The Board Room: Firing the managing agent retained by the sponsor is often a mistake. Except when it’s not.

Often when a sponsor loses control of a condo board after enough units have sold, the newly elected board makes a reflexive decision to change the managing agent that was initially retained by the sponsor. 

This is not always a necessary or, in the long run, prudent.  It can actually exacerbate many of the problems that plague young condo buildings, such as unfinished or improperly completed construction, budget issues and staffing problems. 

The institutional knowledge that the incumbent managing agent brings to the table around these issues should not be underestimated.  Changing managing agents solely because of a sponsor affiliation could wind up being akin to buying furniture from Ikea and throwing out the instructions with the box.   

While there is obviously the potential for awkward moments to occur and potential conflicts of interest to arise, a reputable management company understands to whom they owe their contractual and ethical obligations.

That said, although I generally advise against throwing the baby out with the bathwater, there are some instances where change is truly the best course of action.

Here three situations in which a switch may be necessary:

1. The management company is owned by the sponsor and construction on the building is not finished.   

This type of scenario often becomes untenable simply because the agent is pulled in too many different directions with regard to having to manage the day to day operations of the building and the remaining construction activities. 

Financial obligations can also become blurred; i.e., whether expenditures are a construction cost and thus the responsibility of the sponsor, or a maintenance or repair cost, which may be the responsibility of the condominium or a unit owner.

2.  The managing agent performs so poorly that the disruption associated with a transition pales in comparison–even if change costs more

This occurs when (i) the staff is in disarray; (ii) the finances are in disarray; and (iii) the agent is not responsive to the Board or unit owners.  Under this type of scenario, the level of service is so low that there is little, if any, upside to staying the current company.

Note that if the sponsor owns the management company and still has units for sale in the building, the management company may be working at a below-market rate designed to discourage a switch (and thereby enabling the sponsor to exert some measure of influence, official or not, over the management of the building).  Your board may need to determine whether to put up with a less than stellar job or absorb a fee increase.

3. The managing agent has betrayed the trust of the new board  

There are rare instances when despite its contractual and common law obligations to the condominium, the managing agent is unable to shed its allegiance to the sponsor, usually because of a continuing business relationship it wishes to protect.  If the sponsor has been finding out things that you didn’t want them to know, or you otherwise suspect that the agent’s first loyalty is to the sponsor or anyone other than your building, you may need to consider a change.  

Robert J. Braverman is a partner at the law firm of Braverman Greenspun, specializing in the representation of New York City co-op and condominium boards.