Fine Tuning

It was maddening. Shareholders in a 780-unit Queens co-op kept complaining to the board about banging noises in the middle of the night coming from a particular apartment. When the board asked to inspect the apartment, the shareholder who lived there refused. Finally, building staff got inside – and discovered that the shareholder who lived there had undertaken a gut renovation without board approval.“There were no walls, the wiring was exposed,” recalls attorney Geoffrey Mazel, a partner at Hankin & Mazel, who represented the building. “That’s when we went to court to protect the co-op, to make sure all the wiring and plumbing were done properly. The first thing the shareholder had to do was submit an alteration agreement, then city permits and licenses and insurance, to make the job legal.”

Although most co-ops and condos have an alteration agreement in place, many lack key elements. And when a project goes awry, what’s missing from the alteration agreement can come back to bite the board. Hard.

Security Deposit

One common oversight is forgetting to require an appropriate security deposit. “If someone is doing what’s clearly a multimillion-dollar renovation, [the deposit] may be larger than if somebody is just having their bathroom done,” says Manhattan co-op, condo, and construction attorney C. Jaye Berger.

The alteration agreement should also make clear that the security deposit will not be returned until all sign-offs for completed work have been obtained from the building’s reviewing architect, the Department of Buildings, and any other city agencies.The alteration agreement should also require the shareholder’s architect to identify the signoffs that are necessary, including interim electrical and plumbing signoffs. And attention should be paid to the signoffs themselves, advises co-op and condo attorney Alfred Taffae. “Rather than placing all the burden on the managing agent,” he says, “you have something for him to follow when he goes back at the end and looks to see whether the required signoffs have been obtained – before you release the security deposit.”

Indemnification

It’s also essential that an agreement include comprehensive indemnifications to protect the board and the property manager from any claims of damage to the building’s common elements or neighboring apartments. Attorney Bruce Cholst, a shareholder at Anderson Kill, includes four types of indemnifications in agreements he prepares. The unit-owner must promise to:

•    assume full responsibility for any damage caused by his or her project and not blame anyone else,
•    reimburse for damage done to a neighboring unit or common area,
•    pay for the legal defense of anyone who is sued as a result of injury related to the project,
•    make good on any legal judgment attributable to the project.

In general, the board has the right to reject a shareholder’s application to renovate his or her apartment. When it approves an alteration project, the board exposes itself, other inhabitants of the building, and even third parties to the risk of damage, disturbance, and legal liability. “As a quid pro quo for [the board] saying ‘yes’ and allowing the owner the privilege of improving his apartment, [the owner] ought to be willing to accept responsibility for the risk of mishap arising from his project,” Cholst says.Given the possibility of the co-op or condo board’s own negligence, any such provision must contain a caveat stating the indemnifications are unenforceable in the event of the building’s negligence. “Unless you have that caveat,” says Cholst, “you’re giving [the owner] the legal loophole to claim that the damage is not attributable to his work.”

To maximize the board’s ability to ensure that a shareholder or unit-owner is liable, the agreement should stipulate the board’s right to have the super or an architect conduct inspections to establish baseline conditions in the apartment being renovated and in units to either side and directly above and below it before work begins. This should include the right to videotape the apartment and neighboring units so that if any damage occurs, the board has a before-and-after record of the space.

The super or architect must also be allowed to conduct interim spot checks as work proceeds. Such checks not only allow the reviewing architect to confirm there is no pending disaster but also “to make sure the unit-owner is doing only the work he said he was doing and not sneaking in unauthorized work like putting in a Jacuzzi he didn’t tell anybody about,” Cholst says. By reserving the right to do interim inspections, the board also makes sure its reviewing architect is able to check any work done before walls are closed, including conducting water retention tests in a new bathroom, says Paul Herman, president of the real estate firm Brown Harris Stevens.

Usually, any piping, plumbing, or electrical infrastructure outside the walls of an apartment are the responsibility of the co-op or condo to maintain, repair, and replace. However, “if a shareholder needs to change the pipes because they’re doing work in the apartment and could be changing the configuration of the piping, the alteration agreement must be very clear that the shareholder is now responsible for any problems, repairs, or maintenance with the piping or plumbing or electrical wires that have to be replaced or altered,” says Mazel, the attorney.The board has to strike a balance between taking precautions to protect itself from possible liability and doing its best to keep shareholders happy by accommodating reasonable requests.

Insurance provisions

Another element often missing from agreements has to do with insurance. Any contractor hired by a shareholder must be insured, and the building can require the shareholder to carry homeowner’s insurance for the duration of the work. The agreement should also require that the contractor get additional coverage that will protect the building if one of the contractor’s employees is injured during alterations, and then sues. Because of workers’ compensation regulations, the injured employee “can’t sue his employer, the contractor, so he will sue the building and the managing agent,” says Berger, the attorney. “Not all contractors have policies that would cover that kind of claim, which are called ‘third-party action-over’ claims.”

The agreement should give the board the right to have its property manager or building attorney examine the contractor’s actual insurance policy rather than just accept a certificate showing the contractor is insured, Berger says. The property manager also needs to make sure the contractor has signed the contract for the alterations. “If the contractor for some reason doesn’t sign, that might perhaps make a loophole for claiming maybe these people aren’t additional insureds.”

As the Queens co-op discovered in dealing with the shareholder doing his own illegal renovations, agreements should clearly state that penalties will be assessed for each day a project runs beyond the agreed-upon completion date. After the initial time has elapsed, the board can require a meeting of the shareholder’s consultants, the contractor, the shareholder’s architect, the building’s architect, the managing agent, and sometimes the shareholder. The purpose of such a meeting, says Herman, is to reach “a firm understanding about expectations [for completion].”

In the Queens case, the shareholder was ordered to submit a list of licensed contractors he was using, as well as proof of contractors’ insurance policies and required city permits. The legal action by the board proceeded in phases, with multiple court check-in dates, by which time particular parts of the renovation project had to have been completed. The work finally cost the shareholder tens of thousands of dollars more, including fines and fees imposed by the board, Mazel says. It took an additional six months to finish because the shareholder didn’t have the money to pay his contractors.

“He was a strange guy who didn’t care about the rules,” Mazel recalls. Which underscores the need for a comprehensive alteration agreement, free of loopholes but loaded with teeth for dealing with people who don’t care about the rules.