Many co-op and condo boards find themselves facing discrepancies between the offering plan promises they thought they had and the actual experience they have managing their buildings.
The problems can be varied. It can be construction defects. Or sponsors or developers owning many apartments and running the building as a rental operation. Or it could be a sponsor or developer managing the building way beyond the time the board thought it would be rid of such management.
General Business Law Section 352 regulates sales of “securities” in New York State. Co-op and condominium apartments are treated as “securities” under that law, which is enforced by the Office of the New York State Attorney General. The AG regulates sponsor sales and may monitor conduct by sponsors after the co-op or condominium is created. (General Business Law, Sec. 352)
The boards don't know which way to turn. They fear litigation because of the expense and time constraints. And they forget that the offering plans that they were originally given were regulated to some extent by the New York State Attorney General's Office (AG).
Section 352 of the General Business Law is really what is called a “blue sky” law. It's like the federal securities law that treats sales of stock as something to be regulated by the government. Cooperative apartments’ shares of stock and condominium apartments are actually declared under the law to be securities. Those sales are regulated by the attorney general's office, which accepts the offering plan for the premises for filing but does not approve its contents. But it still knows what's in the plan. Many times, a discrepancy between what you have and what you were told you would be getting can be handled with complaints to the AG's office.
So what we have found is if you can get the AG's attention – which can be hard – you can get them to focus on these discrepancies. If there's a construction defect and the plan is clear that they were going to give you first-rate construction, or if there were supposed to be three drains on the roof and there's only one drain and apartments are being flooded, you can actually make a complaint to the AG’s office. It can get involved and enforce the terms of the offering plan.
It's been stated many times that the enforcement of the Martin Act, which is Section 352-e of the General Business Law, rests solely with the AG. Frequently, courts are taking the position that they won't even enforce the terms of the original condo or co-op offering plan. So, sometimes the only remedy you may have is with the AG. And, ironically, doing that is the cheapest and perhaps fastest way of solving your problem.
There's another area of concern. If the condo or co-op has apartments to sell that they've acquired through foreclosure sales, or if they suddenly realize that they have available space on the roof to construct a new apartment or create a duplex, they would actually find themselves in the business of selling securities. And they must remember that the AG asserts jurisdiction on any sale of apartments, either co-ops or condos. Consequently, they may have to go to the AG’s office and say, “This is really a limited sale and does not require a full offering plan to comply with the law.” In those cases, the AG’s office will issue what's called a “no action” letter. They will take the position that they know this is not a public offering subject to the Martin Act.
You shouldn't forget that you're selling a security in New York, and you might want to cover yourself by dealing with the attorney general’s office. It will tell you what is required as a minimum deliverable to a buyer as far as information about the building. In a way, it’s like getting get a kiss of approval that you're not violating any law.