  a cooperative purchase shares in the cooperative and by virtue of a proprietary  lease have the right to live within the cooperative,” he says. “Members/shareholders in both forms of ownership must pay maintenance fees or  face repercussions, and it is generally easier and quicker to revoke shares in  a cooperative versus foreclosing a lien in a condominium.”  

 Another common question is with regard to an offering plan. Specifically, do  cooperatives have offering plans or just condominiums? A general rule of thumb  to keep in mind is that sales of co-ops and condominium units are made pursuant  to an offering plan, which must be approved by the appropriate state agency to  ensure compliance with all applicable state regulations.  

 “The offering plan includes information related to the physical aspects of the  building, including property surveys, landscaping details, recreation  facilities, appliances and amenities within units, façade, frames and common areas of the property. It’s still very important for prospective purchasers of a co-op unit to read the  offering plan in its entirety to make sure they understand what it is they are  purchasing,” says Alexander. “All too often, first time co-op buyers rely on the information passed on to them  by their real estate agent or the seller of the unit only to be surprised after  they move in that details of their ownership are vastly different than has been  represented.”  

 Often board members and residents are curious if offering plans have a bearing  on a buyer once the first generation of residents has moved into a  newly-constructed building. In New Jersey it’s important to note that offering plans are referred to as a Public Offering  Statement (POS). Regardless if it is a conversion or a condominium, the sponsor  must produce a POS to first-time buyers. “It is a disclosure document telling the buyer what they are buying and  disclosing relevant facts about the type of ownership, the property and the  surrounding community,” says Ramsey. “If there are any particular negative conditions associated with the property  such as environmental concerns or being next to a noisy environment that must  also be disclosed. The POS also sets forth the initial budget and tells the  buyer what his or her responsibility will be to pay the expenses of the condo  association or cooperative corporation.”  

 The document becomes irrelevant after the first buyers have made the purchase.  As such. Ramsey says some first-time buyers pass the document on to the second  generation of buyers because the information may remain of interest. “Statements by the sponsor in the POS are not binding on the association or co-op  corporation,” he says. “But there is existing New Jersey case law that states that a POS is not a  governing document.”  

 For many prospective buyers, a question will come up as to when they will  receive copies of the document. If a prior resident doesn’t furnish the document, boards should be equipped with the answers. “The buyer should contact the property manager or association of the building and  they should be able to provide the documents to the buyer for a nominal copy  fee,” says Alexander. “The prospective buyer should also ask for them during the attorney review  process prior to finalizing the purchase contract so that the buyer fully  understands what he/she is purchasing.”  

 Purchases and Disclosures

 A gray area exists for buyers in the process of purchasing as to when they  receive or read the existing governing documents, explains Ramsey. “They should be received as soon as they go into contract. For initial buyers  this is dictated by law.” According to New Jersey state law, a buyer from the sponsor has seven days to  review the documents after signing the contract and may cancel without penalty  any time within that seven day period.  

 “In re-sales, there is no statutory obligation to provide the governing documents  to buyers. The prudent buyer or the buyer’s attorney will request them and seek to have a review period. But if that isn’t requested, there is no legal requirement to provide them. In a condo, the  governing documents are recorded, so the buyer would receive them as part of  the title search that is typically ordered,” says Ramsey. “In new co-ops, there is also a recording requirement, but that doesn’t include a requirement that the proprietary lease or bylaws be recorded, so the  co-op buyer really has to ask for them before signing the contract.”  

 From a buyer’s perspective, they should have an attorney that is well-versed in vetting  otherwise cumbersome governing documents. Oftentimes, there are red flags that  can be overlooked by an untrained eye. “For attorneys who represent clients in each form of purchase, it is important,  and frankly, incumbent upon the attorney, to adequately explain to the client  the forms of each association, and the consequences of living in each,” says Florio. “For example, because a cooperative generally pays for all water, electric and  heat, the fees are higher than that in a condominium. The attorney should also  try and get a handle on the financial condition of the condominium or  cooperative so the buyer is buying with eyes wide open, but this may not always  be available based on the association’s policy.”  

 In some cases longstanding owners may have initially reviewed the governing  documents but might not have a copy or know where to obtain the latest, updated  file. They are not without options, including submitting a Freedom of  Information Law (FOIL) request to the Attorney General’s office. “The owner should contact the property manager or association of the building and  they should be able to provide the documents to them for a nominal copy fee,” says Alexander. “The documents are also public record and can be requested and copied at your  county clerk’s office for a nominal fee.”  

 Whether it is deemed that a governing document was poorly drafted or somehow  incomplete, there are requirements for changing the document, explains Ramsey. “In a condominium, except in unusual circumstances, any changes to the master  deed or bylaws must be approved by a certain percentage of the owners, in a  condo, or shareholders in a cooperative. In some situations the board may have  the ability to amend the bylaws to make them consistent with new statutory law.” In some cases, some board may propose changes to the bylaws and if a small  minority (10 percent or less) do not vote to reject the change within a set  period of time (usually about 30 days), the amendment passes.  

 While it is more difficult to make changes to the propriety lease is  cooperatives than amending governing documents in condominiums, any changes  that occur should be explained and properly communicated. “In either form of ownership, if an amendment to the documents is passed, the  association should advise the members/shareholders through the same means of  communicating typically done in the association, or if no general mode of  communication, a mailing sent to each to advise of the change,” says Florio. “The amendment process is relevant in both forms of ownership to address old or  outdated provisions within each set of bylaws.”    

 W.B. King is a freelance writer and a frequent contributor to The New Jersey  Cooperator.