While essential to the successful operation of all cooperatives or condominiums, governing documents are often only glossed over by otherwise well-intentioned board members, residents and property managers leading to potential pitfalls. As a result, it is often suggested by counsel that boards revisit, and in some cases relearn, the various components of these all-important and varied documents.
The first step is differentiating between cooperatives and condominiums. Co-ops typically are governed by a proprietary lease, a certificate of incorporation and a set of bylaws. A condominium is traditionally governed by a master deed and bylaws along with a declaration of condominium or a declaration of covenants, conditions and restrictions (CC&R’s). The declaration is usually recorded with the recorder of deeds in your town and county, while the bylaws, which govern the operation of the board, will typically stay within the building.
The fundamental difference between co-op and condo ownership is the “what” buyers are actually purchasing. “In co-ops, the owners are both shareholders and tenants,” James Erwin, an attorney and the founding partner of Erwin & Associates LLC in Chicago, says. “In condos and HOAs, the owners are members of the association and owners of their units. In a co-op, the entire property is owned by the corporation and then leased to the shareholders. In a condo and HOA, the association owns only the common elements, while the members own their individual units or homes,” he explain
Them's the Rules
In both condominiums and homeowners associations, the association's governing documents consist of a declaration (declaration of condominium or a declaration of covenants, conditions and restrictions), bylaws, articles of incorporation, and rules and regulations, according to Michael Kim, a principal of the Chicago-based law firm Michael C. Kim & Associates. “There's sort of a hierarchy in documents, starting at the top where the most significant would be the Articles of Incorporation for co-ops, which set out the general provisions regarding the purpose of incorporation and the types of things that the corporation can do— typically, along the lines of a corporate entity. It would basically provide that the general operations of the association would be handled through the bylaws, which governs the election process of directors, how the directors operate the corporation.” And of course, Kim continues, “rules and regulations would be, sort of, the day-to-day type guidelines as to how the property is to operate and how owners are to behave.”
The declaration, for example, contains provisions like use restrictions, rights, and collections information. Unit owners must vote to modify the declaration. Rules and regulations generally relate to use restrictions. The bylaws are typically amended by vote of the members, whereas the rules and regulations can be amended by a majority vote of the directors. Where rules and regulations conflict with the association's declaration, bylaws or articles of incorporation, those documents will prevail. While it is more difficult to make changes to the proprietary lease in cooperatives than amending governing documents in condominiums, any changes that occur should be explained and properly communicated to all members of the association community, as per the Illinois Not for Profit Corporation Act, according to David Bloomberg, an attorney with the Chicago-based law firm of Chuhak & Tecson, P. C.