NEW YORK CITY

Cooperative buildings often become embroiled in litigation involving leaks in apartments caused by defects in roofs, exterior façades, or other common areas that are the responsibility of the co-op corporation to maintain. The warranty of habitability is duty that is continuous, cannot be delegated, and cannot be waived. It requires that the landlord maintain the apartment in a habitable condition, free of health and safety issues and providing all the basic and necessary services expected of a residence. Damages for breach of the warranty of habitability are generally in the form of a full or partial abatement of maintenance. In addition, the co-op will be required to repair an apartment so that it is in habitable condition. Repair obligations under warranty require only that the co-op restore to the basic requirements.

In addition, the proprietary lease may provide that in the event of a casualty loss, the cooperative will be required to repair or replace walls, floors, ceilings, pipes, wiring, and conduits within the apartment with materials customary in buildings of the type involved.

We interpret this language to mean that the co-op corporation is required to repair or replace with materials customary in the building at the time of the loss. This may be a higher standard than that required by the warranty of habitability. For example, the warranty only requires that a damaged floor be replaced with a usable floor. It does not mandate any particular type of material. However, it does not obligate the co-op to replace higher-end finishes that may have been originally installed by the tenant, typically defined by insurance companies as “betterments and improvements.”

Where the leaks and damages have been outstanding for an extended period of time, the tenant may also seek to recover for breach of fiduciary duty from the individual board members for failing to take sufficient action to resolve the conditions causing the leaks. While board members may be held personally liable for willful or bad faith concerning the corporation’s repair obligations, courts are generally loath to find directors personally liable and often dismiss such claims.

Takeaway

The board should take prompt action to investigate the source of leaks and to promptly make the necessary repairs to curtail further water infiltration and mitigate a claim by the tenant-shareholder for damages in the form of a maintenance abatement and out-of-pocket repair costs. The corporation’s insurer is typically obligated to indemnify the co-op for its repair obligations, usually found in paragraph 4(a) of the lease. When notified of leaks and water damage, boards should promptly notify their insurers and negotiate the highest possible indemnity for the repair costs.

Co-ops also often attempt to fulfill their habitability obligations by performing the repairs and then charging the tenant-shareholder back for those costs on the theory that the proprietary lease makes the tenant-shareholder ultimately responsible for maintenance and repair of those components. However, this “charge-back” practice is not supported by controlling case law and may violate the warranty of habitability’s protections.

There is authority for the proposition that a co-op’s obligation to make habitability repairs should include the duty to bear the costs. The law suggests that the payment of rent (maintenance) entitles the shareholder to the benefit of the bargain, which includes the warranty’s protections. Thus, when contemplating a “charge-back,” the board should be mindful that the practice is susceptible to legal challenge.

A collection of issues – a disability discrimination claim with facts that were sharply in dispute, an elevator project that shut down one of the building’s two elevators for an extended period, a proprietary lease provision that was less than clear, and an insurance company’s reservation of rights with demands for the insured’s substantial participation in the settlement – all make clear the need to communicate effectively with building residents. They also underline the necessity of taking into account the needs of disabled residents when undertaking major projects.

The disabled resident in this case was a renter in a sponsor’s apartment. Even though access in and out of the building for the wheelchair-bound tenant would have been impossible while the elevator was out of service, undisputed was the tenant’s initial request to remain in the apartment when the work started. Factual disputes existed as to if and when the tenant had made demands for a reasonable accommodation and to be relocated after the work began.

After the tenant started federal court litigation, the question as to who was responsible for providing the accommodation – the sponsor or the co-op – as well as who would ultimately be financially responsible, became key issues in the case. While under state and federal statutes, all parties could be held responsible in litigation – the question was who would be financially responsible for paying the accommodation and who was liable for damages incurred.

The key section of the proprietary lease was paragraph 18(d), which holds that the shareholders are responsible for compliance with all laws with respect to occupancy or use of the apartment. The sponsor alleged that the accommodation was necessary because of work done on the elevator and not in the apartment, and it should be the cooperative that bears all financial responsibility. The complaint filed by the plaintiff, while clearly alleging discrimination, was less than clear as to whether there were claims of personal injuries involved. The liability carrier therefore disclaimed coverage; the D&O carrier reserved rights and claimed that it would not be responsible for any damages relating to personal injuries. The court ordered mediation at which time the case was settled.

Takeaway

There are many lessons to be learned from this case. Most important, when undertaking a major project that could have a disparate impact on a disabled resident, make sure the resident and the owner (if different) have a clear understanding about the scope of the project, how it will affect them, how long it may last, and how they plan on dealing with the impact of the project. While the building cannot force a disabled individual to relocate and it is up to the resident to request an accommodation, the importance of documenting all communications with the resident and shareholder cannot be understated. It would have ameliorated many of the issues in this case if there had been a written description of the scope of work, timing, and impact, along with written confirmation of all discussions and a clear written understanding between the cooperative and its non-resident owner as to the obligations of each.

It's that time of year -- year-end review time! And The New York Times' Ask Real Estate column is no exception. In the column's latest edition, Ronda Kaysen looks back on a year of wild stories and reaches out to letter writers to see what's happened since they sought her help. Our favorite? Finding out what happened to the letter-writer whose icy relationship with his fourth=floor neighbor was putting a damper on backyard parties.

Attorney James Samson, a partner at Samson Fink & Dubow, offered some advice about how cases go off the rails. A potential client came to him with serious-sounding charges against the board. Although her charges were serious-sounding, on closer inspection, there was less here than meets the ear. The supposed “poisoning” of her dog occurred when the animal came into contact with some boric acid that had been put out to kill vermin. Other charges were equally questionable: she said the board had changed the locks on her. But, as she admitted after probing by Samson, the board had actually changed locks because it was switching over to a more sophisticated lock system. Everyone was given an expensive, electronic key fob, and additional keys cost $50 each. She wanted more fobs, and she gave them a check, but for some reason, it had been rejected. Banking problems, perhaps. But harassment? Not likely.
“She has a tendency to overstate her case,” Samson said. “I told her she had a motor mouth. ‘Listen to what you’re saying.’ I said. ‘If you can’t state your claim in three sentences or less, you’ve got a problem. Judges aren’t going to listen to you for the whole afternoon.” Her most serious charge – a lack of annual meetings – could be cleared up if she sought out the votes for a special meeting, which he explained to her how to do. “But she has to take an active role. I told her, ‘If you really think you’re being harassed, then go to the Human Rights Commission (HRC).’”
From the board’s point of view, how should they deal with a disgruntled shareholder like her? “The last thing the board wants is for it to go to the Human Rights Commission,” Samson observed, switching perspectives. “The people over there are zealots, true believers, and they can create a lot of trouble. The board should try to stay as far away from harassment claims as possible. The board should be very careful. They shouldn’t play games.”
What games had this woman’s board played? Apparently, they had allowed some shareholders to easily buy two or three additional keys, and if that is true, the HRC will probably ask, “Did you play games with her? Did you make it more difficult for her because she’s always complaining?”
 
Everyone should be treated in the same way, asserts Samson. The board doesn’t want to get itself involved in a discrimination case. Boards should be especially wary of shareholders and unit-owners, he says, who are “looking to find an offense.” Even when a board thinks a claim is bogus, it needs to treat all shareholders the same way to avoid finding itself in litigation.

There are many ways board members can “go rogue.” There are those who refuse to keep matters confidential, making sure they satisfy their constituency by handing out information as it becomes available. There are those who hire their personal attorneys, architects, or other professionals to give a second opinion, regardless of whether the other board members want it. Some believe they get special privileges by virtue of their being elected (as our best board members know, it is the opposite; they want to make sure they are treated the same as – or maybe even worse than – everyone else). And there are board members who sometimes decide that because they have been elected to the board, they have the right to admonish building staff, even if that employee has not violated any rule or policy. Some even think they can, without board knowledge or approval, meet and negotiate with building vendors, sometimes even firing them without anyone knowing about it. The staff complains, vendors complain, apartment owners complain. Trying to reason with a board member like this sometimes gets you nowhere. What does a board do? And more to the point, how does the board effectively notify its employees and vendors and figure out what action, if any, to take against the “rogue” board member without that board member sitting in on every meeting?
 

Takeaway

Unless governing documents do not allow it, board members can call a meeting for the purpose of appointing a committee to address issues with a rogue board member and allow that committee to act (or act up to a point) without the authority of the full board. That way, the committee (perhaps made up of all board members other than the one who is creating havoc) can, for example, meet with counsel, draft and approve letters, or, if it comes to it, authorize beginning a lawsuit. The committee can also discuss the pros and cons of sending a letter to employees or third parties, advising that the rogue member has no authority to act on behalf of the board and to report any contact made by the board member. The committee-board members – working with the building’s counsel and managing agent (both of whom have likely seen this issue before) – must balance potential claims of defamation by the board member against claims of employees and, to the extent it arises, claims made by the union on behalf of staff. There is no perfect solution and no easy answer. The board’s options may be limited and any acts may take time. However, a board that has recognized the issue and attempts to find a solution is taking a step in the right direction.

In October of 2015, New York City followed the lead of the federal and many state governments when it hired Diana Leyden as the city’s first Taxpayer Advocate. Hers is a daunting mission: to help New Yorkers resolve disputes over how much they owe – or don’t owe – in property taxes, fines and penalties. Before taking the New York job, Leyden spent 16 years teaching at the University of Connecticut Law School and running its tax clinic, which provides free legal service to help low-income earners resolve their tax controversies.
“The main part of what we’ll be doing [here in New York] is property taxes,” Leyden told Habitat. “Much of what we’re finding is flaws in how processes run – or don’t run. It was very sobering to see how we’re frozen in time, as far as the way the city’s property taxes are set up. We’re back to 1981” – a reference to the year the city’s four property tax classes were established, a source of undying controversy, especially for residents of co-op and condo buildings. Then Leyden offered a radical notion: “Maybe the whole thing needs to be scrapped.”

Fannie Mae and Freddie Mac meant well when they introduced mortgage programs requiring only a 3 percent down payment as a way of putting home ownership within reach for first-time buyers. But the programs, introduced in late 2014 and 2015 respectively, appear to be too little, too late.
Buyers continue to prefer low down payment loans from the Federal Housing Authority and the Dept. of Veterans Affairs, which continue to make up at least 90 percent of all high loan-to-value loans, reports The New York Times.
Why are buyers shunning Fannie and Freddie? For one thing, monthly payments on an F.H.A. loan can be considerably lower. For another, the need Fannie and Freddie hoped to meet is already being met. “They were late to the party,” says Brian Koss, executive vice president of Mortgage Network, an independent mortgage broker in Danvers, Mass. “And they chose some of the more restrictive approaches.”

A leak that occurred in a Queens co-op raises questions. Not the leak itself, but its aftermath. The story involves what must be a relatively small building because the president also happens to be the managing agent. One day this president/manager – let’s call him “the P.M.” for short – gets a call from one of the shareholders – let’s call him Steve – who tells him he needs the super to fix a leak in his bathroom ceiling. The leak is apparently coming from the pipes between Steve’s unit and the unit upstairs. Time goes by and the P.M. and the super ignore repeated requests from Steve to make repairs.
 
“The leak had gotten so bad that the bathroom ceiling was about to collapse,” Steve wrote in Habitat’s online “Board Talk.” So, the frustrated shareholder finally called 311 and filed a complaint with the New York City Office of Housing, Preservation & Development (HPD), which eventually issued a violation. In response to HPD, says Steve, “the super did fix the water leak (although I don't think it's fully fixed)” and the P.M. “‘then turned around and gave me a one-week notice to fix the water damage, and he also instructed the building attorney to initiate the default provision of my lease. This is obvious retaliation because I filed the complaint with HPD.”

We represent a small five-unit building with a retail space in Soho. When it was offered a well-above-market price for the building, there was interest among the shareholders, but it took weeks to get the shareholders to agree on their respective share of the net proceeds from a sale. Ignoring the assigned share allocations, each shareholder held a different view of what his or her apartment was worth (certain shareholders had renovated, some had not, some were on higher floors, one had roof rights, etc.). After hours and hours of meetings and discussions among the shareholders and counsel, an uneasy agreement was reached to permit the preparation of a contract of sale.

As it was essential that the deal be structured as a sale of individual units rather than a sale of the building by the corporation, all shareholders had to agree to sell. If it were a sale by the corporation, it would have created a double taxation — first on the cooperative level at the corporate rate (after taking into account the depreciated value), and then at the individual shareholder level where each shareholder would have been taxed on distributions of the net proceeds. There were also some IRC Section 1031 issues for certain shareholders.

The developer agreed to the terms and a contract was prepared and sent to the developer’s counsel. After fully negotiating the contract with the developer’s attorney, the developer withdrew its interest as it became uncomfortable with being saddled with the corporation’s exceptionally low basis. Significant legal fees were incurred and it caused considerable disruption in the building. During the negotiation process (which went on for a protracted period of time), the business of the building was put on hold, and shareholders could not make plans (e.g., refinance/sell/sublet) because of the uncertainty surrounding the sale. Relations among the shareholders became more fractured and contentious.

Takeaway

Developers are going to great lengths to buy buildings, and because of the restrictive marketplace and scarcity of product, unorthodox methods are being employed that can disrupt shareholder harmony and not result in the panacea that was promised.

A proposal to sell the building at a multiple of market value may seem incredibly appealing, but trying to reach consensus among all parties is no easy task. An early assessment of the willingness of the totality of the shareholders is essential prior to engaging in the idea of a sale.

Though interest rates have just jumped, your building needs a major capital improvement and your co-op board has decided that the best way to pay for it is to re-finance your underlying mortgage. Before you go mortgage shopping, you need to understand a bit of jargon known as your LTV – your loan-to-value ratio.
This ratio is almost always expressed as a percentage, which is calculated by dividing the proposed new loan by the estimated value of your property. Most lenders limit their loans to a maximum LTV of 75 percent.