Condominium boards that operate buildings with both commercial and residential units frequently ask us for assistance in disputes involving the calculation of common charges.
Determining common charges in buildings that are completely residential is typically straightforward — the board develops a budget and then divides the projected common expenses among the units based on each unit’s respective percentage of the common interest. However, in a mixed-use building where there are both commercial and residential units, the New York Condominium Act permits them to be allocated common charges differently where authorized by the condominium’s declaration and bylaws. Unfortunately, in our experience, boards and managing agents often refer to the condominium’s offering plan for a description of how common charges are to be billed, without checking the bylaws and declaration as recorded in the City Register, resulting in mischarges.
For example, an offering plan might provide that costs are allocated to the residential and commercial units based on the costs attributable to the operation of each. Using this method of allocation, only a small percentage of the condominium’s labor expenses might be allocated to the commercial unit (on the assumption, for example, that doormen serve only the residential units) even though the commercial unit’s percentage of the common interests might be substantial. Referencing the offering plan, the condominium’s managing agent might then use this method of cost allocation when preparing budgets, and continue using the method year after year, until and unless someone checks the condominium bylaws and declaration as recorded with the City Register, and discovers that they allocate costs differently.
Based on the language of the Condominium Act and prevailing case law, the provisions of the bylaws and declaration as recorded with the City Register supersede the offering plan. However, once a discrepancy is found between the bylaws and declaration and what has been charged historically, both the board and the commercial unit owner are bound by a six year statute of limitations insofar as recovering past charges is concerned. Each party may also argue that this six year period has been effectively shortened by the doctrine of “waiver” where the other party knew about the discrepancy for a meaningful period of time and failed to act. The success of this argument will depend on the specific facts of the situation.
Recalculating past charges is typically called a “true-up”. If the commercial unit owner owes past charges based on the true-up and fails to pay, the board can exercise the same remedies it normally has for unpaid common charges, including filing a common charge lien against the unit. If the discrepancy is substantial, litigation sometimes ensues.
If you have any questions about the calculation of the common charges in your condominium, please contact us.