LEGAL CORNER: A Heightened Focus on Inspections, Due Diligence After the Tragic Condominium Collapse in Florida
John Dolgetta, Esq. | August 12, 2021
On June 24th, 2021, our nation witnessed one of the deadliest and most tragic building collapses in its history. It sadly claimed the lives of 98 unsuspecting and innocent residents. Our thoughts and prayers go out to the victims and their families.
Since that sad day, information has continued to come to light in the news regarding the horrific structural conditions of the condominium and the documented history of the complaints relating to those conditions. A tragic event such as this serves as a reminder to all real estate professionals (attorneys, real estate agents, management agents, etc.), and to those individuals who are interested in purchasing a condominium unit or cooperative apartment (the “unit”), of the critical importance of conducting all of the necessary due diligence and physical inspections even when purchasing a condominium or cooperative apartment.
Buying a Condo or Co-op, Do You Need an Inspection?
It is not uncommon for real estate agents and attorneys to advise their purchaser clients to waive their inspection rights when the purchase of such a unit is involved. A common rationale for advising against having an inspection conducted is that other than the limited items contained within the confines of the walls of the unit, the condominium or cooperative corporation is responsible for most of the structural elements, as well as the electrical and plumbing systems throughout the building or condominium. Purchasers are commonly told that purchasing a unit is different from purchasing a free-standing, single-family residence, and hiring a home inspection company or engineer to inspect a unit is not necessary or a waste of money.
In fact, and especially after the horrific condominium building collapse in Florida, the exact opposite is true. Now, more than ever, it is imperative that real estate agents and real estate attorneys advise their purchaser clients to conduct physical inspections of not only the unit, but also of the systems of the building and condominium’s common elements, to the furthest extent permitted by the condominium or cooperative corporation. While some cooperative corporations and condominiums may limit the extent to which common elements and other building systems may be inspected, inspectors may be able to visually inspect those areas that are accessible to them. Considering the tragic events of June 24, purchasers and their agents should request express permission to have their inspection company inspect other parts of the building, as well as the unit itself.
The Importance of Additional Due Diligence:
Review of Minutes, Financial Statements, Other Records
When a purchaser is buying a co-op or condominium unit, it is important that the purchaser and the purchaser’s attorney review the following: (1) the previous two to three years’ (or more, if available) financial statements, minutes of the cooperative corporation’s board meetings or the condominium’s board meetings from the past two-to-four years (at the least), the co-op’s or condominium’s rules and regulations, the Offering Plan (and any amendments), as well as the By-laws and any amendments thereto.
It is strongly recommended that most of these documents, except for the minutes (which many times will need to be reviewed at the management agent’s office in person), be obtained from the seller and/or the management company by the real estate agent prior to or immediately after listing the unit for sale. This will greatly speed up the contract preparation and due diligence process. If all of these documents are obtained and provided to the seller’s attorney, who in turn will provide them to the purchaser’s attorney, the contract review and due diligence process will be reduced by several days.
Review of the Co-op’s and Condo’s Board Minutes
In New York City, it is a common occurrence for the purchaser or purchaser’s attorney to review the minutes of the board meetings before entering into contract. Unfortunately, it is a rarer occurrence in areas outside of New York City, such as Westchester, Putnam, Rockland, Long Island, Orange County, and other areas. In these areas, it just has not been a custom for agents or attorneys to advise their purchaser clients to review the minutes. However, notwithstanding this custom, it is important that both real estate agents and attorneys strongly advise and recommend to their clients that the minutes be reviewed either prior to entering into contract or that a contingency period be included in the contract to allow for review after a contract execution. Since most seller’s attorneys are reluctant to include any review or inspection contingencies in the contract, this will usually have to be done prior to signing the contract of sale.
Normally, the attorneys who offer this service to their clients will charge an additional fee to do so. Many times, due to the cost, purchasers unwisely elect to waive their right to have their attorney review the minutes, or they simply choose not to review the minutes themselves because it could jeopardize or delay the transaction. Common remarks are: “Do we really have to review the minutes?”, “There isn’t going to be anything in the minutes that will affect the deal, is there?” or “I don’t want to lose the deal.” A purchaser, however, should never waive the right to review the minutes, and if the purchaser does so, the attorney should document this in writing.
The minutes often provide invaluable and critical information relating to the condition of the building and building systems, contemplated renovations, past or pending lawsuits, existing issues with tenants, the existence of pest, bedbug, rodent or other infestation problem, noise issues, issues with odors (e.g., restaurants or other nearby businesses), and common charge increases and the imposition of other assessments. If, for example, there were complaints or issues memorialized in the minutes of the Surfside Condominium over the years relating to the structural integrity of the building, upon review of such information, a purchaser may have decided not to purchase a unit in the building.
As a best practice, real estate agents, when representing a client interested in purchasing a condo or co-op unit, should at the initial stages of representation, inform their clients about their right to review the minutes and that once they find an apartment, they should discuss this with their counsel. It would also be a good idea for the agent to ask the condominium or co-op management agent about the review process in advance so that there is no delay. Normally, an appointment must be made to review the minutes. Most condominiums and cooperative corporations do not allow the minutes to be emailed, and therefore, the attorney and/or purchaser will be required to review the minutes at the office of the management agent. They usually will not allow the minutes to be copied. Therefore, knowing the process and procedures in advance can save valuable time.
The Importance of Reviewing Financial Statements
Another important item that should be reviewed as part of the due diligence process is the condominium’s or co-op’s annual financial statements, which are customarily prepared by an independent, certified public accountant, and which are usually audited. At the very least, it recommended that the last two years of financial statements be reviewed by the purchaser or the purchaser’s accountant. The attorneys will usually review the financial statements as well to see if there are any items of significance in the notes to the financial statements referencing items such as existing lawsuits, planned renovations, major anticipated capital expenditures, and other items, which could affect the future financial stability of the condominium or co-op, and the potential for increases in the monthly maintenance or common charges, as well as the likelihood of additional monthly assessments in the future.
A review of the financial statements is extremely important. Most financial statements cover a two-year period. It is important to note that since most financial statements are usually not ready until six months after the end of a calendar year, a purchaser may not be able to review and assess the current financial condition of a particular condo or co-op depending on when the transaction is occurring. Sometimes, a co-op or condominium may be able to provide unaudited or preliminary financial statements, profit and loss statements, or even balance sheets, if requested, but this is not common. A purchaser, therefore, may only be able to review and rely on the previous years’ financial statements. It is also recommended that a purchaser or purchaser’s agent or attorney request information relating to the amounts of the common charges and assessments for previous years so one can review and compare the historic charges to the current charges.
The Importance of Reviewing the By-Laws,
Rules and Regulations and Offering Plans
Additional documents that should be reviewed very carefully are the latest By-laws, Rules and Regulations and the Offering Plan for the condominium or co-op. Many times, purchasers would like to rent the unit they are purchasing or would like to have pets reside with them in the unit. Reviewing the most current By-laws and Rules and Regulations will provide a purchaser with crucial information such as, for example, whether pets are allowed, or if rentals are permitted. If a rental of the unit is not permitted and the client is purchasing the unit for investment purposes, then the client needs to be aware of this and look for another unit. It is important to note that once the contract is signed, the purchaser will not be permitted to cancel the transaction or get out of the contract.
Reviewing the Offering Plan is also very important. Normally, most purchasers and even attorneys elect not to review the Offering Plan. However, the Offering Plan usually contains important information as to the original formation of the condominium or co-op and also contains the original floor plans of each of the units, the number of shares allocated to each unit, whether the units come with storage areas, garages and/or assigned parking spaces. These are all important items that will assist the purchaser and attorney. For example, by simply reviewing the original floor plans contained in the Offering Plan, a purchaser and the purchaser’s agents (attorneys and real estate agents) will be able to ascertain whether any renovations or improvements were made to the unit. In turn, this will allow for an inquiry to be made to the seller’s counsel by the purchaser’s attorney as to whether the renovations or improvements were made with the approval of the condominium or co-op and whether the appropriate municipal approvals were obtained.
The Current State of the Market: Low Inventory,
Bidding Wars, Waiving Important Due Diligence
In the current real estate market, and especially during the past year, inventory has continued to decline (reaching critically low levels) and the demand for housing has increased dramatically. Unfortunately, because of current market conditions, purchasers are being forced to do things they would not ordinarily do. Each property has multiple offers and buyers are increasing their bids drastically just so that their offer is accepted. Many properties are selling above their listing prices. Unfortunately, this causes increasing pressure for purchasers to waive mortgage contingencies, inspections, due diligence, and to agree to contract terms that could cause harm to purchasers. Purchasing a home is one of the largest financial transactions for an individual and no matter the market conditions, one should never rush into any such transaction or waive important rights in doing so.