Managing Through the Coronavirus Crisis
Featured in the April 2020 Cooperator Newspaper.
https://cooperator.com/article/managing-through-the-coronavirus-crisis
Paycheck Protection Program does not apply to Coops, Condos and HOAs but their Apartment Owners may qualify for Economic Impact Stimulus Payments
Now that it has become clear that the Paycheck Protection Program is not available to these community associations and there aren’t a lot of other programs out there right now, boards need to focus on making sure common charges and rent are paid and that collections are pursued.
With the local governments putting holds on foreclosures, summary proceedings and other lawsuits during the pandemic, community associations are at a slight disadvantage in trying to collect common charges or rent. While court proceedings are stalled for the time being, predicate notices under a coops’, condo’s or HOAs’ governing documents should be satisfied and boards should be vigilant with their collections.
There are tactics that associations can take to collect without a formal court proceeding being started. For example, condos in New York can ask tenants of non-paying owners to pay their rent directly to the condo rather than to the owner who is in arrears. If done correctly, it can be a very effective way of collecting without a lawsuit.
Economic Impact Payments by the IRS under the CARE Act should be arriving shortly in owners’ and tenants’ bank accounts. The government just opened up a portal for people who do not qualify to file tax returns, to apply for their stimulus money. Click here. That stimulus money will be used however recipients want to use it. Paying common charges or rent should certainly be a top priority.
Perhaps this is a good time before the stimulus money is spent, to remind apartment owners of the importance of paying common charges or rent. If collections in an association are not an issue, perhaps a letter to owners commending them on their continued payments and how those payments have allowed the association to continue weathering the pandemic. Sometimes people forget, and have to be reminded, how important their payments are to the community. This reminder may help assure their continued payments in coming months which may be difficult for them.
Now that we are in the second week of April, boards should examine collections and take collection action sooner than later. As May comes, if the economy is not restarted, collections may fall off even more so and it is important for association to remain vigilant in collecting arrears. A reminder to owners about the importance of continued payments during these hard times may persuade them to use their stimulus receipts on their common charges or rent, instead of for some non-essential purpose.
Walmart sued for Wrongful Covid-19 Death – Are Coop, Condo & HOA Boards Next?
The inevitable has started. People are suing because of COVID-19 infections. A Walmart employee died from COVID-19 and his family is blaming Walmart for not protecting him during his employment. We warned coops, condos and HOAs that lawsuits will likely happen and that they should be mindful of that in making decisions.
One concern was whether boards should notify residents when employees or residents contract COVID-19. We understand that some boards are and others aren’t. Some are afraid of violating privacy rights and some are more concerned about protecting their residents. This unfortunately is a no win situation for boards. If you take action and notify residents, you may be charged with violating privacy rights. If you don’t take action and someone is later infected, they may complain that you didn’t take sufficient action to protect them, knowing that a dangerous condition existed in the building.
In one instance a condominium was already involved in a lawsuit with a unit owner. Counsel for the unit owner advised the condominium’s attorney that his client contracted COVID-19. The owner wanted management to know so that delivery rules for the owner could be relaxed. The notification was more about what can the condo do for the ill resident rather than any worry about the residents in the 100 plus other units. The attorney specifically warned that they will take legal action if the condo advised residents of the name or apartment number of the ill resident. They were unclear as to whether they approved of a general notice to residents that someone in the building tested positive and was ill.
So, what’s a board and management to do knowing all of that? They definitely have to comply with the privacy laws and naming the unit owner or apartment number would likely be a problem. In that particular instance, the unit owner expressly stated through counsel that the unit owner did not consent to being specifically identified. Other owners in that position may not object to identification in order to protect their neighbors. If there is an objection to specific identification, a general statement that a resident in the building has contracted COVID-19 and people should be more careful to adhere to CDC guidelines when using the common areas should be ok. The trouble is that communications demanding specific information will likely happen. Some managers report that they include in their general communications that specific information cannot be provided and please do not communicate with us asking for this information.
If the condo board did not generally notify residents and someone contracts the disease in the building, one would expect the same type of lawsuit that Walmart is now facing. The resident who catches the disease may argue the the condo, like Walmart, didn’t do enough to protect the best interest of their community.
Coop, condo and HOA Boards and management will continue to face these difficult situations. How about employees who tested positive for COVID-19 and have recuperated and want to return to work. These are tough situations for boards and managment, especially because the medical advice has been so equivocal at times including when someone can return to work in an essential job. The positions on these types of issues seems to change daily.
Now that we are starting to see lawsuits in COVID-19 situations, boards and management have to be more vigilant in doing what is most reasonable for their entire community within the confines of privacy and other laws. This will have to continue on a case-by-case basis for now. Getting professional advice as to what is legal and making the most reasonable decision for the entire community based on that advice, is probably the best course of action until we learn more from the Courts in the lawsuits.
Checking your insurance coverage now is also a prudent thing to do. There may be coverage under your general liability or directors and officers insurance policies. Your insurance professional should be able to guide you. If you learn that claims arising out of COVID-19 are likely not covered then you may want to consider improving your insurance.
Read a news report on the Walmart lawsuit here .
Lenders are excluding Coops, Condos and HOAs from the Paycheck Protection Program
This is a follow up from our article on April 3rd about the Paycheck Protection Program (“PPP”). Read the article.
Our observation then that it did not seem that the PPP was going to apply to coops, condos and HOAs, is turning out to be true. Some people in the industry still feel that the PPP should apply and are likely going to lobby for a change but for the time being it seems that community associations are excluded.
For example, the National Cooperative Bank’s (NCB) website (https://www.ncb.coop) specifically provides now that “Unfortunately, housing cooperatives, condo associations, and homeowner associations are not eligible for this program.”
Stay tuned for more, but for the time being it seems that managers and boards who were gearing up to apply for their associations will not be able to do so for the time being.
The Treasury Department has not yet officially said that community associations are not eligible for PPP, but as we explained in our article last week, it does not seem that community associations would be eligible. Now that lenders are speaking on this issue, the lobbying for community associations is sure to follow to try to change things. While the PPP may not end up applying to them, other programs may open up for community associations; particularly ones struggling with labor expenses like any small business. We often say that community associations are small businesses which should be governed as such by their boards, the government should acknowledge this reality and open programs to help them.
As previously suggested, if such programs become available, coops, condos and HOAs should get ready now and make sure that their governing documents allow their boards to participate in the programs without first obtaining owner approval. Reviewing your governing documents now to anticipate and address any such hurdle is a good idea because some programs like the PPP have limited funding which may be on a first come, first serve basis. Be ready or you may lose out on a limited opportunity.
What’s a Coop, Condo or HOA Board to do when it can’t get its Records from Outgoing Management?
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.
Paycheck Protection Program for Coops, Condos and HOAs?
Many property managers and their coop, condo and HOA boards have been asking about the federal government’s Paycheck Protection Program (“PPP”) and whether those types of entities are eligible. The advice they have been given so far is to apply and see what happens. The PPP is a first come, first serve program and when the money runs out, it’s over.
The PPP authorizes up to $349 billion toward job retention and certain other expenses. Small businesses and eligible nonprofit organizations, Veterans organizations, and Tribal businesses described in the Small Business Act, as well as individuals who are self-employed or are independent contractors, are eligible if they also meet program size standards.
In the literature by the SBA and Treasury Department so far, it does not appear that coops, condos and HOA’s will qualify for the program because they are not for profit entities and even though it seems that some not for profits may be qualified, the literature so far limits the not for profits to 501(c)(3) types of entities, not housing companies or associations. That said, its not at all clear at this point and property managers and boards are taking a “you’ve got to be in it to win it” position and applying in any event.
Concerns to Consider
If your community association wants to apply for the PPP, it ought to first review its governing documents to make sure that the board has authority to borrow on behalf of the entity without obtaining shareholder or owner approval. Many condominium’s have limitations in their bylaws which provide that the board needs a super majority of owners to agree to borrowing for a certain amount or for any amount. If your entity requires approval before borrowing, your board ought to take steps to obtain such approval before or in tandem with applying for a loan under the PPP. This can take time and may be difficult with shelter in place orders in place. Call a special meeting and obtaining the requisite votes may be challenging.
The lending institutions may ask for the governing documents and a certification that the entity has authority to borrow. So making sure the authority exists without shareholder or owner approval is important.
The other concern is who is applying for the PPP loan. If a property management company is applying, it should make sure that a board decision is memorialize in minutes authorizing the property management company to file the application on behalf of the entity. Applications have to be signed, so you should make sure that the signor is authorized to sign on behalf of the entity. If a property manager is an Assistant Secretary, then make sure the person was appointed the Assistant Secretary since the last board election and this is memorialized in minutes. The lending institution may ask for this information. The easiest and perhaps safest approach is to have a board member who is authorized to sign for the entity under the bylaws, sign for the entity.
The last concern to consider is that the government has made clear that it may claw back money that is loaned if it was loaned to ineligible borrowers or the money that was loaned was not used for purposes covered by the PPP program. So, if coops, condos and HOA’s apply and are granted loans in the PPP, the risk is that the government reviews eligibility after the fact and raises issues after the money is already loaned and used. We’d hope that the lending institutions which will be handling applications would vet whether community associations are properly eligible, but the risk exists that loans could be granted and questioned in hind site. The risk is low but should be considered by boards before jumping in.
Information from the Government on the PPP
Click here for information on the PPP from the Treasury Department. Also, the Treasury Department issued an interim final rule on the PPP which is accessible here.
Loan proceeds can be used for:
- Payroll costs**, including benefits;
- Interest on mortgage obligations, incurred before Feb. 15, 2020;
- Rent, under lease agreements in force before Feb. 15, 2020; and
- Utilities, for which service began before Feb. 15, 2020.
**Payroll costs include:
- Salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee);
- Employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provision of group health care benefits including insurance premiums; and payment of any retirement benefit; and
- State and local taxes assessed on compensation.
If your associations decide to give it a try, you will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click here for the application.
Beware of Board, Bad Faith Claims during the Coronavirus Crisis
Cooperative and condominium boards often have inside information about real estate deals in their buildings. Boards should tread carefully when they learn of Coronavirus “fire sales” by owners who are challenged economically or just want to escape to a perceived safer location. With their approval rights or right of first refusal, coop and condo boards have to be careful to act in good faith if they have purchase aspirations in mind.
Boards don’t want to end up like the coop board at 420 East 72nd Tenants Corp. which just got hit with a substantial judgment against it for acting in bad faith, refusing to approve buyers in order to purchase the apartment for the coop to convert into a gym. The New York Supreme Court decided on March 30, 2020, after a trial, that the coop board’s actions were reprehensible and awarded $101,201 with 9% interest from 2017, plus attorneys’ fees and costs to be determined, against the board.
The Court didn’t award punitive damages, but it struggled with that decision because of the evidence of bad faith. The Court explained that “[a]lthough plaintiff presented evidence that tangentially seemed that the defendant Board may have illegally required higher prices for other apartments, as well as plaintiff’s, the proof does not rise to the level of clear and convincing sufficient to support an award of punitive damages. For instance, no other shareholder testified about their experiences with the Board in relation to their sales price.” Had such evidence been introduced at trial, the Court may have slammed the coop board with punitive damages.
Here are some of the Board’s bad acts:
(1) the Board initially asked the seller to hold off marketing the apartment;
(2) the Board made a lowball offer;
(3) the Board then refusal to consent to a proposed outside purchase for higher pricing and then tried to influence the parties regarding pricing;,
(4) the Board delayed for months and months to take official action on the outside purchase application;
(5) the Board refused to take action on the outside purchase application until forced by court order; and then
(6) the Board rejected another offer well above the Board’s offer.
With Coronavirus impacting everything right now, boards have to be careful when faced with approval or waiver of right of first refusal decisions. If your Board is considering injecting itself in a purchase it should definitely get professional advice concerning what it can and cannot do. Fighting bad faith claims like the 420 East 72nd Tenants Corp. had to do for over five years, can make a hot deal become extremely expensive.
Read the decision here.
What’s a Condo, Coop or HOA Board to do regarding Ongoing or New Contracts in light of COVID-19?
The social and business impacts of Covid-19 were largely unexpected. When community associations entered into agreements that are still ongoing, they didn’t have delay or termination provisions for things like Covid-19. So, what’s a board to do regarding these contracts where the board or the vendor or contract can’t perform because of the impacts of Covid-19? For future contracts, provisions can be added to address concerns with Covid-19. Your counsel should make sure that new contracts protect your association in this new world in which we are living.
The more difficult issue is what to do about those existing contracts. Will the contractor be able to delay the completion of the contract, or even cancel the contract altogether? Is the association able to do the same? In most agreements we try to negotiate in a termination provision which allows a board to terminate for no reason at all. These are commonly referred to as termination for convenience provisions. The contractor may be entitled to charge for out of pocket or other expenses or may even be able to recover a portion of profit for the job, in return for a termination by the board. It really depends on what the contract says. So, the first thing you should do is review the contract and see what it says. If there are notice provisions, make sure you comply with them. If it says notice has to be by certified mail return receipt requested, then make sure you mail notice that way.
Another provision in many contracts is called a “force majeure” or “acts of God” clause. Such clauses generally protect the parties in the event that the contract or a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by the exercise of due care. The relief that is requested is typically a suspension of the parties’ obligations under the contract during the “force majeure” event and, if the event continues for an extended period, the right to terminate the contract.
In order to obtain this relief, a party to the contract will need to prove that the event that has materially impacted or rendered impossible the performance of the contract, falls within the definition of “force majeure.” Secondly, the party will need to satisfy any notice provisions and other preconditions that specified in the agreement. These preconditions may require that the parties to the contract take reasonable steps to mitigate the losses caused by the event.
Although it may seem that a “force majeure” clause must be applicable with COVID-19, that is not the case. It is a fact intensive analysis and the party on the other side of the contract who doesn’t want to get out of the contract will argue that the clause does not apply. A party looking to implicate the clause should consider both the direct impact that COVID-19 may have had on the contract as a pandemic, as well as the effect that government actions, including travel restrictions, shelter-in-place or stay-at-home orders may have had. In other words, the applicability of the “force majeure” clause in a contract just because of COVID-19 is not a slam dunk argument.
An issue that has come up several times since the pandemic has involved license or access agreements with neighbors. A coop, condo or HOA performing exterior work may have had to access neighboring properties in order to protect them. Neighbors often enter license or access agreements which include time frames for access and penalties for exceeding the time frames. Sometimes, neighbors aren’t that neighborly and try to impose sanctions for exceeding time frames for access. With COVID-19 stop work orders by the government, construction and required access to a neighbor’s property may take much longer than originally anticipated. This can be an issue for the coop, condo or HOA performing the work.
In many cases, neighbors are all in the same boat and if they are good neighbors they will be accommodating and not try to stick it to their neighbors who cannot possibly complete the work within the anticipated time in the agreement. The end result will depend on what was negotiated in the contract before COVID-19 became a household word. What difficult neighbors should be reminded of is that one day they will be looking for their neighbor to be neighborly and perhaps they ought to reconsider being difficult in these trying times. My sense is that Court that may have to address these types of issues down the road will not be very favorable to difficult neighbors in light of the COVID-19 crisis.
Any association that is in the midst of a contract may want to review their options during this crisis. Associations may also be approached by a contractor seeking to delay or even end an ongoing agreement. Pulling out the contract and reviewing your board’s legal options sooner than later is the best approach.
Pets that Bite – COVID-19 made it even more complicated for coop, condo and HOA boards.
Pets are fantastic but when they demonstrate the propensity to bite, action has to be taken. If a board and management do not do so and follow up relentlessly, they can end up in protracted lawsuits when people are injured. This happened to the Element Condominium board on the Upper West Side of Manhattan and its managing agent.
The incident happened back in 2011 when a unit owner and his pit bull mix were in a passenger elevator in the condominium and another unit owner was attacked by the dog. The dog appeared friendly but then attacked tearing off pieces of the person’s nose and lip. The board and management jumped into action, notifying the dog owner that he should muzzle the dog during their investigation of the incident. The board and management also notified all residents of the incident, the muzzle request and that the dog can only be transported in the service elevator.
Despite this notice, the dog owner ignored it, did not muzzle the dog in the common areas of the condo and used the passenger elevator with the unmuzzled dog.
A lawsuit started in 2014 and one of the claims against the condo and management was that they breached the condo’s rule about pets by allowing the dog in the building both before and after the attack.
The rule provided that:
No pets other than dogs, caged birds, cats and fish (which do not cause a nuisance, health hazard or unsanitary condition), shall be permitted, kept or harbored in a Residential Unit without the same in each instance having been expressly permitted in writing by the Residential Board or the managing agent of the Residential section . . . . In no event shall any Unit Owner maintain more than two (2) pets in a Unit without the consent of the Residential Board nor shall any bird, reptile, or animal be permitted in any public elevator in the Residential Section, other than the elevators designated by the Residential Board or the managing agent of the Residential Section for that purpose, or in any public portions of the Residential Section, unless carried or on a leash.
The condo and management tried to get out of the case, but the Court refused to dismiss against them with respect to breach of the rule after the dog bite incident. The Court reasoned that prior to the incident there was no evidence that the board or management knew that the dog was a nuisance or health hazard.
However, once the attack occurred, both were aware that the dog was a nuisance and health hazard under the rule and thus, there was a question of fact regarding whether the board and management breached the rule by not doing more than providing a notice after the attack.
This begs the question, what’s a board and management to do about a dangerous pet in the building. Now that residents and their pets are essentially restricted to their homes because of Coronavirus and there are substantially more people and pets in building, taking the elevators together for outside walks, issues with aggressive pets are inevitably going to happen.
Once the board or management receive a complaint, an investigation should definitely be opened as soon as possible to determine whether there is an issue and the investigation should be documented.
The steps taken by the Element Condominium board and management seem reasonable under the circumstances there. After the dog bite, however, it is concerning that the Court did not believe a notice to the pet owner to muzzle and use the service elevator, and notice to residents so that they are aware of the potentially dangerous dog, may not have been enough.
If the pet owner had complied with the restrictions, perhaps the Court would have dismissed the rule violation claims against the condo board and management. When there was non compliance, the board and management could have brought an injunction action against the non-compliant owner. Now that the Court’s are essentially closed except for essential business, will an injunction action against the pet owner get attention in Court? Fines for rule violations also may be appropriate and have had a deterrent effect. The board’s and management’s approach should be to act promptly and be as effective as reasonably possible in trying to protect residents from the dangerous pet.
The Elements Condo case just settled this month, 9 years after the dog bite. Community associations and their residents have enough challenges with COVID-19, and hopefully aggressive pets won’t be on your next meeting agenda. If it is, you’ll now know how to best protect your association and its residents.
Read the Element’s Condo court decision here.
Conflicts of Interest will be Problematic for Board Members unless Handled Properly
Back in 2015, a condo board president’s toilet repeatedly leaked into the apartment below. It was determined that the condominium’s pipes to the toilet were improperly pitched. That was eventually fixed in 2015. But, it also was determined that the seal around the base of the board president’s toilet at the floor was damaged. It took two years till 2017 for the seal to be replaced and thereafter the leaks stopped.
The unit owner below sued the board president and the other owner of the apartment above as well as the condo board. There was no dispute that damage occurred, but the battle became what was a common element that the condo was responsible for and what was not a common element and thus, the unit owner’s individual responsibility.
Rather than recusing himself as a board member about the issue, the board president injected himself. The argument in the lawsuit that ensued became that the board president obstructed the investigation and breached his fiduciary duty. The charge was against the board president as an individual, exposing his personal assets in the lawsuit.
The Appellate Division, First Department, just issued a decision on March 26, 2020, reviving the claims against the board president as an individual. In The Lisa Goldberg Qualified Personal Residence Trust v. Board of Managers of the Madison Square Condominium. This Court governs cases in Manhattan and the Bronx and thus condominium, cooperative and HOA board members there should be very careful to recuse themselves when conflicts of interest arise. If they are not willing to do so voluntarily, a board usually has the power to form a committee of board members, excluding the conflicted board member, and leave that board member out of decisions on the conflicted topic.
The Madison Square Condominium board didn’t form a committee excluding the clearly conflicted board president and the board president did not recuse himself which would have kept him out of trouble.
The First Department unanimously held that claims that the board president is personally responsible for the damage incurred, can move forward to discovery. According to the court there was evidence that the board president refused access to his unit while the board was investigating the leaks and that this conduct was in the board member’s individual capacity.
The Court explained that “[g]iven [the board president’s] admitted refusal to recuse himself from decisions that would affect the investigation, the record presents issues of fact whether [the board president] placed his own personal interest in keeping the investigation out of his apartment over plaintiff’s interest in a timely investigation and repair of the leaks and whether the Board took appropriate steps to insulate the investigation from [the board president’s] self-interested involvement and delays.”
In sum, if a board member has a conflict of interest, that person should recuse themselves from decision making on the issue and if they are not willing to do so, then the board should take action to either convince the board member to do so or perhaps form a committee (if allowed under the governing documents) to exclude the board member. In the end (which is not even close for the Madison Square Condominium because discovery in the lawsuit is still ahead of it five years after the dispute started), board members should be careful with conflicts of interest.
Read the case here.
