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.
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, those fundamental documents include the master deed and bylaws, says attorney J. David Ramsey, a shareholder with the law firm of Becker & Poliakoff in Morristown.
For homeowner’s associations, those documents include a certificate of incorporation and a declaration instead of a master deed. For co-ops, “there is no master deed or declaration,” Ramsey says. “There is a proprietary lease and bylaws. Co-ops own the building and you, as shareholder, buy shares that entitle you to lease a certain apartment in the building. The proprietary lease can be similar in content to the master deed, explaining your share of maintenance fees et cetera.”
And who draws up these documents? “The developer or sponsor for the condominium,” says Ramsey.
“And attorneys like me,” says Wendell Smith, a partner in the real estate department of the law firm of Greenbaum Rowe Smith & Davis LLP in the Woodbridge office. The entities are established as non-profit organization for condominiums and homeowner’s associations, he says. Co-ops might be one or the other—non-profit or for-profit. Smith is a co-author of the law book New Jersey Condominium and Community Association Law.
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. “It can be a competency issue or a typographical problem or people just didn’t coordinate with each other, so what the developer wanted is not accurately reflected,” says Ramsey. For example, the “bylaws and certificate of incorporation may be inconsistent with each other.”
There is, however, a system that can help establish clarity. “There is a hierarchy of documents,” says attorney Robert C. Griffin, a partner with the law firm of Griffin Alexander, P.C. in Randolph. “The master deed takes precedence over the bylaws and they take precedence over the rules and regulations.”
Sometimes, though, knowing which document trumps what is still not enough to answer all the questions. Problems can arise when specifics may be lacking. Sometimes the master deed and bylaws “may not be clear,” says Griffin. “They’re general statements of policies.”
Regulations can be drafted to “further the intentions of the master deed and bylaws.” It is important to keep in mind, though, that “they’re not done to eradicate things you don’t want in there,” he says, but are there rather to help clarify. “Governing documents are required to be read together with an effort to interpret them so they are not contradictory.”
Despite all best efforts, contradictions can still happen, leading to trouble down the road. Griffin cited an instance when the front steps of a community were listed as common elements in one part of the governing documents but later on as the unit owner’s responsibility. “If they’re a common element, then you need a reserve for their eventual repair,” Griffin says. Because of the confusion, no reserve had been established for the future repair of those stoops. So the attorneys and management went to the unit owners and asked how they wanted to proceed. They agreed to making the stoop repairs their ultimate responsibility, avoiding a community-wide assessment and giving the unit owners the freedom to repair the stoops as they saw fit.”
Sometimes issues with these important documents arise because care was not taken with their original drafting. At times, Smith says, they’re simply “copied out of books, and if a person is not knowledgeable, they think it's just a matter of filling in the blanks. There is a difference between high-rises, individual houses and their danger points,” he says. Therefore, that time saving, money-saving idea to simply fill in the blanks can cause significant problems later.
And sometimes the documents simply become outdated. “The laws change and there are things that need to be updated,” says Smith. For example, for years, unit owners could sue their own association for injuries sustained in a common area and insurance premiums skyrocketed. “They were suing themselves, basically,” Smith says. More than a decade ago, a law was enacted that said that HOAs, condos or co-ops are not obligated to pay to unit owners for anything that happens in a common element if the bylaws have been amended to say they are excluded. But they had to have updated those documents to be able to benefit from that regulation, he says.
In addition, Smith continues, Fannie Mae or the Federal Housing Authority (FHA) may come through with new guidelines for mortgages in communities and it could be something like only a certain percentage of units can have renters. So the community would have to amend their governing documents to limit the number of renters.
And often those conflicts or the outdated nature of the documents may come as a major surprise to boards, managers and residents. “No one ever looks at the certificate of incorporation because until you go to take out a loan and the bank asks to see it, no one ever asks to see it,” Ramsey says. It is important to bring the documents into conformity “because you want to avoid issues down the line,” he says.
Other issues Ramsey has seen arise include things as seemingly harmless as not filing the annual report form. If that does not happen for a certain number of years, the entity risks forfeiting its charter. The corporation is gone and you have to start from scratch. “The audit form,” Ramsey says, “goes to whoever the original developer was and the new people will amend it to make themselves the registering agent, but every once in a while, it never gets turned over and you’ll come back with a report that the corporate status has been revoked because the board did not file the form. Always check that it has been switched.”
Incomplete documents can happen when property managers change and all documents may not get transferred, so the new people may not be aware of amendments to bylaws. For example, the new manager may get insurance for the community based on the documents they have, not the revised ones. That can cause significant problems down the line.
“Always do an inventory,” Ramsey says. “Have a checklist to ensure that you have all of the documents. Have the manager coordinate with the attorneys. They can order a copy of all recorded documents. If you get everything of record, then you know you have it all.”
Recording all resolutions is also important. “Some resolutions may get recorded such as any that impose obligations or restrictions for unit owners, such as satellite dish issues,” says Ramsey. “But they may not record administrative changes such as a new investment policy because the buyers may not need knowledge of that information.” To avoid those discrepancies in who knows what and when, “we always recommend having a good book of resolutions, kept in chronological order, so that it can be turned over to a new manager or attorney.”
Should changes be needed or amendments need to the most basic documents, then there is an option—and it involves putting the questions up for vote among residents. That, though, can be a difficult challenge. “It requires a super majority to change,” says Griffin. “That’s a two-thirds majority and it’s very difficult to get that level of agreement. To get two-thirds of your membership to vote is very difficult to achieve.”
Ahead of the Game
By being proactive and double-checking the content, accuracy and actual existence of documents vital to the creation and management of a condo, HOA or co-op, a lot of headaches and heartaches can be avoided down the line. “Every manager should be reviewing them,” Smith says. “They are voluminous documents—50 to 60 pages for the master deed, but they should know their documents and what they say. Managers are good at educating themselves.” He also suggests that boards invest in attorneys who know condos, homeowner’s associations and co-ops inside and out. “Boards should have attorneys who know what they are doing, not someone who knows about auto accidents.”
Accuracy and care are imperative when drawing up the documents that will guide the communities that so many individuals and families call home. More than a simple contract or business arrangement, these documents can have a very personal impact on the everyday lives of dozens, if not hundreds, of people.
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 New Jersey Cooperator.