In the Know A Look at Disclosure Requirements

In the Know

New York State has a number of laws to protect consumers—there’s a law designed to protect people who invest in a car and end up with a lemon, for example. If a car has been in a serious accident, the seller has to disclose that information to any potential buyer. Buying a home is an even bigger commitment than buying a car, so you’d think the state must have some pretty strict disclosure requirements in regards to the buying and selling of condos and co-ops. But it doesn’t.

So then you’d assume that New York City must have laws requiring that certain information about an apartment needs to be disclosed to a prospective buyer, right?

Well, you’d be wrong again. While some states do have laws in regards to disclosure and sales of apartments, neither the city nor the state of New York does. There is a state law (the Property Condition Disclosure Act) relating to stand-alone one- to four-family homes, not co-ops or condos, but according to Alan C. Fried, a partner with the Manhattan-based law firm of Braverman & Associates PC, they don’t pack a lot of punch. That’s because the penalty for not complying with the disclosure requirements is only $500—to be taken off the purchase price of the closing—and virtually every seller takes that option.

There is also a federal requirement regarding lead paint. According to Fried, this requires sellers to disclose whether they have any written information about the presence of lead paint in the premises. The purchaser also has to acknowledge that he or she received any such information from the seller, as well as a pamphlet about the dangers of lead paint. There is also a 10-day period in which the buyer can either have a lead paint assessment done, or choose to waive the right to that assessment. Finally, the real estate agent has to confirm that the seller was advised of his or her obligations in regards to lead paint.

Other than that, sellers are under no obligation to disclose anything about the condition of their apartments. But that doesn’t mean that a $2 million home is sold without the buyer learning anything about it and just hoping for the best.

Gathering Information

“What I do is try to gather as much information as I possibly can to help the buyer make an informed decision,” says Daniel Altman of Belkin Burden Wenig & Goldman LLP, a law firm in Manhattan. “What I typically do is send a letter to the co-op or condominium’s management agent with a list of questions. I on my own will initially get a copy of the building’s offering plan, and a copy of the financials for the last three years, and then I will send the questionnaire to the managing agent.”

The information Altman requests from the building includes things like the sublet policy, when the last maintenance increase occurred and how big it was, if any other maintenance increases are expected in the near future, the size of the building’s capital reserve, and whether sellers pay a flip tax to the association.

The minutes from board meetings are another source for details about a building that buyers’ attorneys may call upon. Altman says an attorney or a paralegal will review the minutes to potentially learn about problems within the building that were discussed by the board. These can include lawsuits involving shareholders and/or the building, issues involving noises, pets or problems between shareholders.

“The review of the board minutes will alert me to those types of situations,” Altman says. “In addition, I’ll find out if there are any pending lawsuits amongst shareholders, between shareholders and the sponsor, or between the shareholders and an outside vendor.” These are all factors that buyers can be presented with to determine if the building a good fit for them.

Fried says most boards will allow attorneys to review the minutes from their meetings, but a small number of buildings do not. “There are good reasons not to [submit meeting minutes,] but so many [buyers] are demanding to see them that buildings feel if they don’t, it could discourage purchases.” Another potential hurdle is that some buildings don’t keep particularly detailed minutes, so what they submit for review may not be of much use to a buyer and his or her attorneys.

Finding the Facts

Minutes may contain information that may seem noteworthy but that is actually pretty standard. For example, a special assessment may be a red flag to a buyer, but with fuel prices being so high, Altman says a lot of buildings are handling unexpected fuel costs by instituting special assessments, just as they would for an unexpected repair project. That’s not something that would necessarily raise concern, since it’s fairly common at this point.

“I’m looking for things that are out of the ordinary,” Altman says. “An increase in fuel or insurance costs—those are things I’m aware that boards may be facing. But I’m looking for the dog next door where there’s been discussion at board meetings about a shareholder’s complaints about the dog next to the apartment [my client is] thinking of spending a million dollars on.

“I’m looking for smells, out-of-the-ordinary costs in respect to lawsuits with vendors and third parties; those are the things I’m typically looking for when I review the board minutes.”

Jim Mazzeo of Weichert Realtors’ Mazzeo Agency in Manhattan says it’s the due diligence of attorneys that leads to learning important details of an apartment or building. He says that when buyers ask him questions about a building, it’s usually about amenities.

“The most important thing for a buyer to know about in purchasing a co-op is an underlying mortgage—that would be the thing that can most impact the building’s ability to borrow and any increase in maintenance,” Mazzeo says. “If there’s a very big mortgage on the building, that’s going to expire—and if it has to be refinanced and the interest rate is higher, that could severely impact the buyer.” Mazzeo says that condos are typically easier to process.

Also important, according to Mazzeo, is learning about the physical condition of the building in case any big assessments may be coming up. Mazzeo says these details can often be found in the building’s financials.

Get it in Writing

The law may not require much disclosure, but standard contracts and pre-printed forms produced by Blumberg Excelsior, a company that provides law office products and legal forms, or the Council of New York Cooperatives and Condominiums (CNYC), usually include a good deal of disclosure information. Fried says these forms often change, and that the most up-to-date one is commonly used by attorneys.

Some of the measures added to the contract include a requirement on the part of the seller acknowledging that no alterations or additions have been made to the apartment without the required consent of the corporation, that the appliances are working, and that the smoke detector works.

A fairly new addition to the contract requires sellers to specify anything they might have done that would transfer responsibility for maintenance of an apartment feature from the association to the owner. If a seller installed a washer/dryer in the apartment and intends to leave the appliances behind when they move, the purchaser assumes responsibility for the appliances and any leaks, noise, or other issues that might arise as a result of their presence in the apartment.

Fried explains further. “Frequently, when an owner signs an alteration agreement, the agreement requires them to disclose the alteration to any future buyer, because the buyer is going to be responsible for it,” Fried says. “It will be passed on from buyer to buyer to buyer. So when you buy an apartment, you can be responsible for something somebody did three owners ago.”

In addition to specifics put in standard contracts, individual attorneys will often include their own riders. When representing a seller, for example, Fried includes provisions that the seller won’t be responsible for minor damage done after a picture is removed from a wall. When representing a buyer, he’ll include a provision assuring that the seller confirms there’s no material damage to an area of the walls or floors that’s hidden by art, an area rug, or a piece of furniture. “You don’t want someone to remove the area carpet and suddenly the nice wood floor you saw on the edges is plywood,” says Fried.

Fried adds that most attorneys are including provisions requiring sellers to confirm that the heating, plumbing and electrical systems are in working order at the time of closing, to the degree that the seller is responsible for them. For example, if there’s a leak behind a wall, that’s the responsibility of the association, but if a toilet is leaking, that’s the responsibility of the unit owner.

An area where problems can arise is when the buyer wants something repaired before closing that is the responsibility of the co-op.

“That’s tough,” Fried says, “because most co-ops—particularly if they have a lawyer—will say, ‘We’re not getting involved in that, we’ll fulfill our obligations under the proprietary lease.’”

If, for example, there’s an exterior leak and it’s January, Fried says the building has a responsibility to make a temporary repair, but the major waterproofing project that may be needed won’t be done until the weather warms up. “That can put the seller in a difficult position, because it’s not in his control.”

Sellers’ Legal Obligations

The thing to keep in mind is that there is no legal requirement on the seller to actually answer any questions put to them. However, refusal to answer could raise a major red flag for buyers and their attorneys, and could dissuade the buyer from moving forward.

Even if the buyers’ attorney’s questions are answered however, there still generally aren’t disclosure obligations on the seller unless they are represented in the contract.

“That’s what the buyer tries to do—have the seller make a representation in the contract,” Altman says. “Typically, once you close, whatever representations were made, that’s it. If you find out after the fact that a certain representation was inaccurate, it’s difficult [to do anything about it]. You can attempt to bring a lawsuit against the seller, but a lot of times you’ll be unsuccessful, unless you specifically have in the contract that those representations will survive closing. Those are the magic words: that those representations will survive closing.”

Another problem is that the answers to some questions can be subjective. What’s a ‘disrupting noise’ or an ‘invasive odor’ to one person may not bother another.

One thing a seller cannot do is “affirmatively conceal” a problem or condition that would likely be a turnoff to buyers. According to Fried, affirmative concealment involves making a deliberate effort to hide something that would otherwise be apparent when looking at the apartment.

For example, he says, “Affirmative concealment would be if you have excessive water leaking from an exterior wall and every time someone comes to look at the apartment, you paint over it,” Fried says. “And then it rains again and makes another big stain, and then [the buyer] wants to look at again, so you rush to paint it over.”

After the Sale

Because of the lack of disclosure laws in New York City and New York State, there’s not a lot a buyers can do if, after the purchase, they discover something about the apartment they’re not happy with. It comes down to what was put in the contract.

“Failure to disclose in New York isn’t going to get you too far,” Fried says. “What a buyer would have to do is prove that [the seller] misrepresented something or that they affirmatively concealed a condition.”

Altman says he has dealt with sellers who bought their apartment through an attorney they weren’t happy with, hoping to take an action against the attorney. But even then the chances of winning a suit are slim.

“There’s not much you can do,” Altman says. “You can look at the contract and see what kind of due diligence the buyer’s attorney did, and if everything checks out, you’re basically relegated to reselling the apartment.” The problem with that is that the problem the buyer is unhappy with could lead to the apartment being sold at a lower price than was paid for it—and that means the disgruntled buyer-turned-seller looses money.

To offset the few disclosure obligations on the part of sellers in New York, a good buyer’s attorney will certainly make sure due diligence is done so that the buyer’s investment will be protected. While some negotiations will take place over what is represented in the contract, enough facts about a home are included in a contract to provide buyers with some protection. And a broker will almost always answer a buyer’s questions about an apartment or building—not because of any legal requirement, but because it’s simply good business.

As Mazzeo says, “It would be impossible to do business without answering their questions, and so much so that I don’t know if it’s even necessary to have a legal requirement.”

Anthony Stoeckert is a freelance writer and a frequent contributor to The Cooperator.

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