When to Speak Up and What to Say

Lots of older buildings undergoing facade work are uncovering unsafe conditions, and new buildings have their own construction defect problems to contend with. Is there a duty for boards to disclose to apartment owners any unsafe conditions?

Believe it or not, the answer is no. There is no statutory authority that requires boards of either condos or co-ops to disclose construction defects or needs for repairs to their owners. It’s not a breach of fiduciary duty if they don’t. In fact, the rules that pertain to disclosure for co-ops, the New York Business Corporation Law, requires boards to take minutes of meetings, but nothing that specifically requires disclosures. As for condos, the Real Property Law in the Condo Act has something similar about the duty of secretaries to take minutes at board meetings, but again, nothing specific requiring boards to make those disclosures.

Let’s say a co-op is doing facade work, the contractors do probes and find out that the structural steel is compromised. Suddenly a project that was anticipated to cost $1 million is now 10 times that amount. How should a board proceed?

There are a multitude of considerations. There’s no affirmative obligation to disclose, but how does a board traverse this landscape where it has property values to contend with? That’s a tough question, and every board answers it differently. But it’s important to note that there are a multitude of laws on the books in New York that require the owner of a property, which in this case is both a condo and co-op board, to maintain and repair the common elements. If they uncover a $20 million structural steel problem, they have to figure out how to deal with it. Boards can’t stick their heads in the proverbial sand. They must take some action, and taking action should be disclosed in meeting minutes.

So you disclose that you’re going to spend $20 million on repairs, but you don’t have to say it’s because the steel is rotted, and it’s going to fall down?

Correct. Meeting minutes are actually a pretty unregulated area of the law. Minutes really are there to evidence actions that are taken. There is a presumption that if an action is taken by a board and it’s not in the minutes, it wasn’t authorized. So I advise my boards that if you’re going to vote on, say, entering into a construction contract or taking a loan to finance construction, that you need a resolution, or at the very least, have that vote evidenced in the minutes.

So boards don’t have the duty to disclose, but what is the risk if they don’t?

In terms of the fiduciary obligation of boards to disclose, there really isn’t one. But the question is interesting, because what about tort law? What if there’s a trip and fall? What about if the building, God forbid, falls down? The obligation to maintain and repair for building owners is nondelegable, which means that regardless of whether they disclose or not, they’re ultimately responsible in the end. Now, judges in cases do look at the facts when it comes to damage mitigation. But generally speaking, disclosure isn’t a magic pill that’s somehow going to protect the board from liability.

If you send out a memo to residents saying you have structural problems and are going to have to spend an enormous amount of money, what does that do to the marketability of the apartments?

This is the tightrope that I mentioned before. How do you balance the need to tell your neighbors what’s really happening versus the need to protect them in terms of their property values? When you put anything in the minutes or disclose types of issues like this at a public meeting, the rumor mill can start, brokers will find out, potential buyers will be reviewing them in the minutes, and property values will likely take a hit. I’ve been involved in litigations where we’ve looked at diminution in the value of a property before and after known construction problems occurred and were disclosed. There is a sharp decline. So boards have to balance.

If you do disclose and there is a decline in market value, do board members have liability?

You shouldn’t as long as your disclosure is on behalf of the board and the board decided to disclose it. As a board member you wouldn’t want to go rogue on that. That should be a concerted decision that’s made at the board level about the communication and how that would go out. In that case, you shouldn’t be liable.

Residents would certainly want to know if there’s an unsafe condition in their building. Is there a way they can force boards to disclose them? 

Yes. Certainly a group of unit-owners or shareholders that are like-minded should first approach the board and request that the board take steps to amend the bylaws or the proprietary lease to add in a requirement to disclose health, life and safety risks. If the board doesn’t want to do that — let’s say because they’re particularly sensitive about protecting market values — then most governing documents allow for a certain threshold of unit-owners or shareholders to petition for a special meeting. And the owners or shareholders can force the hand of the board. It typically requires a supermajority. But if they’re organized and really want that to happen, it can be done.

What would you say the takeaway is here?

First of all, boards need to take action to remedy a defect. Boards should hire architects or engineers and rely on them when determining how to maintain and repair their building. And they should record their decisions in the minutes of the board meeting. That is the best way a board can protect itself from liability.