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18 Dec 2014
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CONDO AND COOP RULES OF THUMB: COMMERCIAL UNIT DISPUTES

As a unit owner in a condominium or shareholder in a cooperative building, your focus is usually not on the commercial space on the ground floor.  You might not typically think of the commercial space as a part of your building, but no matter how you view it, the commercial owner can cause quite a bit of grief for residential owners in the same building.  Below, we discuss common issues that result in disputes between residential owners and the commercial owner.

It bears emphasizing that the building sponsor, who typically drafts the offering plan, is the initial owner of all of the units or shares in the building, which includes the commercial space.   Many building sponsors retain ownership of the commercial space, intending to lease it out themselves, and may draft the offering plan to include some beneficial terms for the commercial space.  The sponsor may give, to itself or an affiliate, a sweetheart lease for the commercial space, for a long term at below market rent.

Additionally, the sponsor may write into the offering plan that the commercial space can be used for “any lawful purpose.”  At first glance, this may not seem like a problem, until you stop to consider that “any lawful purpose” may include adult entertainment or a nightclub that unit owners may find distasteful, or a food service establishment that could attract unwanted pests and smells.  An establishment with an otherwise “lawful purpose” may also result in noise and vibration complaints against the commercial owner.  Regardless of whether the noise level is normal for a particular category of business, if the residential owners are exposed to it constantly, they will deem it unacceptable.

Another frequent point of dispute relates to unclear language in governing documents on whether certain parts of buildings are intended for commercial or residential use, like the basement or garage space.  Relatedly, a sponsor that tries, belatedly, to incorporate part of the building’s common space into the commercial space will likely face backlash.

In the face of all of this, a building’s board that is newly-controlled by the owners or shareholders may try to take steps to eradicate what may be perceived as unfair bias toward the commercial owner in the governing documents.  Such action is almost always a case of board beware:  the board still owes a fiduciary duty to the commercial owner, and always acting against the commercial owner may cause the commercial owner to initiate litigation against the board for breach of that duty.

While conflict between residential and commercial owners in a building is inescapable, litigation always gets expensive.  Therefore, open lines of communication and compromise should always be the first response with litigation as an option of last resort.

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