Ask an Expert: Is a double-digit maintenance increase legal?

Q.  Last year, the maintenance fees in my co-op went up 10%, and this year, after a very intense annual board meeting, we were notified that the fee will increase by 17% for 2012.  Before this, fees would go up about 10% every 10 years or so. 

 The “reasons” given for the increase are that cost of utilities is rising and that we need cash on hand to refinance the co-op's underlying mortgage in 2013.

There are other things going on as well that are causing me to be concerned that increases of 10% or more will become the norm in the future.  

Are these increases even legal?  If not, what can we do to stop the sponsor/property management company?

A. The big jump you're facing may not be as out of whack as it seems, say our experts.  Huge hikes in property taxes alone have pushed maintenance fees skyward for most buildings over the past decade.  Your building seems to have gotten off lightly--until now anyway.

"If maintenance had previously increased by only 10% over the past 10 years, that might go a long way toward explaining the recent large increases, as it's unlikely that an average increase of only 1% per year would have been sufficient to keep up with the increasing costs of energy, insurance and labor," says real estate attorney Robert Braverman of Braverman & Associates.

Your board may be playing catch-up now, says Braverman, and "assuming that the revenue generated by the maintenance is being used to pay for legitimate building expenses, there's nothing illegal about a double digit maintenance increase."

That said, observes real estate lawyer Stuart Saft of Dewey LeBoeuf, "27% in two years seems extremely high, so one should ask why." 

If the mortgage needs to be repaid, as you described, that should be done through an assessment rather than maintenance because it's not an operating expense, says Saft.  

In addition, he says, "with interest rates hovering between 3 1/2% and 5%, and likely to continue there for at least another year, the question to ask is, 'Why not refinance?'"

While you can certainly pose questions, there's not much else you can do at the moment.

"A shareholder cannot stop a board from deciding on a maintenance increase as this power is permitted under the bylaws of a co-op," says real estate attorney Sandor D. Krauss of SDK in Manhattan.

And while you could sue the board for breaching its fiduciary duites, your chances of winning are slim to none, says Krauss.

That's because the decisions of co-op boards, like other corporate boards, are broadly protected by a legal concept called the Business Judgment Rule, "whereby courts are extremely reluctant to second-guess the business decisions of corporate boards, especially in the case of co-ops, where board members are elected by tenant-shareholders," explains Dean M. Roberts, a real estate attorney with Norris McLaughlin & Marcus.

Your most realistic course of action?

If you and your neighbors "believe that there is some mismanagement of the co-op's finances or unnecessary increases are being passed, you can either vote the current board out at the next annual meeting or call a special meeting to recall and replace the board members," says Jeffrey S. Reich, a real estate attorney and Wolf Haldenstein Adler Freeman & Herz.

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