Monitoring Owners’ DOB Permits - Fensterstock Law

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Joshua Fensterstock, Partner, Fensterstock Law. Are boards and managing agents responsible for ensuring final sign-off on building permit applications filed by residents and commercial tenants?

BACKSTORY We recently completed lease negotiations for a client who rented a commercial space from an Upper East Side co-op. The building’s certificate of occupancy (C of O) listed the storefront space as “retail” space; however, our client was looking to open a doctor’s office at the location. The lease provisions, which were standard, provided that our client would be responsible for any changes to the C of O that may be required for the operation of the space to accommodate the intended use. Concern arose prior to signing the lease because a simple search of the New York City Department of Buildings’s website revealed that there was an open building permit for the combination of two residential units in the building, which required a change in the building’s C of O as well.

Until the co-op resolved the open permit issue from the residential unit combination, our client’s architect would be prohibited from filing the necessary building permits with the city for our client’s work and for any subsequent application to change the C of O as it related to the commercial space. From our client’s point of view, there was also greater concern that if the co-op did not resolve the residential permit issue, our client could not proceed with an application to change the C of O. The city could then shut down our client’s operations. That would have cost our client not only the lease expenses, which would not toll, but also lost income, all without recourse under the terms of the lease. The resolution was that the lease had to be renegotiated, and the co-op had to assume responsibility for any ill effects the open residential building permit may have on our client’s operations. Ultimately, the co-op resolved the issue with the unit-owner, and our client was able to proceed with the proper building permits and application to change the building’s C of O, which will ultimately reflect the changes to both the residential and commercial areas of the building.

COMMENT The lesson every board member and managing agent should take away from this story is that the association has a responsibility to monitor the building applications submitted by unit-owners very carefully from start to finish. All too often, the focus is placed on the initial application for a renovation and/or combination, and the attention paid to the final sign-off from the city is consequently lost in the shuffle. A failure to properly monitor building applications could potentially lead to fines issued by the city for violations, as well as expensive litigation if residential applications interfere with a commercial tenant’s business. It is the board’s fiduciary duty to all of the unit-owners in the building to make certain that all filings are properly completed; and while the Business Judgment Rule may prevent liability from being imposed upon individual directors, board members can be held liable for their negligence in failing to take an action. Managing agents engaged by the boards to handle the day-to-day operations and who undertake to oversee the correct filing of building permit applications also assume a fiduciary duty to the boards and the unit-owners to see these applications through to completion.

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