Revised State Law Fights Self-Dealing by Condo / Co-op Sponsors
Dec. 21, 2010 — Complain all you want about the New York State legislature, but condo and co-op boards have reason to be grateful: It recently passed a law that orders sponsors to proactively inform boards that you have the right to void any self-dealing contracts once unit-owners / shareholders take over a majority of the board.
That would have helped Paul Hindle. Like anyone would be, he was excited when he bought his condo apartment in 2007, in a 36-unit new construction in Manhattan. Then he moved in, and the problems began.
"The heat didn't work," he says. "The plumbing didn't work. There were cosmetic issues," like the closet doors not being finished. For the first six to twelve months, Hindle estimates, the problems kept cropping up. It was only through casual discussions with neighbors that he discovered he wasn't alone. One unit-owner's shower leaked. Another's vanity had fallen off the wall. Some kitchens weren't completed. There were floors that weren't finished.
"We went through the first winter and we discovered a big problem with the heat — it kept turning itself off. It turned out that the valves in every unit had been installed upside down."
It turned out that the heating
valves in every unit had been
installed upside down.
When the developer refused to offer restitution, and even refused to acknowledge there were problems, the owners got angry. Then they got organized. They formed a board, engaged an attorney, hired a new management company and started using the building's reserve fund to employ plumbing, roofing and heating experts to look at the systems in their building.Their organization paid off. "The minute we started to take control, he kind of walked away," Hindle recalls of the developer. "Since that day, he has been unbelievably disengaged. … Looking back on it, it was almost like the developer still saw it as his building, and we were almost treated as tenants." The unit-owners couldn't get a straight answer about getting their problems addressed. "That's why we formed the board. Had we not done that, nothing would have gotten fixed."
While the problems are not all eliminated, Hindle's building is on its way to digging out of its repair pit — next year, owners will see an increase of 10 percent in their common charges, to help pay in part for all the needed repairs. The developer will be feeling the pinch the most, since he still owns 20 percent of the units.
Legislature to the Rescue
Other new boards will have an easier time with such situations: On August 30, 2010, New York State Gov. David Patterson signed into law a revision to Section 352-e of the New York General Business Law, called the "NY GBL Amendment on Self-Dealing Contracts," to help counter sponsor self-dealing. (Federal law 15 USC 3601 - Sec. 3601 a.k.a. The Condominium and Cooperative Abuse Relief Act of 1980, may also help in such circumstances.)
Now, once shareholders or condominium owners gain a majority, you can end sweetheart leases a sponsor may have with commercial space in the building. You can fire the sponsor's building manager and hire your own, as Hindle's building did. And you have to be told, in writing, by the sponsor, when you can do this.
The revised language in the General Business Law says "sponsors of cooperative or condominium conversions [must] notify tenant-shareholders or unit-owners [that they are] entitled to terminate [self-dealing] contracts within 30 days of the date that right commences and at least six months prior to the date such right expires." But to get your rights, you must make sure you control the board.
To that end, "You have to get elected," says Geoffrey Mazel, partner at the law firm Hankin & Mazel.
Mazel, who counseled Hindle's building, says the problem with self-dealing sponsors is not as great as it was in the 1980s, when there were all kinds of conversions going on, though there are still ways in which sponsors try to skirt the law, such as finding shareholders friendly to their point of view, who run for the board as essentially secret proxies of the sponsors.
The sponsor was supposed
to give up control 20 years ago.
Super-Glued Sponsor
"I did have a situation [like that] about three years ago. The sponsor was supposed to give up control 20 years ago. I was approached by a shareholder group" who wanted to know how to get rid of the sponsor. "You've got to win the election," Mazel told them. But the anti-sponsor shareholders couldn't dislodge the pro-sponsor board.
"Years ago, co-ops and condos used to come to me and I would take a look at the contracts they had and often they would have self-dealing contracts, but the time period for the shareholders to vote to terminate had expired. This amendment would have prevented that," says attorney Steven Wagner, a partner with Wagner Davis.
The revision to the law would have prevented the self-dealing because the shareholders "would have known right away and sought advice much earlier." These days, says Wagner, "when I look at offering plans I don't see the self-dealing contracts, because sponsors [now] know what they can and can't do."
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