Terms of Agreement

This piece was written by four of the attorneys who helped prepare the proposed model agreement: Andrew P. Brucker, Matthew Leeds, Ronald Gold (members of the bar association’s forms committee) and Eva Talel (chairwoman of the bar association’s co-op/condo committee).

As real estate prices shot up during the past decade, there was a corresponding increase in demand by co-op shareholders to alter their apartments. Instead of moving into larger apartments, these shareholders had been finding it more economical – price-wise and tax-wise – to combine an adjoining apartment with their own.

These “mega-renovations” created a host of potential problems: the enclosure of hallways and other common spaces, a profusion of wet-over-dry scenarios (e.g., a hot tub over a bedroom), and noisy living rooms sitting above sleeping spaces. Boards that had theretofore been more accustomed to dealing with smaller scale renovations were now facing new challenges.

Because existing alteration agreements had evolved in a comparatively simpler time, few agreements dealt with these issues. The need to update the New York City Bar Association’s existing model form alteration agreement, now fully a decade old, became crucial.

In 2009, the New York City Bar Association’s Committee on Cooperative and Condominium Law subsequently formed a subcommittee to revise the template upon which many of the current agreements were based. The idea? Strike a better balance between permitting renovations and minimizing trouble for neighbors. The new form serves these twin goals by combining greater board oversight of alterations (preventing the “bait-and-switch” renovations of earlier eras) with express renovator responsibility for alterations that go awry.

Beyond “mega-renovations,” the new form also recognizes new issues that have arisen with increasing frequency over the last decade. These include understanding the ramifications of excessive noise, the problems created by renovations that continue past reasonable time limits, and the impact of a renovation on the building itself, along with a new noise code and other constantly changing requirements in the city’s administrative code.

The new form calls for increases in minimum insurance coverage and security deposits. It also imposes tougher standards on sound transmission, both during and after construction, and discusses rooftop projects (terraces and greenhouses) and wayward water. In addition the form imposes fees for the abuse and monopoly of service elevators during renovations. Projects that drag on too long, despite the imposition of daily fees intended to discourage such delays, will require an additional alteration agreement.

This is only a brief summary of some of the principal changes brought about by the new form. But remember: one size cannot fit all. Boards and managing agents should, in this, as in other matters, take care to consult with an experienced co-op attorney about their cooperative’s particular circumstances. The Committee on Cooperative and Condominium Law of the New York City Bar Association devoted more than a year in its attempt to improve the model alteration agreement. It still remains only a model. Each cooperative board must determine what changes are necessary to conform the model to the policies of the corporation.

Indemnification and Insurance

One of the changes that the committee made to the proposed alteration agreement, released in 2000, was to the section entitled “Indemnification by Shareholder.” The section is a crucial provision since the co-op corporation and its shareholders must be protected to the maximum extent possible during and after construction.

To accomplish that, the agreement not only provides for a contractual promise, but it mandates a method of funding those obligations through insurance. The two sections of the agreement have to work together so that, in the event of a claim, the shareholder, his or her contractor, and any subcontractors all have to make sure that the claim is covered and any damages that are sustained by the co-op, the building, or another shareholder are handled.

The sections of the alteration agreement requiring insurance for the shareholder and contractors are pretty straightforward, although the amounts may differ from building to building as to the acceptable minimum. The basic requirements are that each have insurance and that these policies name the co-op corporation and its managing agent as additional insureds. This means that if there is a claim, the additional insureds can turn to the insurance carrier for the shareholder and contractors and demand to be defended in the action, or that it pay for damage to property. This insurance will usually be primary, meaning it comes before the building’s own insurance company would have to pay for the defense or property damage.

In the case of such insurance, sometimes the carrier for the contractors or shareholder requires more than the idea of naming the co-op as an additional insured in order to handle a claim. Sometimes they are looking to the contractual obligation that the shareholder or contractor has taken on by agreement.

The indemnification provision creates that contract obligation and can serve as the basis for the carrier insuring the obligation under certain types of policies. However, even without insurance funding to help with paying for the obligations, the shareholder having the alteration performed has the obligation to make sure that others are not harmed in the process.

This provision in the 2000 version of the alteration agreement was fairly basic and not that extensive. It was also rather broad in its scope and had the shareholder promising that the co-op, managing agent, architect, and other shareholders and residents would be held harmless from any damage or claims that arose out of or were related to the alterations or any acts of the shareholder who owned the apartment or any contractor working for the shareholder.

While this provision has been maintained in the new version of the agreement in concept, it has been modified to clarify a few provisions to satisfy some legal requirements and recent case law. The revisions made it clearer that while the shareholder was to indemnify the co-op and related parties from any liability arising out of the alterations, such indemnification would not be applicable where the co-op and the related parties were negligent and a cause of the damage that was the basis for the claim or liability.

This fix was needed to comply with the requirements of the state’s General Obligations Law that prohibits an owner of property from obtaining a liability exemption when the problem is caused by the owner’s negligence. This prohibition is a matter of public policy and voids any provision in a contract or lease that would exempt the owner.

In a recent case, the court looked at a very broad indemnification provision in a previous form of alteration agreement (not the 2000 bar association one) and ruled that it violated a mandated prohibition and voided the indemnification obligation of the shareholder to the co-op. The committee felt that even though the provision in the 2000 form was different than the one in the case, it was best to modify it to make it clear that the indemnification was not meant to insulate the co-op from its own negligence.

Deadlines and Extensions

The new form attempts to resolve the problem of alterations that continue for an unreasonable amount of time, disturbing neighbors and sometimes affecting building-wide systems. In the current form, the board would give consent for work to be performed for a finite period of time, as set forth in the “consent letter” attached to the form. The form itself specifically notes that the board does not agree or guarantee that the work can be completed in the tenant-shareholder’s proposed time period. If work is not completed, then it must cease until and unless the board agrees to enter into a new agreement or an extension with the tenant-shareholder.

Nevertheless, sometimes more time is needed, so it was recognized that some relief should be negotiated by the parties at the outset. The provision recognizes that if an extension is necessary, there is additional burden to the corporation and the other tenant-shareholders. But, instead of employing an entirely new application, the parties are given an option to work things out.

The mechanism provided for this allowance is for the parties to provide up front that there is a fixed time period during which the shareholder will be able to ask for an extension of the initial consent, taking into account the additional work and hardship involved, by paying the corporation a previously agreed-upon daily sum. The total amount is to be paid to the co-op when the extension is requested.

The provision does not suggest that this is a purely punitive amount, nor is it disproportionate to the work at hand. Among other things, the sum is designed to compensate the corporation for all that is involved before granting an extension, the additional oversight needed, the additional burden of allowing work to continue further, the inconvenience to shareholders, and other matters.

Although in some sense, the amount to be paid for the extension, which is negotiated in advance, is an exact sum. It was not presented strictly as an amount for damages (or punishment) to be liquidated, but can be seen as an incentive of sorts. A tenant-shareholder, facing a shutdown of work and an additional payment if he or she needs an extension, would probably try harder to finish on time.

Inspections

It might seem obvious that a property owner allowing a shareholder to perform work would have a right to inspect the job to make sure that what is being done is what was proposed. It is probably equally obvious that if the inspection discloses the work is not as it should be, then the corporation can require that deviations from the permitted alteration must be corrected.

This provision was to reflect actual experiences where tenant-shareholders or workmen denied access for an inspection. The committee felt that a more explicit provision would be appropriate to confirm the right of inspection, including inspections without prior notice, so that the parties are less likely to be able to cover up any offending issues. Still, the agreement does not call for the corporation to sneak into the apartment for this purpose, but does call for the presence of some representative of the owner or of the workers who are on site.

Consent

A number of practical issues commonly arise in alterations that are simply not dealt with in the prior model alteration agreement. One such issue involves consent, found in paragraph 6 (f). The new model requires that all consents and approvals must not only be in writing, but signed by an officer of the cooperative corporation or a duly authorized employee of the managing agent. All too often changes are made by a shareholder during the alteration who then claims that the superintendent knew and consented to the changes. Hopefully, this paragraph will eliminate such disputes.

“As Built” Plans

Under the old model, the plans for the alteration could not be modified without the approval of the co-op and its engineer. However, in the real world, changes are made and often forgotten (at least until there is a dispute). The new model alteration agreement now requires, in new paragraph 6 (e) (iii), that at the end of the alteration, “as built” drawings must be prepared and submitted by the architect or engineer who prepared the original alteration plans, or by his successor.

Before the addition of this provision, the architect (or engineer) merely had to certify that the job was completed and the shareholder had to provide proof of governmental sign-offs. The “as built” drawings are essential since they catalog in one place all changes that were permitted in the original plans. These plans will also serve as an important reference for work done in the future or for repairs of the alteration that may become necessary.

Deposits

Often in an alteration, the expenses incurred by the corporation can mount up as attorneys, engineers, or architects are called upon to review documents and deal with the shareholder’s professionals. In a major alteration, these fees and expenses can be extraordinarily high. The old model alteration agreement simply stated that the shareholder would indemnify the cooperative corporation for such expenses. The corporation could either bill the shareholder, or use a portion of the deposit required by the old alteration agreement. This deposit was also used to assure the faithful performance of the terms of the agreement (such as reimbursement for damages to the building, etc.).

This was not the best method for dealing with the reimbursement issue. After all, the one deposit was actually being used for two different types of expenses: the fees that are immediate, certain (although the amount may not be), and often ongoing, such as legal, architectural, and engineering. On the other hand, the deposit was also a protection against expenses that may have been incurred sometimes during but often at the end of the alteration.

Therefore, the new model alteration agreement includes two deposits. One is considered a payment “on account” of the fees and expenses the oversight by the professionals. The other, the more traditional deposit can be used for all other reimbursements.

A shareholder in the middle of an alteration is often not quick to write reimbursement checks to the co-op (especially because he or she is probably in the middle of cost overrun quarrels with his/her contractor), so the committee included a real deadline for the reimbursement. Under the model, the shareholder has three business days after receipt of the co-op’s demand to reimburse the co-op’s expenses. The same time period applies to replenishing the deposits (if the deposits are used for the reimbursement).

OTHER VOICES
Round Peg, Square Hole
Greg Carlson, executive director of the Federation of New York Housing Cooperatives & Condominiums, offers his views on the proposed agreement.

After reviewing the new alteration agreement, I see a few things that are new but not a dramatic change from others I have read. The problem is this: they are trying to fit a round peg in a square hole. The agreement is all-encompassing but not every renovation is a gut rehab – which this agreement covers.

Instead of trying to have one agreement cover everything, there should be an alteration agreement for a gut rehab or for combining apartments. In a renovation in which people are updating their kitchens and baths, but are not doing any structural renovations and do not have their own architect or engineer, the owners will need a different type of alteration agreement. Then, you have a third kind (a decoration agreement) for residents who are just painting or decorating their units.

Let’s try to be practical about this process and look at what the resident wants to do and not burden him or her with a mountain of legal clauses.

OTHER VOICES
Testing Legal Limits
Sylvia Shapiro, attorney and author of The New York Co-op Bible, offers her views on the proposed agreement.

In an effort to control overzealous renovators, the Committee on Cooperatives and Condominiums of the New York City Bar Association recently proposed a new model alteration agreement for co-ops. The agreement seeks to obtain its objective not by setting new restrictions on shareholders but by imposing significant cost burdens and non-monetary sanctions, some of which test legal limits.

Among the major changes are the following:

Review deposit. Under the agreement, shareholders would have to pay a newly established “Review Deposit” – an advance on account for all the fees the board estimates the building may incur as a result of the work being done, including engineers, attorneys, and other charges. While cost-shifting to reimburse buildings for actual expenses has been judicially sanctioned, this provision (Paragraph 1d) goes the next step, applying the concept to amounts neither incurred nor even known, determined solely by the board.

Upfront money. If the board spends down the upfront money, it can require a refill and if the renovating shareholder doesn’t pay within three days, he could be in breach of the agreement (see below), which carries potentially serious consequences (Paragraph 10).

In addition to being liable for these and other amounts (which are deemed additional rent and could trigger a default), the board may impose interest from the time payment was due at a rate equal to the lower of twelve percent a year or the maximum legal rate, currently nine percent (Paragraph 3, Definitions).

Late fees. The agreement does away with the notion of late fees, a number of which have been struck down by the courts as unenforceable penalties. Instead, in return for the board granting a contractual “extension period” to complete work, shareholders must agree to – and pay in advance – a specified amount per day for each additional day of work beyond the “Required Completion Date” (Paragraph 6d). But it’s at least questionable whether a court would deem such “consent” as freely given when it’s a condition for finishing necessary work.

Damages. Regardless of what the proprietary lease says, under the agreement, shareholders would have to pay to fix damages to their renovations caused by the board in the course of performing repairs for which it is responsible (Paragraph 13).

Breaches. Shareholders who commit any breach of the agreement, even if it’s an infraction unrelated to the work, like not paying within three days any sums claimed due, can be required by the board to undo all the renovations just done (Paragraph 17).

Indemnification. The indemnification provision has been expanded (Paragraph 9), but it remains to be seen whether it can withstand legal challenge, given the recent decision by the appellate division striking down an indemnification clause in a co-op’s alteration agreement as a violation of the General Obligations Law.

No doubt there are rogue renovators who need to be reined in. But the almost automatic response to this, and most problems, is to increase board power without imposing any corresponding oversight responsibilities. Will the application of ever-stiffer fees and penalties reform these offenders? Surely, the proposed changes will make the process more expensive and onerous for all. By more actively engaging up-front in the review process and monitoring troublesome renovations through regular inspection, boards might help prevent projects from escalating, thereby averting the need for such draconian sanctions.

This article was adapted from a post that previously appeared on www.highrisesociety.com, a new website dedicated to helping owners navigate the perils and pleasures of co-op and condo living.