Courting Disaster

 

Say Goodbye to Resales

Boards that don’t keep minutes are playing a dangerous game with their building value.

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How would you like to make sales dry up in your building?

 

Or guarantee you’ll lose every challenge to your authority as a board? What if you couldn’t charge assessments, collect flip taxes, or go after people who were in arrears?

 

Nutty, right?

 

Well, not so nutty if you’re one of the boards that don’t keep minutes.

 

If you think there ain't no such animal, talk to John D. Wolff, president of Alexander Wolff & Co. He remembers taking over the management of a cooperative apartment building and being startled to find that the board didn’t take minutes of its meetings. “They just never saw the need for it,” he explains. “They just never took them.” (He soon changed that.)

 

Or listen to another manager, in Yonkers, who reports that he sometimes has trouble with boards that don’t want to take minutes. “I’m no secretary,” one board member after another would tell him. “They don’t want to do it,” he complains.

 

And it’s not just small buildings that are lax in their record-keeping. “We’re talking 100-unit buildings, 70-unit buildings, 50-unit buildings,” says Theresa Racht, a partner in the law firm of Racht & Taffae. “These are not just the 10-unit buildings where everything is much more casual. These are big buildings managed by respectable firms.”

 

The scenario in such situations couldn’t be simpler: a potential buyer sends his attorney around for due diligence. “You get the minute book and find there are zero minutes. It’s as if the boards never met,” says Racht, who adds that some buildings only have two or three months of minutes for the whole year – not because they didn’t meet but because they “meet by conference call, and nobody’s taking minutes. In the last year, I’ve handled a good number of condo purchases, and have run into a lot of these cases.”

 

As an example, she points to one property, 66 Leonard Street, where she reviewed the documents for a prospective buyer. Although there were apparently meetings held year-round, there were no minutes from August 2010 through October 2012, when Racht inspected the minutes book at the 43-unit condominium. There were minutes from July 2010, October 2009, November 2008, October of 2008, and October 2007, but from no other months. When Racht discussed the situation with the manager, Donna Auletta of Douglas Elliman, she found there were no minutes taken for those months. “The agent said she had notes of the meetings, and she went through them, but I had to spend an hour on the phone talking with her to get the information.” (Auletta denies that there were missing minutes, saying that “perhaps they were in another file. We believe that minutes are important.”)

 

Minutes? Who Needs Them?

Why on earth would anyone neglect to take minutes? “It’s a silly situation and question,” says attorney Richard Siegler, a partner in Stroock & Stroock & Lavan. “Even if you’re not required to take minutes, why would you not?”

 

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hy indeed? Abbey F. Goldstein, a partner in Goldstein & Greenlaw and the attorney for a 290-unit cooperative in Elmhurst, Queens, that hasn’t taken minutes in years, says there are a number of reasons. “There are pockets in Queens and Brooklyn where English is a second language [for the board and the building] and it becomes very difficult for them to write in English, let alone keep minutes,” he notes, adding: “Some of them don’t even know they’re required to keep minutes. I haven’t done a statistical analysis of this, but I would guess it’s a greater problem in Elmhurst, Queens, than it is in Park Avenue in Manhattan.”

 

What about when potential buyers request them? “That sometimes wakes up the board into thinking, ‘Hey, we need to do this or we could lose a sale,’” Goldstein says. “But a lot of times, buyers don’t ask for them because they don’t know to ask for them.” And their lawyers? “The buyers don’t want them to [review the minutes] because it costs too much, or else the lawyers don’t offer to do it because they’re not paid enough. It’s not worth it to them to go the extra distance. These are not the kind of high-priced deals you get in Manhattan.”

 

That can mean lost sales. “As an attorney, you look at the lack of minutes, and you wonder how the place is being run,” observes Racht. “If a buyer’s attorney can’t find out anything about the building, they’re going to tell their client to walk away.”

 

And if you lose sales because you have no minutes, the shareholders might turn ugly. “If they feel that the absence of minutes is affecting sales, they get concerned, and they can ask, ‘What kind of ship are we running?’ If the items needed to do due diligence are unavailable, that speaks volumes about the building,” says attorney Ira F. Nesenoff, managing partner of Nesenoff & Miltenberg. “Are people not taking their roles seriously enough?”

 

You Need Them

So you need them to make sales. But you also need them to operate the building. Although the Condominium Act requires a secretary to keep a “record” of  the actions of the board, and the Business Corporation Law (BCL) requires that “minutes” be kept. Most attorneys say there’s not a dime’s worth of difference between the two requirements. Although the BCL technically doesn’t apply to condos, case law over the years has, practically speaking, placed condominiums under the BCL umbrella. “The court went out of its way to say in its ruling in Levandusky” – a seminal case that says co-ops are governed by the BCL – “that the ruling also applies to condominiums,” says attorney Stuart Saft, a partner at Holland & Knight.

 

And, anyway, even if the BCL didn’t apply, notes attorney Geoffrey Mazel, a partner at Hankin & Mazel, “who in their right mind would advise a board not to keep minutes?”

 

In short, it’s your fiduciary duty. If you don’t have a record of your meetings, says Goldstein, “the technical term for that is that you’re fucked.”

 

The failure to have minutes can hurt in litigation. Explains Goldstein: “Every court is going to require minutes, so their absence reflects negatively on the board.”

 

“It may be hard to collect on arrears [or flip taxes],” adds Steve Wagner, a partner at Porzio, Bromberg & Newman. “A smart attorney can challenge the board and say, ‘Where was it decided? Show me where it was established in the minutes.’ If someone’s breaking a rule, how do you show there is a rule? If it ain’t in the minutes, it didn’t happen.”

 

“If the board ever got sued about a decision it made,” agrees Racht, “and needed to produce minutes to show how the decision was arrived at, they wouldn’t be able to prove it.”

 

Wagner points to the notorious case of a co-op that was caught with its minutes down: 425 East 50th Street, a seven-unit self-managed building that apparently had no minutes and, consequently, lost a dispute over the imposition of a flip tax.

 

Then there was a large outer-borough co-op represented by Goldstein that passed a resolution forbidding washing machines in apartments. One shareholder refused to remove the machine and challenged the board in court, saying the rule was never properly adopted. Although the directors testified that they had adopted the resolution, they couldn’t produce minutes to back up their claims. They lost.

 

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Memory Motel

Minutes are also the institutional memory that allows you to govern. New boards should be able to piece together what happened in the past from the minutes. Minutes are the official record of what took place at every board meeting. They show that decisions were made by a majority in a businesslike fashion.

 

Minutes should be brief but still record all the key facts. “I like to say, ‘Less is more,’” advises Wagner. “Minutes should not include too much detail, but they should also be specific enough so you that know what’s going on. They should tell you what actions were taken at the meeting.” In short, you want to cut out irrelevant embellishments, like the set of minutes that was so detailed that it reported: “The board adjourned for 15 minutes to go out and admire the sunset.”

 

The board can also evaluate the progress of projects by tracking them in the minutes. “How long have they been debating something?” asks Racht. “You go back and review two or three years, you can count on one hand the issues that are discussed at these meetings. First, there’s the meeting to get the Local Law 11 evaluation done. The next meeting is who we are hiring to do it. 

 

Then there’s the report of who was hired, and so forth. Decisions get made slowly, over time.”

 

 

Although there is no legal requirement to share the minutes with the shareholders or potential buyers, most attorneys argue that you should show them because, otherwise, it looks like you’re hiding something. The minutes can be reviewed by owners (as well as potential buyers) to evaluate the competency of the board, the state of the building’s finances, litigation, and other matters.

 

In fact, minutes are an important way to promote the value in your property. “You may desire to get information out that you want to be sure buyers see,” says Racht. If, for instance, you want to advertise that there are fewer dogs, you can report in the minutes that a committee has been appointed to look into limiting dogs. “By putting that in the minutes, you’re going to be sure that most potential buyers hear about it. A lot of boards come to me and say, ‘We want to be sure the buyers are told ‘X’ – that we’re rewriting the house rules or we’re rewriting the pet policy. We don’t trust the brokers or sellers to tell them.’ I say, ‘Put it in the minutes.’”

 

So, in the end, if you want to be judged well –  and understood – by future boards and would-be buyers, be careful about what you write. But also be sure to write. For, if you don’t, says Nesenoff, “it’s like walking into a dark closet with a hood over your head. You don’t know what’s going to happen.”