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.
