Defects After Move-In: How Boards Can Hold Sponsors Accountable

In this informative Legal Talk episode, attorney Michael Savino of Braverman Greenspun shares with Habitat's Paula Chin essential guidance for co-op and condo board directors dealing with construction defects in new buildings. The conversation provides a clear roadmap for boards to protect their interests when issues arise after a sponsor hands over control.

Savino explains that while minor problems can often be addressed through punch lists, major defects—particularly in building systems like plumbing and facades—require swift and methodical action. He emphasizes that these issues can be both costly and potentially dangerous to residents and passersby if left unaddressed.

Key takeaways for board directors:

• Act quickly and document everything: Survey unit owners about problems, save all communications, and notify the sponsor early, as there's a six-year statute of limitations from the first unit sale to file claims.

• Hire the right experts: Engage an appropriately sized engineering or architectural firm to conduct a thorough building assessment and provide detailed documentation of all defects—this initial investment will prove valuable in negotiations or litigation.

• Understand your options: Before pursuing litigation, explore whether the sponsor will cooperate through direct negotiation or a tolling agreement. If litigation becomes necessary, ensure the sponsor entity has assets to pay for repairs.

• Consider costs carefully: While violation fines and repair costs may be recoverable, legal fees typically aren't unless specifically provided for in the offering plan. Statutory interest of 9% can accrue on claims during litigation.

The episode underscores that proper due diligence and documentation are crucial for boards to successfully address construction defects and protect their buildings' long-term interests.

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 Michael Savino, a partner at Braverman Greenspun, who's here to talk about what boards at new construction buildings can do to ensure that they are protected from any defects after the sponsor hands over control. Let me start, Michael: so does this apply to both co-ops and condos and what kind of problems most commonly arise? 

Michael Savino: Yes, these do apply to both condos and co-ops, but the trend now is new buildings come up as condominiums, so you don't see as many co-ops pop up. But really, if you're dealing with new construction, each building goes through some growing pains, we shall say, after the construction happens. Some are very minor and can be handled through punch list items, but some are actually major issues that the building has to be worried about and remediate to ensure the health and safety of the unit owners.

Paula Chin: So this applies to both co-ops and condos. In general, what kinds of problems typically come up and are these for both common areas and inside apartments, or only the first? 

Michael Savino: Yes. So it varies by construction.

So each building, after it's completed, unit owners may see minor issues to the finishes of their interiors. They may see minor issues to the common elements, but those issues can be handled through punch list with sponsor, and often a sponsor will come in and do some level of work if it's not too costly and to keep unit owners happy.

What we're concerned about is in a new construction, the defects that affect facades, systems such as a plumbing systems, elevator systems, because not only are those costly to fix and repair, but they're also issues that can affect the life and health and safety of the unit owners and people who are traveling around the areas.

A lot of buildings that we have handled have experienced facade issues, which have come up within the six year statute of limitations after the first sale of a unit within the building. And the reason why this is troublesome is A, a new facade of a building should not be experiencing defects which require a massive remediation so quickly after the building's done.

And B, once sponsor is out of the building, it is the board of managers who were comprised of unit owners at that point, who are left having to remediate that. And a lot goes into, for example, a facade claim. You have to get permits, you have to make sure you have a license agreement with all of your neighbors to put up proper protections in the building.

You have to have contracts from the contractor, proper insurance, and then scaffolding set up and sheds. So it's a massive undertaking for a board to do, and it's often a full-time job for those board members to pick up that project and, and carry it through. So what we like to tell unit owners once they are in the building, and this can happen before, during, or after the board members take control of the board, is if you're experiencing problems of any kind within the building to hire an engineer or architect from a reputable firm and one that is able to take on the project, that meets the needs of your building. So if you have a four unit condo building, you don't necessarily have to go with one of the international firms. But if you are a 250 unit, 50 level building, you may not want to go to the solo practitioner who is not well equipped to do that. And you wanna make sure that the architect or engineer who's hired takes a look at the building systems in its entirety to make sure that even if there aren't issues that are manifesting themselves now, they're not hidden within the walls and they're not gonna break down prematurely. Because everything in a building requires maintenance. There's wear and tear for certain systems, but if you're dealing with a plumbing system, you don't want that to break within two years of the building.

A facade should not have to be replaced wholesale within five years after the building is done. 

Paula Chin: And likewise, other than problems, a facade of course poses a danger to people below. Now, so you said the first step, if there are problems, is to bring in someone to do an examination of the building.

And what if defects are found? 

Michael Savino: If defects are found, what we recommend is the architect or engineer write a report. A very detailed report that sets forth every defect, which is found and recommendations for the future in terms of conducting future probes or further investigation, because most times there will be a study or there will be an email from the board that goes out to the unit owners asking if any unit owner has issues within their unit.

And based on those responses, you're able to target the areas that require the most attention at that point. Then the architect or engineer will conduct further investigation and write a report, which is a very detailed report, outlining what the defects are. And once that report's in final form, what we do is put that together with a demand letter to sponsor and say, here are the issues that the building's experiencing.

We'd like to have a sit down. We'll schedule an investigation with you and your expert to come in and take a look at it. Because at that stage, we wanna make sure there's open communication because some sponsors will come in and actually do the work to get the building into a position where it needs to be.

Paula Chin: But if they don't, you wanna make sure that you exhaust all avenues before you commence a costly litigation. 

So let's say the sponsor is antagonistic. Either doesn't respond or won't do the changes necessary. What's the next step? 

Michael Savino: We've seen that quite a few times in these situations because oftentimes when a sponsor's faced with a fairly large transition study with very expensive fixes, sometimes they choose to ignore it and hope it goes away, but it doesn't in most circumstances.

So if sponsor is antagonistic, if sponsor chooses not to fulfill their obligations, then you may send another letter again saying, we're reaching out one final time for you to take a look and come in and at these defects. And if not, then the next step is litigation. And there's a number of different avenues that you can go down when you are doing litigation.

But when you're dealing with construction defects, the main cause of action you're looking at is a breach of contract against sponsor. Because sponsor, when they are marketing the building and when they are choosing to, to build a massive project or any type of project for a condo, they have to submit an offering plan to the New York State Attorney General.

And within that offering plan, there are a number of different promises and obligations that are included in that . And those are usually backed up with an architect statement, a sponsor certification, that everything is true. And within the offering plan, they'll list the systems in the building, they'll list out what type of facade, what type of finishes, et cetera. So if there are any defects that are within the building, then that's a breach of that offering plan and the purchase agreements that each unit owner will sign when they're buying into the building.

Paula Chin: Michael, earlier you mentioned the statute of limitations. So I imagine timing is important here. Can you talk about that? 

Michael Savino: Yes. So statute of limitations is one of the most important things you can deal with in litigation because if you don't timely bring an action, then you're precluded from bringing those claims against sponsor and you can lose out on a massive project.

You may have to foot the bill for a whole facade repair. So, like I said, their main cause of action against a sponsor and a situation where there are construction defects would be a breach of contract, which is a six year statute of limitation. And we compute that from six years from the sale of the first unit within the building.

Paula Chin: And what if you file that and they don't do it within that period, or is there a deadline after you file that, that they have to respond? And what if they don't? 

Michael Savino: Yes. So going back on that point, if you are choosing to proceed with litigation, if sponsor forces your hand, there are a couple different avenues you can pursue.

One is filing something called a summons with notice, which will lay out generally what your claims are. And the next one is to bring an action by summons and complaint. So the difference between the two is a complaint includes much more information and it if you file a summons with notice, depending on how it's served, sponsor's attorney has between 20 and 30 days to enter an appearance and ask for a copy of the complaint. If they don't do so, then technically they're in default and you can pursue a motion for default against sponsor. Similarly, with the complaint, if you serve it on sponsor, they have between 20 and 30 days to answer, and if they don't do so, then you can move for default against 'em as well.

Paula Chin: I understand there's something where you can extend the statute of limitations-- a tolling agreement? Explain how that works. 

Michael Savino: Sure. So a tolling agreement is something that's used quite frequently in situations like this. And a way that the tolling agreement is used and is fruitful in these negotiations is, if you have a sponsor who's willing, at least externally to work with you or the board on this, and you provide the transition study, sponsor says, okay, we're gonna get our team together, we're gonna take a look at it, or maybe we're even gonna propose some sort of settlement or resolution of this.

In that circumstance, both parties can enter into a tolling agreement, which is an agreement between the board and sponsor to toll the statute of limitations to suspend the statute of limitations for a certain time. So it's a written agreement between the two parties, and basically, once that agreement is signed, the statute of limitations is suspended for the time period that the parties agree to in that.

So if you don't necessarily want to proceed with litigation because sponsor is an active participant and looking to actually fulfill their obligations, a tolling agreement is a nice step to take because it allows both parties to work through certain issues without having a publicly filed document, which is the summons with notice or the summons and complaint.

Paula Chin: So it's much less confrontational and perhaps likely to get a better result on both sides. Michael, can you give us some examples that you've dealt with, perhaps a non successsful one where perhaps the board didn't take the right steps and a sponsor didn't want to do things, and another one where everything worked out fine.

Michael Savino: Sure. Just going back on the tolling agreement for a second, Paula, a tolling agreement is a useful tool, but you have to have two willing participants. Mm-hmm . So both the board and sponsor have to be willing to enter into this tolling agreement. But also, it's not something that we would enter into if sponsor was not taking the right steps.

So if sponsor received the transition study and either ignored it or said nothing in here is our responsibility. In that case, it wouldn't be fruitful to enter into a tolling agreement because you're just delaying the inevitable. You have two sides who are conflicted, and it seems like litigation in that situation is what they need to get moving forward.

So a tolling agreement is a tool that we use only when you have a meeting in the mindset we're gonna have future conversations and that maybe we can work this out with that litigation. 

Paula Chin: How about a scenario of one that the ending was good and perhaps a scenario where not so good? 

Michael Savino: Sure. During my career , I've had it both ways.

I mean, I'm a litigator, so obviously negotiations pre-settlement have not gone the way we would've liked them to. So there are situations where we have provided a transition study, and I can think of one specifically where the board hired an engineer to look at the building system. It was determined that there was a lack of fire stopping within the building. Before the suit was filed,

sponsor said, absolutely not. We have a self-certification saying that the fire stopping was included. We're not even gonna come look at it. We fast forward to litigation. Depositions don't necessarily go the way that sponsor would've liked them. Future probes are done, which discover lack of fire stopping in additional areas.

And sponsor then came in after six, seven months of litigation and agreed to do work on their own, under the oversight of our engineer that we hired to make sure it was done properly. So. If you look at the NYSEF document, it's littered with construction defect cases where sponsor doesn't take it seriously beforehand, and sometimes you just need that extra nudge to push it into litigation.

Paula Chin: But we've also had circumstances where there was a transition study done and there were some pretty large scale defects including a facade claim. And before litigation was filed, we went through the steps that I outlined for you before: we had a transition study done, we had inspections, we had facade drops, and the parties came to an agreement that sponsor would perform certain work and they would pay for other work to avoid the cost of litigation. 

Let me ask about costs. First, the possibility that, sponsor will not do anything. And in the meantime, right, perhaps you're getting hit with violation fines. And also, you know, unit owners are living with problems. Are there cases then, even if a ruling is in their favor, where they're just out of pocket for the money?

Michael Savino: Certain times you can be, because sponsors oftentimes are single use entities. Who don't necessarily have bank accounts, don't necessarily hang around after they divest themselves of all the profits from the building. So I have not had the circumstance where we have gone through litigation, we have a judgment, and it was uncollectible at that point due to the fact that the sponsor was just a single use entity.

But it's certainly something to take into account when you are thinking of commencing a litigation against a sponsor, because oftentimes insurance that the sponsor maintains does not pick up indemnity payments. They'll often provide a defense because the duty to defend is greater than the duty to indemnify.

So just because you start a lawsuit and insurance defense counsel comes on, that doesn't mean that the insurance company is gonna pay out for the defects because there are long lines of exclusions for the work of the sponsor and for construction. So certainly it's something that one must evaluate before they move into litigation.

And we like to take a look at the sponsor entity, the parent entity, and also the principal of the sponsor to see whether or not they are people who are developing in the city still. And oftentimes we will name the principal in a litigation because there are certain causes of action which allow you to do so, one for fraudulent or negligent misrepresentation.

So in situations like that, before moving to litigation, it's recommended that you take a look at who you were suing and to make sure that you're not spending costs and chasing something which is gonna result in a piece of paper that you can't collect on. 

Paula Chin: Michael, what would you say the takeaway here is for boards? 

Michael Savino: The biggest takeaway is to do the proper due diligence.

As soon as you discover that there are issues within the building, have the managing agent send out a survey to unit owners to figure out if anyone has complaints in the building. Have emails saved and notify sponsor at the earliest time that you can. A lot of unit owners will be in communication with sponsor directly after they purchase their units for punch list items and other issues.

So at that point you have a paper trail of there being defects in the building, there being complaints. It's a little easier to move forward once the sponsor turns over control to the board because at that point the board of unit owners can commission a study and it's a building expense that they can go forward with.

Sometimes when sponsor is in control of the board, it's a little more difficult. They may block certain efforts, which is not necessarily in their best interest to do so, because then you bring that up in litigation. But the unit owners have to just make sure that they're documenting everything, that they're taking the appropriate steps to make sure that there's a record of all the defects, and bring that to sponsor's attention as soon as possible, because you have to worry about statute of limitations and you have to worry about, like you said, costs and fines. 

The most important thing is just making sure that you document any issues that you're having within the building, and then if you get to a point where it's discovered that there are defects within the building, hiring an architect or an engineer that you trust, that's appropriate for the size project, and that can actually put forward a report accurately displaying what the complete building picture is. Because that initial work will pay dividends later on. You can't move forward with the communication with the sponsor and say, we have issues in the building, and when they ask what, say, I don't know, leaky windows. You don't wanna do that. You wanna make sure that once you're approaching these negotiations and these communications, that you have concrete evidence of the issues so that you as a building can accurately remediate them and fix that.

Michael Savino: And that you can say to sponsor, this is what's wrong and this is what we want done. And this falls under your obligations in the offering plan and the purchase agreements. 

Paula Chin: Michael, let's end with one more question about cost. Let's say a sponsor is cooperative, or let's say they aren't, and you prevail in court.

Does the sponsor have to pay the violations? Does the sponsor have to pay the board's legal costs? 

Michael Savino: So tho those two questions are separate issues. So in terms of violations, we've had discussions with a sponsor where there were violations and that there were costs for a sidewalk shed that had to be put up as a result of a facade project.

And we try to wrap that up into the settlement negotiations early on as well because, but for the defects, the board would not had to have spent that money to put up a shed and they wouldn't incur those fees. So those are things that can be included in a resolution with sponsor. Legal fees unfortunately are not, unless there is a clear contractual provision and an offering plan, which,

surprise, surprise, A sponsor would never put in that a board's entitled to their legal fees. Legal fees are not recoverable in a construction defect case. Something else that you look at in terms of costs. Sponsor is responsible for statutory interest of 9% on these construction defect claims. So with litigations in New York, that can drag on for some time.

That number, depending on the overall value of the case can build up very quickly. And that's something that if they're obligated to pay, I mean, it's a, it's a good negotiation standpoint saying that you've now had 9% interest building up for four years on a $5 million claim. So that can be substantial.

Paula Chin: Michael, I think this has been really informative for our listeners and readers, thanks so much for joining us today. 

Michael Savino: Thank you, Paula. My pleasure.