When living in a cooperative or condominium, residents inevitably face special assessments. The boards levy these special fees on shareholders or unit owners to cover unexpected expenses or significant repairs. It’s common for owners to react with frustration to these charges, particularly if they seem sudden or unjustifiably pricey. At times, the discontent escalates to the point where owners legally contest the charges.
Successful assessments must follow bylaws
Whether an owner’s legal challenge to an assessment succeeds largely hinges on the board’s ability to justify the assessment within the framework of the co-op’s or condo’s foundational documents. If the rules, such as those outlined in a condo’s declaration and bylaws, sanction the board’s action for a specific purpose and the assessment adheres to these protocols, courts are inclined to side with the board under the business judgment rule.
Business judgment rule offers exceptions
While the business judgment rule protects co-op, condo, and HOA boards from being second-guessed by the courts, it’s not an absolute defense. This principle typically prevents courts from overturning a board’s decision, even if the judge personally disagrees with the board’s action. However, there are four legal exceptions that boards must keep in mind:
- Any rule or policy set by the board must align with the governing documents of the building. A rule that contradicts these documents could be challenged legally and potentially nullified.
- The rule must not violate any laws or contradict established case law. A court will not uphold an illegal policy.
- The rule must not breach the fiduciary duty the board owes to its shareholders or unit owners, which means acting in the best interest of the community.
- There must be a legitimate corporate purpose behind the board’s regulation; typically, this is a low hurdle to clear, as most board decisions that aim to benefit the corporation in some way will meet this criterion.
Don’t overlook the political fallout
In addition to the four legal stipulations, boards must consider the political ramifications of their policies. Even if a policy meets the legal criteria of the business judgment rule, it could still face strong resistance from the community. An unpopular rule may incite community backlash, potentially leading to the board being challenged and replaced at the next election. In addition, a shareholder or unit owner who is having a hard time paying the base maintenance/common charge may find it impossible to pay extra monies so immediate collectability comes in to question (especially where the assessment is to pay for a repair that is needed immediately). So, while navigating the legal landscape is crucial, boards must also be attentive to the sentiments and needs of the residents they serve.
While boards can get help evaluating their bylaws and the implications of the business judgment rule, they will likely need to also draw upon their diplomatic skills to manage a special assessment, especially large or unpopular ones.