Gallet Dreyer & Berkey, LLP | When Sponsors Transfer Control of Condominiums to Unit Owners - Advice to New Board Members
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When Sponsors Transfer Control of Condominiums to Unit Owners - Advice to New Board Members

09/10/2011 | Fall 2011 Newsletter
Many condominiums built during the construction boom have recently transitioned from being controlled by the sponsor that originally developed and built the condominium to being controlled by the resident unit owners. Once the sponsor turns over control of the building to the unit owners, an election is held in which unit owners can run for the board of managers, which controls the condominium’s affairs. These first new board members have important responsibilities and make several important decisions that will chart the building’s future.

The new board must hire competent professionals to assist in determining whether the sponsor met all of its obligations under the condominium’s offering plan, and to guide the board to take appropriate actions where the sponsor did not meet its obligations.

If the building was newly constructed or had substantial renovations, the new board should hire an independent engineer or architect to review the construction and identify any deficiencies. The board should carefully examine whether the construction met the requirements of the building code and the condominium’s offering plan.

The new board must select a managing agent and a condominium accountant. The managing agent will be responsible for the day to day management of the building. The board should ensure that the managing agent is independent from the sponsor. Many sponsors install managing agents that are affiliated with the sponsor. Sometimes, such managing agents do not always put the resident unit owners’ best interests first.

The same theory holds true for the condominium’s accountant. Once the first board takes control, it is important to learn whether the sponsor spent the condominium’s money properly. An independent managing agent and accountant should review all expenditures of condominium funds by the sponsor and its affiliated managing agent, to ensure the monies were spent properly on condominium projects for which the sponsor was responsible.

Once the board has the appropriate information to determine whether there was any improper conduct by the sponsor, either by misappropriation of funds or faulty construction, it should consult an attorney to review its options for recovery. In many instances, the sponsor has used a shell entity with no other assets, and by the time the board speaks to an attorney, the sponsor no longer owns any units in the building. As a result, filing a lawsuit and getting a judgment against the sponsor may not result in the board seeing any money. We have found that in disputes with sponsors, typically the best method is to try to negotiate with the sponsor and, where necessary and appropriate, to bring complaints to governmental agencies, such as the New York State Attorney General and the Department of Housing Preservation and Development.