Alteration Agreements Must Have These Three Elements

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. Here are three must-have provisions of every effective alteration agreement: 

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. 

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; and make good on any legal judgment attributable to the project. 

Insurance provisions. 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. 

Make sure there are no gaps in your alteration agreement. When a project goes awry, what’s missing from the agreement can come back to bite the board. Hard.