Costs of Prosecuting Claims Against Sponsor Can Skyrocket

The board at a 10-unit Tribeca building has learned how difficult it can be for a condominium to fund litigation. The board decided to sue the condominium’s sponsor, claiming that the sponsor failed to reveal physical defects in the building, failed to fund the reserve fund as required, and allowed one of its principals, the owner of the building’s commercial space, to cause structural damage to the building. In its suit, the board claimed unit-owners faced “staggering” costs to repair existing damage and prevent further damage. 

Before filing suit, the board had to figure out how to pay for the legal expenses they would be facing. The bylaws of the condominium state that the board of managers, at least annually, shall prepare a budget for common expenses in order to fix the monthly common charges payable by unit-owners. The common charges may include an amount “for a general operating reserve.” The bylaws also provide that the board may impose “assessments as are necessary to provide funds for other condominium purposes [and] expenses which were not anticipated at the last time common expenses were determined.” Assessments greater than $25,000 require the approval of at least 50 percent of unit-owners. 

The board voted to authorize a $25,000 special assessment on all unit-owners, to be used for legal fees and expenses. Going further, it also authorized additional common charges of $227,000, spread over a 22-month period, for the funding of reserves to pay legal fees and expenses. 

Unit-owners were billed for the special assessment and additional common charges. The owner of the basement and first-floor commercial unit – whose principal was a member of the sponsoring entity – did not pay its bill and challenged both charges. The state Supreme Court rejected the challenge to the assessment out of hand, finding that it clearly fell within the authority of the board granted under the bylaws. 

However, the increase in common charges was more problematic. The board argued that the $227,000 in additional common charges was for “a general operating reserve,” as authorized by the bylaws. The sponsor argued that that the term “general operating reserve” was not intended to encompass reserves for litigation. The court found that the documents on their face were insufficient to sustain the board’s position, and that the matter could not be determined without fact-finding proceedings to ascertain their meaning. Fact-finding proceedings can be time-consuming and costly. 

The lesson here is that the bylaws of condominiums establish the circumstances under which the board of managers may increase common charges and impose assessments. These circumstances are very often much more restrictive than those under which co-op boards may take similar action. Boards should study their bylaws carefully and seek legal counsel before taking action to raise money from their unit-owners that may be controversial – and subject to legal challenge. 

Victor M. Metsch is of counsel at the law firm Smith, Gambrell & Russell.