Boards

Government backed mortgage lenders, Fannie Mae and Freddie Mac, issued temporary project review requirements relating to significant deferred maintenance in condominiums, co-ops, and similar developments.  To assess a project’s eligibility, Fannie Mae and Freddie Mac each promulgated a standardized “Condo Project Questionnaire Form” to obtain information related to significant deferred maintenance, the plan for addressing same, and the corresponding financial burden on condos and unit owners.

In July 2023, at the direction of the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac updated and relaxed their requirements for lenders to issue loans to prospective buyers of condo units. The new guidance is provided by Fannie Mae Selling Guide Announcement (SEL-2023-06) and Freddie Mac Selling Guide Bulletin 2023-15. These were at the direction of the FHFA to move towards permanent guidelines for lenders servicing condo units. They went into effect onSeptember 18, 2023, for all new loan applications, but lenders were authorized to incorporate changes from the date the guidance was issued a few months ago.

The new requirements apply to all condo loans and all loans in a co-op project with five or more attached units, as well as loans under the waiver of project review policy.   While there may be fewer ineligible projects under the new guidelines, many lenders are likely to remain wary of older condo projects or those that may be unable to finance necessary upgrades in the future.

The Fannie Mae/Freddie Mac project review requirements do some of the following:

• define critical repairs, material deficiencies, and significant deferred maintenance, including defining routine repairs that are not considered critical;
• prohibit sale of condo loans and co-op share loans in projects in need of critical repairs;
• prohibit sale of condo loans and co-op share loans in projects with current evacuation orders due to unsafe conditions;
• require a review of all structural or mechanical inspection reports that have been completed within 3 years of the project review date;
• provide new requirements for condo or co-op projects with pending or approved special assessments; and
• prohibit sale of condo loans and co-op share loans in projects with unfunded repairs totaling more than $10,000 per unit.

Critical Repairs

Repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project. These include:

• Material deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
• Any mold, water intrusions or potentially damaging leaks to the project’s building(s) that have not been repaired;
• Advanced physical deterioration;
• Any project that failed to pass state, county, or other jurisdictional mandatory inspections and/or certifications specific to structural soundness, safety and habitability; or
• Any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment).

Routine Repairs

These repairs are not considered to be critical and include work that is:

• Preventative in nature or part of normal capital replacements (e.g., focused on keeping the project fully functioning and serviceable); and
• Accomplished within the project’s normal operating budget or through special assessments that are within guidelines.

Material Deficiencies

Physical deficiency that affects a property’s safety, soundness and structural integrity.

Significant Deferred Maintenance

Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:

• full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time;
• the project has deficiencies, defects, substantial damage, or deferred maintenance that
  • is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;
  • the improvements need substantial repairs and rehabilitation, including many major components; or
  • impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing

What do the Bulletins Mean for Condo and Coop Boards?

While the new bulletins only directly impact lenders, condos and coops need to be cognizant of these changes and their likely impact.

Two changes boards should pay particular attention to are:

• Lenders are now required to review all structural and mechanical inspection reports, including reserve studies, completed in the prior three years from the loan project review.
• Lenders are now prohibited from issuing loans for complexes with unfunded repairs totaling $10,000 or more per unit.

Additionally, it is likely that lenders will continue requesting an expanded range of documents related to the condo or coop when assessing eligibility.  This may include board meeting minutes, board meeting notices, and other documents related to a condo’s plans for financing and completing future repairs. 

The guidelines continue Fannie Mae’s and Freddie Mac’s efforts to address what they have determined to be risky investments. Condo and coop boards should expect Fannie Mae and Freddie Mac guidelines to continue to evolve.

In a recent legal battle, LiNQ1, LLC found itself at odds with 170 East End Condominium and its Board of Managers over allegations of negligence, breach of contract, and more. This case, indexed as No. 154594/16 Appeal No. 953 Case No. 2022-04598, serves as a cautionary tale for New York condominium boards, emphasizing the importance of addressing problems with common elements promptly. The Supreme Court, New York County, entered an order on October 4, 2022, denying LiNQ1, LLC’s motion for summary judgment on various claims. This article delves into the key aspects of the case and the implications for condo boards facing similar challenges.

The Allegations

LiNQ1, LLC accused the Board of Managers of 170 East End Condominium of breaching its obligations under the condo’s bylaws and governing documents. The plaintiff argued that the board failed to maintain and repair certain common elements, leading to issues such as moisture accumulation and recurring mold infestations within the plaintiff’s unit.

The specific elements highlighted included a 90-degree chiller pipe above the kitchen ceiling, the ventilation system, and the building’s façade. These alleged deficiencies were identified by plaintiff experts as sources of the persistent problems.

Breach of Contract and Negligence Claims

LiNQ1, LLC sought summary judgment on claims of breach of contract and negligence. The court, however, affirmed the denial, citing triable issues of fact raised by the defendant. Disputes centered on whether problems with the plaintiff’s HVAC unit, ventilation rebalancing, or the lack of proper flashing were contributing factors to the alleged issues.

Additionally, the court considered whether the defendant could be held liable in negligence for breaching its nondelegable duty to maintain common elements in good repair, citing relevant legal precedent (Onetti v Gatsby Condominium, Multiple Dwelling Law § 78[1]).

Tortious Interference with Contract and Breach of Fiduciary Duty

LiNQ1, LLC’s claims of tortious interference with contract and breach of fiduciary duty faced scrutiny. The court found that the plaintiff failed to demonstrate, as a matter of law, that the board deliberately failed to make repairs to render the unit inhabitable, leading to tenant lease terminations.

Issues of fact concerning the defendant’s alleged bad faith in performing repairs also thwarted the plaintiff’s bid for summary judgment on the breach of fiduciary duty claim.

Private Nuisance and Business Judgment Rule

The court further addressed the private nuisance claim, emphasizing that issues of fact needed resolution at trial. Whether the ongoing mold condition resulted from negligence or intentional wrongdoing remained a question to be determined.

The defendant invoked the business judgment rule, arguing that its decisions regarding maintenance and repairs were shielded from judicial review. However, the court rejected this argument, emphasizing that the rule does not protect actions lacking a legitimate relationship to the condo’s welfare or taken in bad faith.

Declaratory Relief and Future Implications

The court concluded that any declaration of the parties’ rights and obligations must await trial to determine the existence of a justiciable controversy.

Lessons for Condo Boards

This case underscores the vital importance of condo boards proactively addressing issues with common elements. Condominiums are governed by bylaws and regulations, and failure to adhere to these obligations may lead to legal repercussions.

Condo boards should consider regular maintenance, timely repairs, and transparent communication with unit owners. The business judgment rule, while providing a degree of protection, does not shield actions taken in bad faith or unrelated to the condominium’s welfare.

As this case proceeds, it serves as a reminder to all New York condo boards to approach their responsibilities with diligence, recognizing the potential legal risks associated with neglecting common element maintenance and repair duties. The outcome of this case will likely set a precedent for similar disputes in at least the First Department (covering Manhattan and the Bronx), emphasizing the need for boards to act in the best interests of the condominium and its residents.

The Supreme Court in Richmond County through out a condo unit owner’s defenses to a nonpayment case seeking a money judgment for common charge arrears. The Court found that the affirmative defenses by the investor condo owner were boilerplate and couldn’t withstand summary judgment.

The owner stopped paying common charges because of a water leak within his units. The Court held that under the condo’s governing documents, there is no right of set off and the unit owner couldn’t withhold paying his common charges because of a water leak.

The Court distinguished another case called Granda v. Condominium I v. Morris (222 A.D.2d 520 (2nd Dep’t 1996) where the parties agreed to a withholding of common charges and placement in an escrow. in that condo, there was an enforceable agreement to withhold common charges, in this case, there was none.

As typical for condos, the governing documents provided for an award of legal fees and costs for collection of common charges. The Court granted the condo summary judgment and set an award of attorneys’ fees and costs for an inquest where the Court would decide how much to award the condo.

Read the decision here.