My board says they’ll fine me $500 per day for liquidated damages if I don’t finish my renovation on time. Is that allowed? What if something unexpected delays my project?
“Liquidated damages are fees imposed by a condo or co-op board to give the building some control over a shareholder or owner’s renovation project,” says Niki Khindri, an associate attorney at Manhattan law firm Wagner, Berkow & Brandt, who negotiates construction contracts and handles construction issues for co-op and condo boards as well as shareholders and owners.
“These fees are intended to keep the project on time and provide a measure of damages if the work is not completed within a stated time frame,” she says.
Khindri says liquidated damages are typically found in an alteration agreement and are assessed on a per diem basis. “Sometimes the fee is staggered so it starts at $500 and then rises to $1000 or more per day if the project continues to overrun,” she says.
Negotiating liquidated damages with your contractor
If you are considering a renovation, it’s important to plan ahead, carefully review the alteration agreement and include a liquidated damages clause in the construction contract with your contractor, says Khindri.
“This means if the work is not done in time and you are charged for liquidated damages by the board, you can pass these costs on to your contractor,” she says.
Khindri points out it is much more difficult to reach a solution after the fact, once the work is underway and overrunning, which is why you need to anticipate these issues before you start your apartment renovation.
An attorney with experience of construction contracts can look over your agreement. “Your contractor might say it takes six weeks but not consecutive weeks, so in that case, the contractor could come and go and before you know it, you are going to be way beyond any time limit that’s in place,” Khindri says.
Renovation projects have a habit of taking longer than planned. Khindri says four months is usually the maximum time allowed for a renovation project in a NYC condo or co-op but it’s still important to build in as much time as you can into your construction contract.
Khindri says when negotiating a construction contract rider on liquidated damages it’s not uncommon for the contractor to ask for more time to complete the work. “When a contractor is responsible for liquidated damages they will often be more realistic about how long the project is going to take,” she says.
Damages versus penalties
Generally, as long as the imposition of the fees isn’t “unconscionable” (or seen as an unenforceable penalty) they will usually be upheld, subject to the business judgment rule, Khindri says. “This is a presumption that in making a decision, the board is acting in the best interests of the business and shareholders,” she says.
However, if the board’s fees are grossly disproportionate to any actual harm suffered, they may be seen as unenforceable penalties. This is why you will often see language in an alteration agreement stating that liquidated damages are “not to be considered a penalty” but are merely intended to compensate the co-op and shareholders for the unknown costs and inconvenience of the continued work.
“Some fees may be struck down if they are disproportionate or unreasonable,” Khindri says.
For example, if a fine imposed by a board does not reasonably approximate the damages for costs incurred, a lawyer can argue the fine is punitive and therefore unenforceable by law. However, Khindri says most recent New York cases tend to side with the board and “will defer to the board’s business judgment, even if the fees are outrageous.”
Legal representation will be necessary to negotiate a settlement in these cases. For example, if the delay is due to the building’s structural issues exposed during a shareholder or owner’s apartment renovation, you may be able to reach an agreement with the board. In these situations, it’s important to carefully review the co-op’s governing documents and the alteration agreement to determine who is responsible for any delays.
If your co-op stops the work without a valid reason for doing so and then later penalizes you because the work ran over, you can argue the liquidated damages are improper. “It’s best to get ahead of the problem as soon as the work is stopped and notify the board in writing that you are not responsible for the delays and state the reasons why,” Khindri says.
Another way to challenge liquidated damages is if the work you are doing is merely to build-back your apartment following a casualty event such as a flood or fire. In these situations, the shareholder would be performing necessary repair work, not voluntary alterations. Khindri’s firm has represented shareholders in these scenarios and successfully negotiated for the removal of a liquidated damages requirement from the alteration agreement.
The scope of your work could be an important factor. “If you’re doing $20,000 worth of work, you may have a better argument that a daily charge of $500 was disproportionate,” Khindri says.
Niki Khindri is a New York City real estate attorney with Wagner, Berkow & Brandt and focuses on real estate transactions, co-op and condo law, and intellectual property law. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Niki an email or call 646-780-7272.