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LEGAL/FINANCIAL

Putting Teeth in a Non-Disclosure Agreement

Bill Morris in Legal/Financial on November 30, 2017

New York City

Non-disclosure Agreement
Nov. 30, 2017

The trend is clear. Recent court rulings have made co-op and condo documents more accessible to shareholders and unit-owners. While some residents welcome this move toward greater openness and transparency, many boards and their attorneys worry that delicate information will get into the hands of residents with less-than-pristine motives. The consequences, they fear, could be dire – such as someone posting the building’s financial statements on Facebook.

The first line of defense is a non-disclosure agreement (NDA), which boards can require residents to sign before they’re allowed to view certain types of sensitive information. Some boards use a standard corporate NDA or one provided by the New York Bar Association. Others have their attorneys draft one. Increasingly, boards are seeking to put teeth into NDAs to deter residents from breaching the agreement. 

“What you want to do with a non-disclosure agreement is to make sure that everyone’s incentivized to keep their promises,” says attorney Andrew Stern, a partner at Tane Waterman & Wurtzel. “You can put provisions in the agreement that enable the board to go to court seeking a court order stopping the disclosure of information.” The agreement could also require that if the board prevails in court, the offending party must cover the board’s legal costs.

While most governing documents don’t empower boards to set fines for a breach of an NDA, boards can demand what’s known as “liquidated damages,” a prescribed sum of money that a resident agrees to pay if there is a breach in the agreement. Such penalties cannot be added to maintenance or common charges, Stern notes, or “used to foreclose or evict.” 

The collection of liquidated damages might prove small consolation, in the eyes of attorney Robert Braverman, a partner at Braverman Greenspun. “My concern always is that once the non-disclosure agreement is breached,” Braverman says, “the horse has left the barn. Liquidated damages don’t cure the breach.” 

An NDA is not required every time a shareholder or unit-owner asks to review documents. Court rulings, statutes, and governing documents have made some information open to all, including lists of owners and their contact information, financial reports, invoices, minutes of board meetings, and redacted legal invoices – provided the request to view them is made “in good faith and for a valid purpose.” Residents are also permitted to make paper or electronic copies after viewing these documents. An NDA is advised in gray areas, Braverman says, such as bid proposals, records of arrears, and whether email addresses are part of a person’s contact information. 

“Non-disclosure agreements are definitely more common now because of the recent court rulings,” Braverman says. “We’ve come up with our own form. I’ve been told my agreement is overly broad. I’ve had one person who refused to sign. My response was that if you don’t sign, you don’t see the documents. It’s not negotiable.” 

Stern agrees that boards have to be ready to draw lines. “The way we look at it,” he says, “is that if a shareholder makes a request to see documents that are not covered by the Business Corporation Law or that the board is not prepared to share, or if the shareholder doesn’t agree with what’s been redacted – then the shareholder can sign the non-disclosure agreement or pursue litigation.” 

Given the scope of recent court decisions, boards’ powers to put teeth into their non-disclosure agreement are limited. “At best it’s baby teeth,” says Stewart Wurtzel, a fellow partner of Stern’s at Tane Waterman & Wurtzel. “You’re not going to get a big bite.”

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