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30 Sep 2016
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Illegal Tenants:

In New York City, illegal leases and sublets are as common as Dunkin’ Donuts in Massachusetts.  A co-op’s proprietary lease can flat out forbid sublets of any kind.  It is also common for a proprietary lease to require a potential subtenant to interview with the board, or for the shareholder to wait for a predetermined period after purchase before considering a sublet.  Regardless of the type of restriction in the proprietary lease, if a shareholder violates it, the board can bring an action to evict both the owner of the premises and the subtenant in housing court.

While it doesn’t happen often, some shareholders in co-ops are even barred from allowing their adult children to move back in.  Some co-ops also block the right to automatic succession to shares or to the apartment.  There is, however, a slight work around courtesy of New York law.  Under the roommate law, which does apply to co-ops, a shareholder of record is allowed to have an additional occupant, and their minor children, live with them.  A shareholder is allowed to rent out a room of his/her unit to another person.  The caveat is that the shareholder must also be living there.  If the owner of the unit has a roommate and moves out leaving the roommate to occupy the unit alone, the roommate’s occupancy is converted into an illegal sublet.  Tenants often “get away” with doing this, however many co-ops do an annual inspection.

With condos, the individual units are structured with every apartment considered a separate property. While it is more difficult for condos to restrict a unit-owner’s lease/sublease of their own apartment, they still try.  The condo association can set rules and guidelines for tenant behavior and property use, and in more recent years, some condo agreements require board approval for tenants and subtenants.

When addressing an illegal sublet, there’s a requirement for the counsel to send a letter to the owner of record to cease and desist. And if they fail to do that, then their only recourse at that point is to go into court.  There are two ways of going into court. 1.) Go into housing court to evict the illegal tenant.  2.) Go into Supreme Court and force the sale of the unit for a violation of the condo or co-op agreement. These options can take much longer than most people would realize, and a victory for a co-op or condo building is difficult at best.  If a reasonable agreement cannot be attained before court intervention, its best to consult with legal counsel to determine what steps should be taken to attain the desired end goal.

 

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23 Sep 2016
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What Happens Behind Closed Doors:

Most co-op and condo residents understand that there is a board of fellow residents in place with the duty of protecting the interests of their building community and individual owners—they’ve probably taken part in numerous board elections, or even served on committees, or volunteered on behalf of the building in some capacity. But many residents who’ve never held elected office still don’t truly understand the roles of the board members.

They have responsibilities within the board, at board meetings, within shareholder and unit owner meetings and in dealing with professionals and building documentation. The board is also obliged to respond to changes in the economic environment, the membership base, and the physical and financial status of the building.  Board members need to think beyond their personal opinion and be more concerned for the good of the building, as they represent everyone.

Boards are normally made up of an odd number of directors and usually contain four officers—the president, vice president, secretary and treasurer. We have previously addressed in more depth the role of the president, who, among other duties, typically calls the meetings of the membership and of the board, prepares the agendas and leads deliberations. If the president is unavailable, the vice president steps in.  The treasurer is essentially the building’s chief financial officer, tasked with performing all duties pertaining to building finances.  The secretary is tasked with administrative duties – signing necessary documents, keeping meeting minutes, maintaining records, and keeping everyone informed of meeting dates and times.

Those serving on their board who don’t hold an officer position are usually referred to as directors, although some buildings come up with different titles for some members, depending on their role and responsibilities.  Often new board members enter into their positions without knowing the full scope of the responsibilities they’ll be taking on. New board members usually start off as a director, learning, watching and absorbing information.

Whether you are president, an officer, or a director, every vote carries equal weight, which highlights the importance of having an odd number of board members on each board.  A deadlocked vote is ineffective.  It’s important to understand that no individual officer or director is making all of the decisions.  Naturally, the election process varies from building to building.  Not every building decides to vote for their entire board every year. Some allow two- or three-year terms, but positions are usually staggered to ensure that while new blood is infused into the building’s administrative team, there is still some continuity and understanding of the process and how things work.

 

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16 Sep 2016
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Construction Defect Claims:

When a condo unit or the shares referable to a co-op unit are sold, a purchase and sale contract is created between the building’s sponsor and the purchaser.  In addition to other obligations, the sponsor is required to provide an offering plan that provides the purchasers with full disclosure regarding both the unit and the building in which the unit is located.  Offering plans include details such as the construction and layout of the building and condominium units, materials used for the building’s construction, what fixtures and amenities will be included in the units, projected income and expenses for the building, the percent common interest applicable to each unit or set of shares, and the sponsor’s warranties and disclaimers regarding the building’s construction.  As we have previously discussed, the requirements of the offering plan are set forth in the Martin Act and are exclusively enforced by the New York Attorney General.  Such regulations are intended to protect consumers from unscrupulous or careless sponsors.  When these mechanisms fail, condo boards resort to litigation to ensure the sponsor repairs the defective units.

As a result, the “exclusive enforcement” provision of the Martin Act, private plaintiffs are restricted in bringing fraud claims against building sponsors.  As such, the strongest claim available to condominium purchasers in construction defect cases is typically a claim for breach of contract.  The prevailing party in a breach of contract legal action must prove that the damages suffered by the plaintiff were a result of the defendant’s breach.

When suing under a breach of contract theory, the condominium’s board of managers or individual unit owners/shareholders claim that the sponsor breached the terms of the purchase and sale agreement by failing to build and deliver the building and units in accordance with the representations made in the purchase and sale agreement, and as a result, the building and its owners/shareholders have incurred damages to fix such defects.  It is important to be mindful of the fact that courts uphold the statute of limitations for a breach of contract claim in a construction defect case from the date that the sponsor closed on the sale of its first condominium unit in a particular building.  Further, private plaintiffs may be able to bring a breach of contract claim against the sponsor’s architect, if they can successfully prove that they were intended to be “third party beneficiaries” of the contract between the architect and sponsor.
 
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14 Sep 2016
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The Counterfeit Mall:

Design piracy is actually not illegal in the United States.  A discount manufacturer or designer’s goods that mimic a luxury brand’s look without displaying the original designer’s name or logo is, in most cases, acceptable.  However, the manufacture and sale of a fake designer handbag (for example), complete the original designer’s name and logo is a different matter altogether – it’s an illegal counterfeit good.

Odds are, a tourist strolling down through certain parts of Chinatown in Manhattan will likely be met by seedy merchants offering counterfeit goods.  Much like any illegal purchase, buying a counterfeit Chanel handbag can take you to a shadowy back ally or up a dark stairway to a small room full of fake designer goods.  However, in some cities, like Shanghai, these counterfeit goods can be found in a regular shopping mall.

The Han City Fashion & Accessories Plaza in Shanghai has, since 2006, been a tourist destination, where you could purchase cheap counterfeit goods – anything from counterfeit Tory Burch and Michael Kors goods to North Face backpacks.  Lonely Planet’s website describes Han City as “a popular location to pick up knock offs, with hundreds of stalls spread across four floors,” and encourages tourists to “scavenge for bags, belts, jackets, shoes, suitcases, sunglasses, ties, T-shirts, DVDs and electronics.”  Han City is perhaps the most brazen of Shanghai’s counterfeit markets, just down the street from luxury stores carrying genuine versions of the counterfeit merchandise sold in the mall.

Yet, it seems as though Han City’s decade long streak may be coming to an end.  Citing pressure from the “adverse effects” of online counterfeit sales and the Chinese government’s increased focus on intellectual property rights, Han City’s landlord announced that Han City would be closing at the end of June.  A number of retailers have vacated, citing increased government pressure, including weekly visits from officers of Shanghai’s Municipal Administration for Industry and Commerce.  As of August, some counterfeit retailers remained open, but probably not for long, as the mall changed management at the end of July, and many vendors believe the new management team plans to bring in legitimate vendors and raise rents.  While there is still a long way to go to stamp out all of the counterfeit markets in Shanghai, the closure of Han City is a victory for both the government and luxury brands facing the unending battle to protect their rights.
 

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09 Sep 2016
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Common Law Fraud:

In 1921, New York enacted the Martin Act, often referred to as New York’s “Blue Sky Law,” to fight fraud in connection with the public sale of securities and later, real estate offerings.  The Martin Act, New York General Business Law article 23-A, sections 352–353, gives the attorney general exclusive enforcement powers, including both civil and criminal remedies.

The Martin Act requires that a condo or co-op sponsor fully disclose all material terms, including certain disclosures about a building’s construction and projected finances, within the offering plan.  Under the Martin Act, only the attorney general may bring an action against a sponsor if the sponsor fails to disclose the required financial and construction details.

The Martin Act’s “exclusive enforcement” provision leaves private entities and individuals with a lack of authority to pursue any Martin Act claims against a sponsor. While private plaintiffs can still bring common law fraud claims, a common law fraud claim requires a private plaintiff to prove that the sponsor made an affirmative statement within the offering plan that can be proven to be false, and that the sponsor knew the statement was false at the time it was made.  A simple omission of fact in the offering plan is not persuadable by a private entity, as it would fall solely under the purview of the Martin Act and the attorney general to remedy. Further, courts have been quick to dismiss such actions as impermissible tricks, noting that such parties are not permitted to bring an action based on the sort of claim over which the attorney general has exclusive jurisdiction under the Martin Act, and that “artful pleading” will not result in a successful common law fraud claim.  This often arises in the context of construction defects, in which it is next to impossible to prove intent, making a common law fraud claim unsustainable.

 

 

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02 Sep 2016
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Recourse for Non-Payment:

Co-op fees are a well-known fact of New York life and a general cost of living, but what happens when your neighbors don’t pay their fair share?  What recourse do boards have when payments are late or missed for months at a time? How does the process work?

Boards, of course, are not banks, who have armies of clerks on hand to eagerly jump on a missed payment. Boards can ultimately foreclose on a property for a condo or on shares in a co-op.  However, the foreclosure process is far from swift and comes with steep legal costs.  For a condo, the building should first file a lien against the unit/shareholder pursuant to New York Real Property Law Section 339-aa, which provides a vehicle for foreclosure in a manner similar to foreclosing on a mortgage.  Additionally, if there are any pre-existing liens, such as real estate tax liens or from a mortgage.

While in most instances, including a condo, a mortgage-holder is the first to be paid in the event of a foreclosure, this is not the case with co-ops.  In the case of a co-op, the building’s interest is superior to that of the mortgage-holder.  When seeking payment of back-due maintenance fees, a bank can pay the back-due fees to the co-op and preserve its own interest.  Once the fees are paid and the bank’s position is secure, the bank can then institute foreclosure proceedings against the shareholder.  Unlike a traditional foreclosure, this process can be swift. In a few months, the shares can be foreclosed upon.

There are, of course, non-judicial collection options, including sending notices, publicly posting names of delinquent unit owners, or banning them from building facilities and suspending amenities.  Or, as the law and most condominium bylaws require that arrears in common charges be paid from the proceeds of the sale or by the buyer, a board of managers could also wait for voluntary sale of the unit to collect the delinquent fees.  While there are situations when a board might choose to allow a delinquent shareholder to pay later—if, say, an owner has been sick but is going back to work and back on full salary—it is best to avoid favoritism and the risk of a discrimination lawsuit that comes with it.
 
 
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