Boards

Before the Coronavirus pandemic caused exterior construction to grind to a halt, facade projects were commonplace throughout New York City and most metropolitan areas.  Associations with professional management and an attorney and engineer guiding them, have to all be prepared for problems that may occur.  Since COVID-19, we have received numerous calls about coops, condos and HOAs experiencing problems with their contractors, and as a result of thorough and well-thought out provisions in their contracts, they were protected and able to get out of their contracts or hold the contractor’s feet to the fire to get the association what it needed.

The contract is the most important thing when a dispute arises.  The terms are critical.  Sometimes associations have their engineer prepare the initial AIA contact and then have an attorney review the contract.  This is not suggested for a number of reasons.  Engineers are usually listed in a contract with terms that may favor the engineer.  For instance, there is a provision regarding intellectual property which favor the engineer over the association.  That provision should be changed and engineers typically include it.  If the association is having an attorney involved in the contract process (which it most definitely should be doing), then the attorney should be drafting the contract from the inception.  Another reason is that contract drafting is considered the practice of law and engineers are not licensed to draft contracts.  

Associations should make sure that their contracts are well thought out and comprehensive.   For instance, if an association did not include a provision permitting it to delay or terminate a contract for convenience or with, the Coronavirus shut down could have been devastating economically.

The Board of Managers of 215 East 80 Condominium had problems with its facade contractor Jerrick Associates back in 2016, and they are still litigating about it now.  The condo didn’t make the last $88,685 payment on the $700k plus contract because it claimed the job was poorly done and there were leaks into apartments resulting in damage.  The contractor filed a mechanic’s lien and then sued the condo and its management company Rudd Management in 2018. The Court just issued a decision and the litigation goes on.  The Court couldn’t decide the contractor’s claims for breach of contract and an account stated on evidence and couldn’t decide the condo’s counterclaims either.  The Court did dismiss the claims against management based on the agent for a disclosed principle doctrine, but it took 2 years to get to that point.

Hopefully the condominium included an attorney fee provision in the contract so that the breaching party is responsible for the non-breaching party’s legal fees and costs. This could be problematic for an association though if the contractor is correct and thus, the association could be responsible for the contractor’s legal fees and costs.

The condo and management should document the issues as they are happening during the project and coordinate with the engineer with respect to those issues so that there is good evidence if there is a dispute.  It is very difficult to do so years later.  In the 215 East 80 Condominium case, the engineer seemingly certified that the work for final payment was performed.  The Court, however, explained that the contract provided that certification of payment does not mean that the work was performed according to the contract and thus, did not entitle the contractor to summery judgment. The certification could be very persuasive at trial.  It certainly would have been better if the engineer and association were on the same page so that the engineer did not make such certification unless the certification was correct.  

As you can see, problems with facade contracts can be awful and lead to expensive lawsuits.  Knowing this, associations and management should be careful from the very beginning and make sure their contracts are thorough and comprehensive, that the execution of the project is well managed in a coordinated way by management, the attorney and engineer on behalf of the association.  The failure to document issues and coordinate efforts can lead to a lot of headaches when problems arise.

Read the decision here.

When coop, condo or HOA boards rely on management to keep their books and records, getting outgoing management to turn them over to new management can be difficult.  Some states like Florida have enacted laws covering transitions, but many states like New York do not have such specific laws yet.  Reputable property managers handle transitions in a methodical and professional way.  Although they obviously don’t like losing business, they realize that it is a part of business.  We are finding, however, that far too many property managers who are either new to property management or not reputable, do not take this reasoned approach and act in a vindictive way.  With the Coronavirus pandemic we are starting to see real estate brokerages who are economically challenged, trying to expand into the property management business. It is those fly-by-night management companies that board should avoid.

Some difficult management companies will claim breach of contract by the association for terminating their services.  A number in New York try to enforce automatic renewal provisions in their contracts without satisfying the General Obligation Law notice requirements before doing so.  Boards ought to be careful when entering management agreements to make sure they know their rights and how they can terminate the agreement.  Sometimes terminations can be for convenience only with no strings attached and at other times, they require some form of payment to terminate or some other hurdle to end the relationship.  

One provision that is often absent in a management agreement is an attorney fee provision allowing the non-breaching party to recover legal expenditures because of the breach against the breaching party.  This provision can mean an easy transition as no one likes to incur legal fees and costs, much less pay their adversaries expenditures when they lose.

Over the last few months, six different associations decided to transition to new management and retained us to represent them.  Each of the associations experienced difficulty with outgoing management who had sole control of the association’s books and records.  The different outgoing management companies involved, each had contracts without legal fee provisions and some with automatic renewal provisions.  In all of these cases, the boards tried to resolve with the management company, but were not successful on their own.

In some instances we were able to convince management that they had more to lose by not cooperating and a lawsuit was not necessary.  However in other instances, a lawsuit was unfortunately required.  

Where contracts do not contain a legal fee provision, the association could try to seek punitive damages against the company, particularly when the company is a repeat offender or is affecting more than one association.  That was the case involving the Lux Condominium and its outgoing management company, Core Management NY.  We didn’t represent the parties but the situation involved is similar to most of the other cases we handled.  

Like most of these failure to turn over records cases, Core Management was terminated and refused to turn over books and records. After the lawsuit was started, Core agreed to turn over records in a Court Order but then turned over 17 boxes of unusable and disorganized records.  After another Court Order requiring certain electronic documents to be turned over as well, and failure to comply by Core, the Court granted the condo its legal fees and costs in the lawsuit.  Core appealed but the Appellate Division, First Department upheld the sanctions award under 22 NYCRR 130-1.1(a), (c)(1) and (c)(2) finding that the award of years of legal fees and costs was amply supported.

The Court explained that Core Management “refused to turn over [the condo’s] files after it had been terminated as [the condo’s] managing agent thereby causing [the condo] to commence the instant proceedings.  Core Management then delayed turning over the sought material, subsequently provided the material in an unusable and disorganized format, and ignored a court order.”  

Some takeaways for boards looking to change management is to review your management agreement to ascertain your rights, plan ahead, and begin as early as possible, keeping your own books and records which you can give to the new management company.  Make sure to get your surviving professionals involved as early as possible to guide you through this business divorce and create a record that can be used to persuade outgoing management to cooperate or a Judge to award legal fees and costs to the association.  The Lux Condominium v. Core Management case just armed coops, condos and HOAs with another weapon against unprofessional, vindictive management companies.  

Read the entire underlying decision and appellate decision.