What steps should shareholders and owners take when members of their co-op or condo board are mismanaging the property? Purchasing an apartment is an investment and board members need to ensure they uphold their fiduciary duties and protect the interests of the building. Board members are elected to make and implement day-to-day decisions for the building, so how can shareholders and owners effectively respond to issues of mismanagement?

Co-ops tend to have stricter rules in their governing documents that either prohibit or limit shareholders from subletting their units. If the proprietary lease does not permit subletting a unit, or requires board approval, shareholders who breach this provision may have their lease terminated. However, what happens when the board members fail to act? Neighboring shareholders may become frustrated with the board’s failure to enforce provisions of the lease, especially when there are financial consequences. Co-ops typically require at least fifty percent of the residents to be shareholders for a mortgage. If the percentage falls below the required amount, the board may have to “refinance its underlying mortgage or to secure one to do capital improvements.”[1] This can lead to complications for shareholders who want to either sell or refinance their shares. Concerned shareholders should hold a meeting to discuss what steps they can take to ensure the board is looking after the building’s best interest. This could involve writing a letter to the board to raise attention to the matter or holding an election to replace certain board members who do not comply with their duties.

If a co-op or condo board member is committing fraud and mismanaging funds, shareholders, owners, other board members, and/or managing agents should contact the building’s counsel and notify the appropriate authority. The person who discovers the wrongdoing should not try to resolve the issue with the wrongdoer alone. This can lead to an array of ethical and legal issues. If a board member is using common funds for their own personal use, this must be reported to local authorities in an effort to criminally prosecute the individual. “Notice of wrongdoing by a single dissenting director to the association’s counsel will trigger ethical and fiduciary considerations for the association’s counsel that will require them to carefully consider how to best represent the association’s interests”.[2]

Mismanagement is a serious issue for shareholders and owners alike. However, shareholders and owners create a system of checks and balances on the board’s power and authority. Voicing concerns to ensure there is no board mismanagement is essential to protecting the interests of the building and your investment.

[1] Livingston, Peter I. (January 2018) “Q&A: Our Co-op is Being Improperly Run.” The Cooperator. Available at: https://cooperator.com/article/qa-our-co-op-is-being-improperly-run.  Accessed on March 22, 2018.

[2] King, W.B. (June 2015) “Why Do You Call?” The Cooperator. Available at: https://flcooperator.com/article/who-do-you-call/full. Accessed on March 22, 2018.