The $300,000 Mistake: How Boards Can Avoid a Violation Crisis

Navigating building violations can be tricky for co-op and condo boards, especially when it comes to determining responsibility for corrections. In this enlightening discussion with attorney Brandon James of Borah Goldstein, board directors will learn crucial guidelines for managing violations effectively and avoiding costly mistakes. Habitat's Paula Chin conducts the interview. 

James breaks down the fundamental "rule of thumb" - unit owners and shareholders are typically responsible for conditions inside their apartments, while boards handle common area issues. However, there are important exceptions, such as lead paint violations and problems stemming from common area issues like facade leaks causing interior mold.

Key takeaways:
• Even when violations are the unit owner's responsibility, notices typically go to the building first - making it critical for boards to promptly notify and follow up with residents responsible for corrections

• Failing to monitor and address violations can have severe consequences, including massive financial penalties, difficulty refinancing, and damage to the building's reputation - one example cited showed a 25-unit building that accumulated over $300,000 in violation penalties

• During refinancing, most lenders require buildings to cure outstanding violations within six months of closing, putting boards under pressure to resolve backlogged issues quickly

• Boards can generally recover violation-related costs from responsible unit owners through indemnification clauses, but this becomes much more difficult if too much time passes between the violation and enforcement

The episode emphasizes that proactive monitoring and prompt attention to violations, even minor ones, is essential for maintaining both building safety and financial health. Letting violations accumulate can create a snowball effect that impacts everything from property values to residents' quality of life.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Paula Chin: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Paula Chin with Habitat, the New York City magazine for co-op and condo board directors. My guest today is Brandon James, a partner at Borah Goldstein Altschuler Nahins and Goidel, who's here to talk about building violations, specifically when boards are responsible for correcting them and when they're not. Brandon, can you first start by laying out the background for this?

When are boards responsible and when are they not? 

Brandon James: It's not always black and white, but generally the rule of thumb is unit owners in a condominium and shareholders in a cooperative are typically, pursuant to the building's organizational documents, responsible for the conditions on the inside of their apartment.

 As a general rule of thumb, you could say if it's a condition inside the interior of the unit, then the responsibility would generally fall on the unit owner or the shareholder. Now again, there are some gray areas or some cases where the law specifically says it falls on the building. For instance, the obvious one would be lead paint, which by default falls on a co-op, for instance, as a quote unquote landlord, although there is some leeway to shift responsibility there, even though that is a condition in the interior of the unit. Again, the default by statute is to say that it's the building's responsibility. Another example might be, for instance, if there's a condition from the common areas of the building that's causing a noncompliant condition on the interior of an apartment.

For instance, a facade leak that is maybe causing mold on the inside of an apartment. General rule of thumb, as I said, is if it's inside the unit, it would fall in the unit owner or shareholder. But there are caveats to that. And obviously that's something where the building's managing agent or the attorney should be consulted to confirm who would ultimately be responsible for curing it.

Now, I would mention that almost always by default, the notice of violation will be sent to the building since they are the entity registered with HPD as the property owner or their managing agent. So even if it is something that is very clearly the unit owner or shareholder's responsibility, the vast majority of the time the violation is going to name the co-op or the condo as the respondent, and it's going to be sent to them even though it may ultimately not be their responsibility. 

Paula Chin: So what does that mean a board needs to do? So let's say they get that notice, but it's not their responsibility.

I imagine they will have to make sure they're on top of what the unit owner or shareholder is doing to correct the violation. 

Brandon James: Yeah, exactly. And that's one of the main takeaways of today's talk is stressing to boards the importance of actively monitoring their building. Not just new violations that come in but preexisting violations.

 As far as you know how to handle these situations um, actually just recently dealt with something that kind of falls right into this fact pattern, where one of our condominium clients, one of the unit owners had basically called 3 1 1 to complain about what she believed was a mold growth inside of her apartment.

And it was ultimately a condition that was very clearly her responsibility. It was an interior dividing wall, so there was no leak or any other condition that could have caused this from the common area. Clearly something she would be responsible for in this case having allowed that condition to foster the growth of mold.

But she called to complain, assuming that it was ultimately the building's responsibility and the violation was issued against the building. And at that point, they reached out to our firm to see if we could send someone to the the hearing. And that's when we told them, hey, actually, this isn't your responsibility.

You're not liable for this. And then we had to start working with the unit owner and their attorney to get them to take it over. And both co-ops and condominiums, there's indemnity language that says if . If the building incurs violations because of a condition for which the shareholder or the unit owner's responsible they have to hold the building harmless for that.

And so in this case that's ultimately what happened. We told the shareholder, hey, you have to send someone to either resolve this violation or settle it. And if we end up being defaulted because you don't, if you don't send someone to the hearing and we get the maximum penalty because of that, we're going to charge that back to you.

Paula Chin: And just as a sort of side note, when that happens, are the boards also protected in terms of their legal fees being covered? 'Cause I imagine that can add up pretty quickly. 

Brandon James: So that's another area where it can be very gray. Generally speaking, courts are loath to award attorney's fees, and that's true for legal issues, across the country in general, whether you're talking about tort claims or property damage, whatever it may be.

So unless the building documents are, explicit to say, , including any cost that the building may occur as a result of the shareholder not curing the condition, including, attorney's fees. Unless that is in there it's probably not gonna be upheld if you try to charge that to the unit owner or shareholder and they challenge it.

But I would say probably a majority of building organizational documents would include that by default. So I would say most of the time you would be able to include that. And even if you can't I think it's not improper to put the onus on the shareholder to say, you need to explain now why you shouldn't be paying us back for this cost that arose because of your actions.

And I will mention too that, there are some violations that even where it is a shareholder or quote unquote a tenant that causes it in the co-op context, the building is ultimately held responsible for it. And one example would be, illegal short-term sublets, where thankfully now they've made it more difficult to do this because of the recent registration requirements that went into effect about a year and a half ago.

But previously if you had, a shareholder or in the case of rental buildings, a tenant in your building that was illegally doing short term sublets, the violation would be issued against the building owner. And those can be significant violations, right?

And in that case the building owner would still have to show up and fight it. And again, you try to pass that cost back to the shareholder that caused it. But there is direct or strict liability there for the owner of the property, even though they had nothing to do with the condition.

Paula Chin: So just to be sure that I understand, let's say you have a building that allows sublets and you have a unit owner or shareholder who is subletting their unit and there is a violation. You're saying in that case when the violation goes to the building, that they in fact are responsible to correct it or, or as opposed to the unit owner or shareholder of that particular apartment.

Brandon James: So yeah, ignoring the bylaws and proprietary lease for a minute, the Department of Buildings, and we're talking just about illegal short-term sublets. Anything less than 30 days, right. which are never allowed in any multiple dwelling building or even any one to four family building, save for very limited carve out exceptions now where the person still living there and the renter is living with them which is a whole nother topic, but it's very limited the circumstances nowadays where you can do a less than 30 day short-term rental. And in the case where you have someone that, that was doing that when the violation is issued, it is issued against the building owner or the co-op in this case now. So at the end of the day, the Department of Buildings and the oath hearing officer are going to hold the building responsible for it.

That's where then we would look back to the proprietary lease and the bylaws, and we would have that indemnification language and be able to shift the burden. Even if the building has to show up or defend it and pay the fine because they're strictly liable, we can still pass that on then via the indemnification clause.

So there's an interplay between what the law says and then how it actually plays out in these co-op and condo buildings. Now, again, thankfully that's not as big of an issue these days because they've really cracked down on these short term rentals and made it more difficult to do so without being caught.

But either way, that's an example of, even though it's something very clearly done by the shareholder, it, it will still ultimately be issued against the building. And not incorrectly. So it's not being issued against them just because they're the one on the HPD registration. It's being issued against them as the owner of the building intentionally.

Paula Chin: And getting back to responsibility. Let's say, what if a board doesn't say stay proactive about, who's got violations and are they curing them? How can that come back and hurt them? What are the repercussions? 

Brandon James: So obviously there's the financial implications, right?

A lot of DOB and ECB violations carry financial penalties.And if you're not identifying these violations as they're issued and, notifying the shareholders and exercising that indemnity protection, eventually years later, as is most often the case when they have to cure these violations, typically in the context of a refinance, it may not be possible to go back through 10 plus years of violations and say, oh, this should have been paid by this shareholder who maybe is no longer even in the building. So it's important to catch them as they're coming in so that you're assigning responsibility, as the, violation is being issued, not five to 10 or 15 or 20 years after the fact, when it may be very difficult, if not impossible to exercise that indemnity. So there's the financial issue. These penalties accruing and buildings may ultimately have to pay these themselves if they're not timely notifying the shareholder of the obligation to cure it. There's also the damage to the building's, we'll call it reputation if you will.

One of the most extreme examples I saw was working with a client who was buying a cooperative apartment and it wasn't a building that we represented, but as part of our due diligence, we found that this building, and it was approximately a 25 unit co-op on the Upper East Side, if I recall correctly, they had over $300,000 in accrued violation penalties.

And for a building of that size, it was like equivalent at the time to a year and a half of their annual budget. So even if they had just dedicated their budget to paying off these violations and nothing else, it would've taken over a year to do so. So she ultimately for very obvious reasons backed out of the deal, and I'm sure she wouldn't be the only buyer that refused to purchase in that building.

Now that's a pretty extreme example. Most buildings don't let it get that far out of control. But where I most often see this come up and, being an issue is in the context of of building refinance in the co-op sense, right? When you're talking about the underlying building mortgage. Most co-ops are typically going about 10 years in between refinances and it's not unusual to see a large number, dozens and dozens of violations that come up in the title report when you are now trying to close on this refinance.

Most lenders are fairly understanding as long as it's not a rent impairing violation, know, something that prevents the occupancy of the building or a portion of it or precludes the co-op from collecting maintenance AKA rent. Because there are some violations that are so severe that the city just says you're, you can't even collect rent from somebody in your building because your building is so far out of compliance.

As long as it's not a rent impairing or occupancy impairing violation, most lenders will say, okay, we'll still let the loan close. We're not gonna hold up your loan. And that's a good thing because most of the time you're operating under a pretty strict deadline to get these refinances closed before the commitment expires.

Or before rates may change depending on what time period you're in here. But most lenders are understanding, but they will require almost every time you have violations like this, the borrower, to enter into an undertaking. Basically, a promise to say, I will have all these violations cured and/or dismissed within a stipulated period of time from closing, most often six months.

And if you don't, then it's a default under the mortgage. Now, again, not all lenders are strict about enforcing that undertaking. I have some lenders where they required it and then they never followed up again to see if they actually did it. I have other lenders that are reaching out every few weeks asking for an update.

Even though we still maybe have months left to go to cure the violation. Does depend on the lender you're working with, how strictly they're gonna enforce it. But certainly if you have these violations, it could jeopardize the closing, or at the very least, almost puts you under the gun to now get them and no property manager or board wants to be in that position now where you're now outlaying tens of thousands of dollars after you just refinanced your building to cure violations to pay the accrued penalties and fines. It's something that you're always better off addressing as it comes in, as opposed to letting this backlog build up.

And a lot of penalties can, include interest, right? Like ECBs, where the longer it goes unpaid and uncured the greater the penalty grows. There is an interest in doing it timely in that scenario as well. . And then, the last most sort of obvious reason to deal with this is the safety concerns, right?

These violations are issued for a reason. And yes, some of them might be very minor, insignificant conditions, failing to post adequate notices at the entrance of the building, for instance. Some of them can be more serious and can potentially interfere with not only somebody's health or safety or wellbeing, but maybe even just the ability to use their apartment Or parts of the building. So there is this idea of reputation and also just day-to-day life of your occupants. Making sure that they're living in a legally compliant building. 

Paula Chin: And getting back to what you said was the takeaway, which is that boards have to monitor these violations and be sure that unit owners and shareholders are taking care of them.

If you don't, as you said, you can end up with a huge amount of money, that you may not have and you may not get the people to correct. Therefore you're responsible for paying them. And the same issue could be if you do refinance and say you have this six months period to cure. If those people still don't cure, you're out of pocket, right? You have to pay the money. 

Brandon James: That's a great, example you raised there. If in the instance where you close on the mortgage refinance and the lender says, okay, you have six months to cure these violations and a number of those violations are violations for which the shareholder's responsible, you're now either chasing the shareholder to do it or having to step in, cure it, and then charge the cost back to them. . But again, you're doing all this sort of against the clock, right? And it's not a great situation to be in. It's one of those things where if you're dealing with them as they arise.

It's much less time, energy, money involved than if you wait until they've stockpiled and now you have to deal with them and you're under the gun to do so. 

Paula Chin: Just getting back to one more point, the building, you said that was facing the enormous amount of violations, as you said, that amounted to their annual budget or more.

What happened there? 

Brandon James: I don't know what ultimately became of that building. The client, like I said, obviously backed away from that and was not interested in purchasing there. And as I said to, I'm sure she's not the only one. And I think too, that, a lot of times in the residential context of, of individual unit purchases banks don't typically look at building violations.

But I'm sure you're gonna have some lenders that do see these come up and are gonna, express concern. Most often they would ask for an indemnity letter from the board saying that they would hold the bank harmless for building violations, hold the unit harmless.

But when you're talking about such a large amount where again it does dwarf their budget, I think there's legitimate concerns there of, okay, how are they ever gonna dig out of this hole? 

What I would expect would happen in a case like that is, is probably some negotiated settlement with the city to try to reduce those penalties as much as possible.

But certainly, the penalties are only one aspect of it. A number of the violations in that building were facade violations, right? So besides the fines and penalties that you're gonna have to pay, even if they get reduced, there's the actual work that you're gonna have to undertake to cure the underlying condition that gave rise to the violation.

And that's not even factored in when I said the penalties were more than their annual budget, that doesn't even factor in the cost to cure it, right? Unfortunately in that case, I think they let it go to such an extreme, they dug themselves into such a deep hole that it's gonna require

a lot of time, energy, probably, legal fees and contractor expenses to dig themselves out of it. And it's probably going to be, a multi-year project. But certainly they would have their work cut out for them. And in the meantime, who knows what effect that's gonna have on their shareholders' ability to sell their apartments, to refinance their apartments?

It's not a good place to be at. 

Paula Chin: Certainly does sound like the ultimate nightmare. Brandon, this has been, I think, really informative for our listeners and viewers. Thank you so much for joining us today. 

Brandon James: Oh, Paula, thank you for having me. It's always a pleasure.