The Real.Est List
The Board Room: How to get a sponsor to do something they'd rather not
Everyone has heard about the morass of litigation that frequently takes place between sponsors and residents in the courthouse or the Attorney General’s office.
But it doesn’t always have to be that way.
Here are a few instances in which reluctant sponsors have been—and can be—persuaded to work cooperatively with unit owners without resorting to more drastic and expensive means.
1. Convince the sponsor to give up a seat on a board they control
In newer buildings where the sponsor still retains the majority of the board seats, unit owners are usually entitled only to a couple of seats at a time during which there are typically lots of growing pains in the building.
While sponsors won’t give up control, it’s frequently possible to secure an additional board seat for residential unit owners so that, for example, there will be three resident board members instead of two on a seven-member board to handle staff issues and quality of life issues that a sponsor typically is not interested in focusing on as much.
There are two key persuasive points.
First, remind the sponsor that the building will be a better place to live—and theoretically more attractive to prospective buyers of unsold units.
Second, the sponsor can be assured that in the event not all of its representatives are able to attend a board meeting, and, as a result, it does not have a majority at that meeting, the residential members will not take advantage by making decisions that the sponsor would not be in favor of (an exercise which, if attempted, would backfire anyway since the majority could un-do the measure it did not support).
2. Persuade a controlling sponsor to fix open and obvious construction defects, or to get an engineer’s study before relinquishing control of the board
While it is true that many of these types of cases wind up in court or the Attorney General’s office, there are some issues that can be dealt with by a simple reminder to the sponsor representatives on the board that as board members, they are functioning in a dual capacity--meaning they owe a fiduciary duty to the owners in the building that includes investigating and addressing open and obvious construction defects.
Turning a blind eye will not only leave the sponsor exposed to liability, but possibly give rise to claims against the individual sponsor representatives on the board for breach of fiduciary duty.
3. Convince a sponsor who has sold all its units to come back and finish/fix things that aren’t done
Once a sponsor sells out and effectively leaves a building, it can be tough to get it to fix things like lobbies that don’t look up to par, outdoor spaces filled with dead and dying plantings, incomplete gym equipment, etc.
If the sponsor has other projects in development, remind its representatives that it pays to cultivate a reputation of delivering a project as close to what was originally intended as possible. A roof deck that was supposed to have grills and furniture and nice plantings but actually consists of a plastic bench and some weeds is not going to reflect well on the sponsor's reputation.
If the sponsor maintains that it has complied with all of its obligations, try to negotiate a “shared cost solution” which, if successfully negotiated, will invariably be less expensive and more effective than a lawsuit or complaint to the Attorney General.
4. Motivate a sponsor to deal with a troublemaking renter
In a conversion situation, in which the sponsor retains ownership of some units and rents them out, it can be difficult to motivate a sponsor to take appropriate measures to deal with tenants that cause problems for the building (hoarding, secondhand smoke, excessive noise, etc.).
In a co-op, if the tenant’s behavior breaches the building’s proprietary lease or violates the law, a sponsor can be served a ‘notice to cure.’ If the behavior continues, you can attempt to terminate the sponsor's lease and threaten to foreclose on its shares.
In a condominium where the renter’s behavior violates the association’s bylaws or the law generally, an action can be commenced against the sponsor to enjoin the violation. If a condominium board is required to take such measures and an injunction issues, the sponsor can be required to reimburse the association for its legal fees (provided the by-laws have an “attorney fee provision”).
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