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Keeping Up Appearances

Theresa Racht is a partner in the law firm of Racht & Taffae.

A young woman is STRUCK by falling masonry from a five-story building. An elderly man plunges to his death by stepping into an elevator shaft. A family is found dead from carbon monoxide poisoning in an apartment over the boiler room. Firefighters die battling an electrical blaze that also kills several residents and destroys much of the building. A co-op decides that the cost of capital improvements resulting from decades of deferred preventive maintenance is too costly for the shareholders, so the shareholders sell the building and the cooperative ceases to exist.

These are tragedies that actually happened because building systems were not maintained. Each one could have been avoided simply by having the property owner adopt and follow a preventive-maintenance agenda. It’s always tempting to focus on making the public areas attractive or keeping the shareholders’ maintenance payments low instead of making repairs and capital improvements. Still, maintaining the property is not only prudent management, it can also save lives and money, prevent illness and injury, and avert bankruptcy for both the building and individual owners. It can also keep the board out of court – or even jail. And it can possibly avert lengthy litigation with your insurance company.

Under its governing documents, the board is charged with the upkeep of the building, the management of the finances, and, broadly speaking, doing whatever is in the best interests of the residents. These obligations are all aspects of the fiduciary duty of the board, both collectively and individually. If you don’t fulfill them, not only can people be harmed but you might lose everything.

 

Nightmare Alley

Let’s walk through some scenarios. Your roof occasionally has a leak, and the managing agent and the super both say you should get a new roof, which is going to cost $30,000. But, because you want to redo the lobby, you have the roof patched instead. The roof, however, is 25 years old, and its 20-year warranty has long since expired. This structure has outlived its useful life, and while visible leaks seem to be fixed, there will probably be leaks into the infrastructure of the building that can cause tremendous damage.

Taking this example to the next step, you proceed to have your lobby redone, and whenever someone complains about a leak from the roof, you have it patched. Two or three years go by and a shareholder on a lower floor starts complaining about a leak, water damage, and mold. After much investigation, it is determined that for years the roof has been leaking like a sieve into the infrastructure of the building, causing water damage to the structural wood supports of the roofing system, water damage in several apartments, and mold in the walls and venting systems. The building now not only must replace the entire roofing system but has to face the expenses of mold remediation and structural repairs as well.

In addition to those extra costs, you’ve got hysterical residents claiming mold-related illnesses, and the building has been tainted in the marketplace so owners can’t sell. Meanwhile, the owners are threatening a lawsuit against the individual board members for failing to maintain the building. If such a suit is started against you, the building’s directors and officers’ (D & O) liability carrier will probably refuse to defend you, and you will have to either defend yourself or seek indemnity from the building, which may not be possible.

So, instead of spending $30,000 for a new roof and postponing the lobby renovation for a year or so, the building has spent $500,000 – and it’s not over. On top of that, you may find yourself personally paying for the costs of defending any lawsuits resulting from the failed roofing system, and even paying damages. Or the bank holding the underlying mortgage on the building may be threatening foreclosure for your failure to maintain the building, something a lender has the right to do.

 

Death by Brick

Then, there’s the example of the five-story building that hasn’t done any exterior masonry/repair work in a very long time. Local Law 11 exterior wall inspection reports only apply to buildings taller than six stories. Therefore, buildings of a lesser height have to be self-disciplined in maintaining their exterior walls and the parapets and copings. In this example, a chunk of decorative masonry from the parapets falls off one day, lands on a stroller, and kills the baby inside.

You now face a great deal of negative publicity and a multi-million-dollar wrongful death suit. If evidence surfaces that there had been pieces of the building falling off for years and you took no steps to repair, your insurance carrier will disclaim coverage and defense. After spending $1 million in legal fees defending the multi-million-dollar wrongful death suit, a court finds against you and awards the plaintiff $15 million – money that the building must pay out of its own pocket because the insurance carrier has turned you down. Since the building is only worth about $5 million, you can’t raise it by getting a mortgage. You may have no choice but to have the building declare bankruptcy. There could even be personal liability imputed to the board members.

Then there’s the failure to oversee renovations and alterations by residents. You basically let them subdivide rooms in apartments, combine units, do electrical work and plumbing, and generally perform alterations to their apartments without requiring that the resident submit more than a general description of the work to you. You never said “no” to anything proposed, and you never reviewed plans, specifications, licenses, or contracts, nor had an engineer or architect do so on your behalf.

One day, there is a catastrophic fire. In fighting the blaze, a number of firefighters are critically injured when they become trapped in one of the apartments, and one of them dies. The subsequent investigation traces the cause of the fire to recently installed electrical wiring that was not done to code, and traces the firefighter injuries to the inability to exit because the partitioning blocked the fire escape.

This scenario actually happened. In 2006, the owner of a building on East 178th Street in the Bronx was arrested and charged with manslaughter, criminally negligent homicide, and reckless endangerment. Firefighters were injured and one died because they couldn’t find their way to the fire escape around the tenant-built partitions.

I have seen warrants issued in the name of the president of a cooperative in connection with minor fire code violations. I have no doubt that should a firefighter die in similar circumstances in a co-op or condo, a similar arrest warrant would be issued against the president.

 

Solving the Problem Proactively

Does this sound scary? Absolutely. Should you resign from the board immediately and never serve again? No. These situations, and many like them, are preventable. You simply need to adopt and follow a simple preventive maintenance agenda made up of the following elements:

Report of building condition

Timeline for repairs, large and small, and

Short- and long-term financial planning: creating sufficient income and reserves to perform repairs and major capital improvements as needed.

This will mean that some things that residents would like to see done have to be postponed, such as creating the playroom in the basement or changing the hall carpeting. But if you don’t have a preventive maintenance agenda, it could be you in one of those terrible scenarios.

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