Paula Chin in Co-op/Condo Buyers on August 10, 2023
In 2005, a shareholder at an Upper East Side co-op renovated his apartment after signing an alteration agreement in which he took responsibility for any damages that might result from the alterations. The agreement carried an additional requirement: if the apartment was ever sold, the new purchaser had to agree to assume responsibility for these alterations, even though he or she hadn’t made them.
Fast forward a number of years. A new owner was living in the unit when the previous alterations caused a massive leak, resulting in extensive damage to the unit directly below as well as flooding the hallways on two floors. The co-op board turned to the current owner to foot the repair bill, but he refused to pay it. When the co-op looked for the signed assumption agreement, it wasn’t there. The reason? Because it was not signed when the transfer closing took place, even though the stipulation was in the co-op’s alteration agreement. Instead, the board had to foot the $2.5 million repair bill.
It's a cautionary tale. “An agreement isn’t simply, ‘Someone wants to do this scope of work today, we are going to approve it, and then they’re liable going forward if something goes wrong,’” says Leni Morrison Cummins, chair of cooperatives and condominiums at the law firm Cozen O’Connor. “What many directors don’t realize is that without an assumption contract with future buyers, those obligations will literally disappear into thin air.”
A standard alteration agreement typically includes a clause saying that the current owner is required to inform prospective purchasers of any alterations and obtain the buyer’s agreement to assume responsibility for them. While that seems to provide protection to the co-op or condo, it doesn’t. What’s needed is for the purchaser to actually sign a document that references the alteration agreement by date and binds the buyer to all of the obligations in it. An example of this is the “Purchaser’s Assumption of Alteration Agreement,” (available at the New York City Bar website https://bit.ly/AltAgrForm).
As for when the document has to be given to the purchaser, there are several options. “A co-op, which won’t approve a transfer until it has a completed application package, could make the assumption a required part of that package,” says Chris Tumulty, a partner at the law firm Fox Rothschild.
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Similarly, a condo can require an assumption agreement before waiving its right of first refusal and allowing the sale to go forward. Boards can also ask the seller to deliver the signed document prior to closing, or the document could be signed at closing. If the latter, “It better not come as a surprise to the buyer,” Cummins says. “If someone suddenly learns there were alterations that they are liable for, you’d better believe they are going to demand a price concession, or even walk away.”
Whichever method is chosen, it’s the board’s responsibility to keep meticulous records of the alterations for every apartment — what was changed, when, and by which owner. That’s important, because with each change of ownership, the subsequent owner who signs an assumption agreement is responsible for the alterations made by every previous owner.
The challenge is that there is no consistent, agreed-upon way to record each successive set of alterations or to make buyers aware of the changes made to their units. Record-keeping is often left to managing agents, but since management might change, it can’t be assumed that the information is passed along.
“Basically, you have to treat alteration and assumption agreements like corporate documents and make sure they’re retained for safekeeping,” says Ken Jacobs, a partner at the law firm Smith, Buss & Jacobs. “And when there is a sale, the board has to make sure that management checks the agreements for that unit, and for management to inform the transfer agent. The right hand has to know what the left hand is doing.”
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