How Condo Boards Can Protect Themselves From Sponsor Negligence

When a sponsor hands over control at a new construction condo, there are often growing pains. Some are very minor — like wall or floor finishes in the apartments or common areas — and can be handled as punch-list items. But others, like facade, plumbing or elevator issues, have to be remediated to ensure the health and safety of unit-owners. With facade defects, for example, you have to get permits, a license agreement with your neighbors to put up proper protections, contractors with the proper insurance. 

TALK IT OUT FIRST  If you notice any defects, you should hire an engineer or architect to do a transition study of the building systems in their entirety to make sure there aren’t additional problems that aren’t apparent. Ask unit-owners if they have any issues in their apartments, so you're able to target the areas that require the most attention. Your professionals will conduct further investigation and write a very detailed report, which you should put together with a demand letter saying, "Here are the problems that the building is 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." Some sponsors will come in and actually do the work, but if not you’ll want to have open communication and make sure you’ve exhausted all avenues before commencing a costly litigation. 

KNOW YOUR OPTIONS If the sponsor is antagonistic, you can file a breach of contract claim. Timing is important here. You have to do this within the six-year statute of limitations after the first unit is sold; otherwise, you're precluded from bringing claims against the sponsor and may have to foot the bill for all the repairs. If going to court is necessary, you file either a summons with notice or a summons and complaint. The sponsor has 20-30 days to respond, and if they don’t do so you can move for default against them. But there’s another option at this stage: entering into a tolling agreement with the sponsor to suspend the statute of limitations while negotiations take place for the sponsor to correct the building issues, potentially avoiding a confrontational lawsuit.

MOUNTING COSTS  In the worst case scenario, the sponsor refuses, and in the meantime you’re getting hit with escalating violation fines, unit-owners are living with problems, and you have to foot the bill for repairs. Even if the court rules in your favor, you can still be out of pocket because sponsors are single-use entities that don't necessarily have bank accounts or hang around after they divest themselves of all of the profits from the building. And you can’t recoup your legal fees unless there's a specific provision in the offering plan, which — surprise, surprise — is something a sponsor would almost never put in.

DOCUMENT EVERYTHING  All of this means that boards have to do the proper due diligence. As soon as you discover that there are construction issues, have the managing agent send out a survey to unit-owners to see if anyone has complaints in the building. Save the emails and notify the sponsor as early as you can. Also, unit-owners will often be in communication with the sponsor directly after they purchase their units for punch-list items and other issues. You want all of that so you have a paper trail. That initial work will pay dividends later on.