The Commercial Tenant No One Saw Coming

When a licensed cannabis dispensary tried to set up shop inside a primarily residential Manhattan condominium, the board found itself in an uncomfortable position: their bylaws, drafted decades earlier, simply hadn't anticipated this moment. The commercial unit owner had rights. The tenant had a potential license. And the board had far less leverage than they expected.

In this episode, Jennifer Miller, managing partner at J. Miller Law, talks about how this dispute unfolded and what it exposed about the way mixed-use buildings are governed. The case raises questions that apply well beyond cannabis — about what happens when the document running your building was written in a completely different era, and what realistic options boards actually have when they want to push back. The answer involves more creativity, negotiation, and luck than most people would expect. Habitat's Carol Ott conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges.  For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Bylaws spell out everything from elections to finances to what kinds of businesses can operate in your building given the complexities of governing a condominium or co-op boards often think of bylaws as one and done, but here's the rub. The world keeps changing and bylaws don't always keep up.
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Carol Ott: I'm Carol Ott with Habitat Magazine, and today we're going to take a deep dive into what can happen when your bylaws lag behind the times.
My guest today is Jennifer Miller, managing partner at J Miller Law. Jennifer, thanks so much for being with us today. 
Jennifer Miller: Thank you for having me. 
Carol Ott: So you recently dealt with a case that really highlights why one and done is problematic. Your client, a condominium, had a commercial unit owner who wanted to open a cannabis dispensary, but the board didn't want that.
Can you tell us what happened at this condo? 
Jennifer Miller: Sure. It was brought to my attention that the commercial unit owner was working through a process with its potential tenant to open e legal cannabis dispensary. In this day and age and in the news, you hear a lot about illegal cannabis dispensaries. This is one that the New York State Office of Cannabis Management was offering a license to.
And so we were faced with a predicament of whether or not this use group was permitted either at law or under the governing documents. And so this was a. Matter of first impression for me because when the developers created the bylaws, especially in this building, they had actually been very thoughtful about thinking of certain uses that may be legal, but that they actually did want to prohibit, for example.
Restaurants, tattoo parlors, methadone clinics. But because cannabis was not legal, you know, 20, 30 years ago, of course they didn't have the wherewithal or the thought that, you know, perhaps this is something that we should pre prohibit. 
Carol Ott: So let me just jump in here. First of all, when the board learned that the commercial unit owner wanted to rent to a legal cannabis shop, I, I guess the board didn't want that.
Jennifer Miller: So for them it wasn't so much the issue of cannabis. They really weren't taking a position on the legality of that and whether or not, you know, the governor, whether politically that was the right thing to do. It was more of an issue of having this type of use in their building, which was primarily residential.
The common area of their lobby that had an entranceway to their elevators had a shared space with the commercial unit owner. 
Carol Ott: I see. So that's actually the reason why the board got concerned. 
Jennifer Miller: Yes, there was concerns over that. There was a lot of children that resided in the building. And so New York State puts a lot of restrictions for cannabis dispensaries in terms of distance from a school.
So the board and many of the residents felt the same way. If you can't be within 500 square feet of a school. Why for the same rationale, why should we have it within a building that has 20 to 30 children residing? 
Carol Ott: So just walk me through, I mean boards are probably listening to this, but the process, so here's the commercial unit owner who wants to rent to this dispensary.
Do they have to go to the board for approval? 
Jennifer Miller: Well, it really depends on your bylaws. So in this case, you know, commercial unit owners and sponsor developers when creating bylaws, they actually give a lot of rights to commercial unit owners to make that space more marketable and value. So, you know, there isn't usually a requirement to provide notice about use.
It's just usually. A section in the bylaw. For example, the commercial unit may use it for any legal use except for X, Y, Z. So you know, in this case, we found out about it because of the process of what is required under New York State and giving notice to the local municipalities. 
Carol Ott: I see. So if that hadn't been the case.
The board wouldn't necessarily be in on the loop of who was going to, who was gonna be there. 
Jennifer Miller: That's correct. In this case, we saw it published because there had to be notification to the community board and it got picked up by the local paper and the community. And there had to be a public hearing where the community board gave their opinion on whether or not they felt like.
A license should be issued by the Office of Cannabis Management. 
Carol Ott: And before we get back to this particular condominium, what did the community board say? Regarding this slide? 
Jennifer Miller: Yeah, so the community board was very much in agreement with the position that the board was taking. You know, there's certain requirements to open a dispensary, for example, it needs to be on the first floor here.
There was this. Step leading up to the commercial unit. They had concerns about other schools being in the neighborhood and whether that was in violation of the cannabis law, they had concern over a DA access in the building. In addition, you know, they took note of all the residential makeup of the building in the shared lobby, so they did issue an opinion and resolution.
Denying their support of this license for many of the reasons that we stated. 
Carol Ott: But, but in this condominium's bylaws, there wasn't teeth for the board to say, this is a prohibited use. 
Jennifer Miller: Not explicitly, and that's what's really difficult because there was other provisions that, you know, should be go to court that we would rely on.
You know, the, the question was. For example, the commercial unit owner or any unit owner must comply with all laws. The question then becomes, what's all laws? Is it federal law? Because under federal law, cannabis use isn't legal in the operation of a dispensary. But you know that that's difficult. Going to a New York court.
And asking them to rule against, you know, the governor that's very much in support of this program. So that's a tough predicament to be in, whereas it's much clearer if we just had an outright prohibition 
Carol Ott: and for most bylaws. What does a typical bylaw say about the, in regards to a commercial unit owner, I guess, to any owner, what can, what can somebody rent to and what they, what can they not rent to?
Jennifer Miller: I think this was very eye-opening to me, given this circumstance. You know, it, it really, it, it varies. That's why you really need to go back to your bylaws and review what are permissible uses. I've seen bylaw provisions or declaration provisions that just say any legal use. I've seen other provisions that say.
You know, any legal use, but X, Y, Z. So it really can vary and you can't just assume what can go into that space. So that's why it's important to, to look at this perspectively. 
Carol Ott: And what can a board do in changing their bylaws so that what, what, what can they do about this? So down the road, I don't know what.
Might be out there that a building wouldn't want? 
Jennifer Miller: Well, it's a great question because it becomes difficult. You have competing interests here. You have a commercial unit owner that is more thinking about the building in its unit for economic reasons than you have a residential unit owners and that board that's thinking about more of the compute.
Community and life safety. Not to say the commercial unit owner doesn't care about life safety, but you very much have diverging interests in a mixed use building. So the issue is, is for the most part, when it comes. To use those provisions are set forth in your bylaws or declaration, and in order to change or update those, you're gonna need a unit owner vote.
You know, at a minimum 66 and two thirds, perhaps 66 and two thirds percentage of common interest. Number sometimes as well. But what becomes very complicated is that sponsor developers, when creating bylaws, oftentimes give a commercial unit owner a veto power that you cannot amend that provision without getting their consent.
So you're a little bit in a bind here, and that's really where. You still wanna start thinking about your bylaws ahead of time. Is this an issue? Maybe you're on friendly terms with your commercial unit owner. Maybe your commercial unit owner doesn't really care and never would never imagine thinking of having this in their space at this time.
And so. Perhaps this is just a negotiation. For example, on that prohibited list, maybe it's prohibiting restaurants, is a cafe, a restaurant? Maybe you do a little bit of negotiation where you say, we can get our unit owners to vote to remove restaurants off the list. If you'll agree to put a cannabis.
Dispensary on there, or is there something else that's restricted in the bylaws? Maybe something to do with alterations. So it's more about having that conversation with the commercial unit owner that maybe they will consent if you give them something in return. So it's really about being creative and strategic.
Carol Ott: I see. So talk probably hopefully will help, but you can't, you. A board would not be able to put something realistically in their bylaws that is sort of a firm line that can't be crossed. 
Jennifer Miller: Well, they could attend to, whether they do it through a rule or a house rule or a policy, but it's very unlikely that that would be unenforceable.
So it's best that they have these conversations early on, review it and know what the potential and possibility is, especially if you're on good terms with your comm commercial unit owner. 
Carol Ott: So at the end of the day, what happened at this condominium I, so the cannabis dispensary. Didn't. Locate in this condominium?
Jennifer Miller: That's correct. You know, at the end of the day, they weren't issued the license. There was whether, you know, through all the support of the neighborhood the whole entire neighborhood came to the community board meeting. The board really advocated with its unit owners. There was a lot of advocacy to the cannabis control board to you know, why this would not be a good location.
So the tenant you know, never received the license and you know, now it's being rented out to a, a new tenant. 
Carol Ott: I see. If you had one piece of advice for boards when it comes to their bylaws, what would it be? 
Jennifer Miller: My one piece of advice is you need to review it. I would say take a look at all these different provisions and talk to your attorney about it and see if there's any updating that can be done.
I mean, you're, the developer created many of these bylaws for buildings 20 to 30 years ago. Technology has changed. Laws have changed. What is market has changed and so you really just can't have this relic of a document that makes no sense. There's a lot of ambiguities in it and I know that it might take a little bit of money and effort and time to update those bylaws, but I can guarantee you that it's a lot better than going into litigation over it.
Carol Ott: Thanks. It makes a lot of good suggestions for boards. Jennifer, thanks so much for joining me today. That was Jennifer Miller. And I'm Carol Ott. Thanks for listening. 
Jennifer Miller: Thank you.