The article highlights Avoiding Lawsuits Related to Alteration Requests.
Avoiding Lawsuits Related to Alteration Requests
By Barry Margolis, Partner, Abrams Garfinkel Margolis Bergson
Extensive apartment alterations often involve complex structural issues such as removing walls or converting pre-war spaces into modern, loft-like units. Boards may be reluctant to approve these changes either to avoid major changes to plumbing lines or in a desire to maintain the building’s original character. However, this can lead to litigation, with rejected applicants challenging a board’s decisions and claiming a breach of fiduciary duty.
Wet-over-dry rules. Many co-op and condo boards have rules relating to what is known as wet over dry — the concept that you cannot install a room with plumbing over a room without plumbing, such as moving a bathroom or extending a kitchen so it sits over a downstairs neighbor’s living room. Concern for leaks or water infiltration means plumbing installations must be in line with the plumbing that exists above and below that particular apartment. However, wet-over-dry concepts are not necessarily memorialized in any type of co-op or condo written rules, so there’s no expectation on the part of the applicant that there will be a prohibition. If a board rejects an alteration request on this basis, conflict can arise and inconsistencies in how boards apply their rules can lead to breach of fiduciary duty claims.
Shifting policies. Boards often change from year to year, with some boards being more liberal or stringent about allowing wet-over-dry alterations. This can generate inconsistent outcomes within the building and oftentimes the breach of fiduciary duty claim arises from a party arguing that others have made similar alterations, so there should be no reason for their application to be rejected. Disputes over inconsistencies might be seen elsewhere — for example, whether a board is unreasonably withholding consent to a sale of an apartment. Any time a shareholder is unhappy with an outcome within a co-op or condo and they’re choosing to pursue litigation, that litigation typically will include a breach of fiduciary duty claim.
Transparency. Boards typically want alterations to be consistent with the building’s operations, ensuring they don’t put the building in any type of jeopardy. Creating a good written record around the alteration request is the best way for boards to adequately protect themselves against breach of fiduciary duty lawsuits. Board members need to explain their rationale for declining an application, making sure that they’re very timely in their communications. It’s also important to clearly explain the board’s concerns so the applicant can adjust their alteration design. The clearer the communication, the more likely you’ll be protected under the business judgment rule, which protects board members as long as they act within their authority, in good faith, and follow proper procedures. Amending the governing documents, such as the house rules or bylaws, to clarify alteration policies can also be helpful. If policies are expressly set forth within a corporate governance document, that goes a long way to protecting the board when it makes a decision based on one of those rules.