Share Certificates and Estate Planning, Monthly Fees and Carrying Charges, and Occupancy Agreements
Share Certificates and Estate Planning
Q: Most cooperative bylaws prohibit anyone who is not a member from serving on the board of directors. But a growing number of cooperative members are altering the ownership of their share certificates as part of their estate planning process. They are placing title to the share in a trust and deeding the share to their heirs, but reserving a life estate for themselves. Or they are titling the share in the name of only one spouse. Do you have any suggestions on how to address the issue of who can serve on the board in these cases where the membership is titled differently purely for estate planning purposes?
A: This issue is not unique to cooperatives. Many townhome and condominium associations also have similar restrictions in their bylaws requiring all board members to be members of the association. The bylaws may contain provisions permitting a trustee, beneficiary or other similar representative of an entity owner to serve on the board of directors. Some bylaws also contain specific provisions to address the situation where a person holds a life estate or other similar interest in the property or the share, though many do not. If the bylaws do not provide an applicable exception to the requirement that all board members be owners or members of the cooperative or association, then the cooperative must follow the bylaws or amend them.
Following the bylaws may mean that otherwise qualified persons will be disqualified from serving on the board because of how they have chosen to title their share. However, these residents may be able to serve on committees if permitted under the bylaws and/or the resolution establishing the particular committee. If a cooperative or other association does not like this restriction on board membership, it should consider amending the bylaws to either provide for exceptions for these different estate planning tools or to allow for non-members to serve on the board of directors.
For those cooperatives and associations that are subject to the Minnesota Common Interest Ownership Act (“MCIOA”), a minority of directors may be non-members unless the bylaws require otherwise. So the bylaws can be amended to require that only a majority of the directors be members of the cooperative, which would allow for a spouse not in title or the holder of a life estate or other similar non-member resident to serve on the board of directors. If you are considering amending your bylaws or any of your governing documents, you should consult with an attorney who practices in this area of law.
Monthly Fees and Carrying Charges
Q: Is there any legal effect or difference between the terms “monthly fees” and “carrying charges”?
A: Both of these terms are used interchangeably by cooperatives to refer to the installments of the annual and other assessments that are levied by the cooperative against the owners’ shares. Sometimes we also hear people refer to these assessments as “dues.” Since we know that membership in any cooperative or other community association is not voluntary for those persons who purchase a share or property that is part of the association, I advise associations not to use the term “dues,” as this term implies that the charges are voluntary and that the member could choose not to pay them by opting not to be a member of the association.
Similarly, the terms “monthly fees” and “carrying charges” do not fully express the true nature of these charges. Technically, the correct term to use is “assessments,” which means a charge levied against real or personal property that becomes a lien against that property if not paid. However, I can’t foresee any negative legal consequences to using one of these other common, but less correct terms, provided that everyone understands what is being referred to when that term is used.
Q: Our governing documents contain an internal conflict with regard to our occupancy agreement. The bylaws state that the board of directors may amend or revise the occupancy agreement without approval from the members. However, the occupancy agreement itself states that it may only be amended by a vote of the membership. Because our cooperative is subject to a master mortgage insured through HUD, our regulatory agreement also requires HUD’s approval before any changes may be made to either the bylaws or the occupancy agreement. The occupancy agreement does contain language that requires the member to abide by all of the governing documents (declaration, bylaws, rules and regulations, etc.). If the cooperative wants to implement a new policy, such as a ban on smoking in the units, is it better to include the new policy in its entirety in the occupancy agreement, or simply reference the policy so that we do not have to amend our occupancy agreement every time we want to update our policies? Will we have issues with trying to enforce the new policy if it is not included in the existing occupancy agreement? What if the board revises the occupancy agreement to include the policy but does not obtain approval from the membership?
A: This question is loaded with many subparts and intriguing twists. To address the internal inconsistency issue, there is a hierarchy with the governing documents that dictates which document prevails in the case of such a conflict. In the event of a conflict between the declaration and any other document, the declaration prevails. For older cooperatives that do not have a declaration, the bylaws would contain the ultimate authority on all matters (to the extent that they are consistent with applicable laws). In the case of a conflict between the bylaws and the occupancy agreement or any rules and regulations that are established pursuant to the declaration and/or bylaws, the bylaws prevail.
So in the above example, if the terms of the occupancy agreement conflict with the bylaws, the bylaws will prevail over the occupancy agreement, meaning that the occupancy agreement can be amended by the board of directors without obtaining approval from the members. That being said, because the occupancy agreement states otherwise, the board can and should expect some backlash if it attempts to do so without first addressing this conflict in the documents. I would therefore suggest that the occupancy agreement first be amended to remove this conflict before or at the same time as other substantive changes are being made and that the members are notified of the reason for the change, namely that the conflicting language was removed because it was unenforceable.
In response to the next question regarding inclusion in the occupancy agreement of specific policies that may be subject to change by the board, my recommendation would be to have the full policies set forth in the document that is more easily amended, and only a basic reference to the policy or the board’s ability to set said policy in the more permanent document. This way, the cooperative does not have to go through the huge process of amending the bylaws or declaration in order to keep up with changes in the rules or other policies.
In the case of the occupancy agreement, if it can be amended by the board without approval from the members, then it can be changed any time the policies are changed by the board and should therefore repeat as much of the cooperative’s policies as are applicable to a member’s continued occupancy of a unit. (Policies dealing with membership or other matters not relevant to the actual occupancy of a unit need not be included in the occupancy agreement). However, if changes to the occupancy agreement require approval from the members, then in that case I would recommend that the occupancy agreement only make reference to the cooperative’s rules, policies and procedures and require the member to abide by these and all of the governing documents without specifically stating what those rules or policies might be.
Finally, while the questioner did not specifically ask about the smoking issue per se, the above reference to a policy banning or restricting smoking in the units raises another concern. Because this particular cooperative has a declaration, I think it is safe to assume that it is governed under MCIOA, which governs all cooperatives formed on or after June 1, 1994. MCIOA contains a provision that requires all restrictions on the use or alienation of a unit or membership interest to be contained within the declaration. Whereas the board has the authority to ban smoking in common areas as part of its power to regulate said common areas, a ban or restriction on smoking within the units themselves would constitute a use restriction and thus must be contained in the declaration under MCIOA in order to be valid.
Therefore, in our above scenario, if this cooperative wishes to impose a smoking restriction that is not contained in its existing declaration, it must do so by amending the declaration. As set forth above, if there is a conflict between a rule or policy adopted by the board that restricts smoking in the units and the declaration that contains no such restriction, the declaration will prevail and the conflicting rule or policy will be deemed unenforceable. If the cooperative is not subject to MCIOA and does not have a declaration, then a smoking or other use restriction may be contained in the bylaws, occupancy agreement or even the rules and regulations, depending on the authority granted to the board in the bylaws to regulate the use of the units through these other types of documents.
I would recommend that this board consult with an attorney about its specific situation in order to determine its authority to impose the policy in question and with regard to amending any of the documents as may be necessary in order to remove conflicts and to effectively implement any desired policies. If you have questions about these issues or any other legal issues regarding your cooperative, townhome, condominium or homeowner’s association, feel free to contact the author.
**Originally published in CIC Midwest News