Holding Condominium Developers Accountable for Construction Defects

Imagine you bought a condo in a new, or recently constructed, development.  The brochures and website described a beautiful lifestyle with plush amenities.  After you move in you notice that things aren’t quite right with the common elements.

Months and even years go by, and the pool and clubhouse are still not built.  Streets are poorly paved or flood easily.  Roofs leak and terraces are already cracked.  Common charges are a lot higher than you expected and now there’s talk of an assessment.

You and your neighbors have complained to your condo board, but they haven’t done anything – and you doubt they will because they all work for the developer.  By the time homeowners finally take control of the board, the developer is long gone and ignores your complaints and questions.  What can you do?

Plenty, according to a recent decision from the Putnam County Supreme Court.  This decision reinforces two key principles which give condo owners a chance to hold the developer accountable.  First, condominium developers must live up to the promises contained in the offering plan – even if many years have passed since the homeowners took over.  And second, developer-appointed board members can themselves be held accountable, long after they resign, and may be subject to greater scrutiny than ordinary boards because of their inherent conflict of interest.

The developer can’t simply hand over the keys and walk away.
In most cases, the developer has an ongoing obligation to construct the common elements as they were detailed in the offering plan.  And with each unit the developer sells, it is renewing that promise.  In its April 18, 2024 decision, the Putnam County Supreme Court confirmed this when it denied the developer’s motion for dismissal on statute of limitations grounds despite the fact that the developer had stepped away more than five years before.  It’s also a reminder that a lawsuit by the condo board against the developer for issues related to common elements will benefit the entire community, regardless of when you purchased your individual unit.

Business judgment rule protection for board members may not be as robust when the board is controlled by the developer.
Typically, condo board members are protected by what’s known as the business judgment rule, which basically says that board actions taken in good faith on behalf of the community cannot be challenged in court.  However, in a new condo development, the first board is often made up of employees of the developer.  This creates an obvious conflict of interest especially where the developer has not finished construction or there are defects that it must fix. This kind of board cannot possibly perform its duties with undivided loyalty to the community.  Are they really going to push the developer to correct defects or finish the job quickly and according to the plans?  And they are not going to sue the developer on behalf of the community because that would be like suing themselves.

The Putnam County decision reminds us that boards that are controlled by the developer are still on the hook for up to six years after they resign and do not enjoy the same protections of the business judgment rule because of their affiliation with the developer.  When there are allegations that the sponsor-controlled board concealed or ignored defects, cut corners, or failed to address construction problems, the business judgment rule will not serve to automatically dismiss lawsuits against the board.

The Court’s decision sends a clear message to condo owners and boards.  If your developer has not lived up to its promises, courts will hold developers and their appointed board members accountable for delivering the community you were promised – even if many years have passed.

Other SBJ Blog Posts 
Attorneys at our firm publish informative blog posts on a variety of litigation, commercial real estate and co-op/condo topics. For a quick preview of recent blogs, we invite you visit the Blog Post section on our website.

Supreme Court Decision Puts Employers on Notice of Increased Risk of Discrimination Claims Based on Job Transfers

Employee dissatisfaction with job transfers is a common difficulty that employers face all the time. A recent Supreme Court decision concerning federal discrimination claims based on job transfers announced an important change in the law that managers and HR professionals must be aware of.

The Supreme Court’s decision on April 17, 2024 in Muldrow v. City of St. Louis lowered the burden for employees asserting Title VII claims based on a job transfer.

The Court held that a Title VII claimant need not show that the transfer caused “significant” or “material” damage to the employee, such as, for example, by a cut in compensation, as numerous circuit and district courts have held.

In Muldrow, Sergeant Jatonya Clayborn Muldrow worked as a plainclothes officer in the St. Louis Police Department’s specialized Intelligence Division from 2008 into 2017. Later in 2017, a new Intelligence Division commander asked to transfer Muldrow out of the unit so he could replace her with a male police officer. Against Muldrow’s wishes, the Department approved the request and reassigned her to a uniformed job elsewhere in the Department. While Muldrow’s rank and pay remained the same in the new position, her responsibilities, perks, and schedule did not. After the transfer, Muldrow no longer worked with high-ranking officials on the departmental priorities lodged in the Intelligence Division, instead she supervised the day-to-day activities of neighborhood patrol officers. She also lost access to an unmarked take home vehicle and had a less consistent weekend shift schedule.

Muldrow commenced a Title VII sex discrimination that ultimately landed in the Supreme Court.

The Eastern District of Missouri granted the City summary judgment. The Eighth Circuit affirmed the decision, holding that Muldrow had to – but could not – show that the transfer caused her a “materially significant disadvantage.” The Eighth Circuit further held that Muldrow’s lawsuit could not proceed because the transfer “did not result in a diminution to her title, salary, or benefits” and had caused “only minor changes in working conditions.”

The Supreme Court reversed based on the plain words of Title VII, which provides that it “shall be an unlawful employment practice for an employer … to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individuals race, color, religion, sex or national origin.”

Based on this language the Court held that a job transferee does not have to show that the harm incurred was significant or material because the term “discrimination against” means “treat worse.” As such, an employee need only demonstrate that the subject transfer caused “some” harm connected to the employee’s terms or conditions of employment.

HR professionals and managers must be aware of the Muldrow decision because employee dissatisfaction with job transfers is inevitable.

In light of Muldrow, employers must be aware that a job transfer that provides the same compensation and similar job responsibilities may still be considered discriminatory under Title VII. Consequently, managers and HR professionals must scrutinize all transfers carefully to identify any and all changes to the employee’s terms and conditions of employment (not just compensation and job title, for example) to assess whether the proposed transfer may cause a significant risk of a discrimination claim.

Other SBJ Blog Posts 

Our firm’s attorneys regularly publish insightful blog posts covering diverse topics including litigation, appeals, cooperative and condominium law, real estate and land use law, corporate law, employment law, and local government issues.

For a quick preview of recent blogs, we invite you visit the Blog Post section on our website.

Corporate Transparency Act Compliance Update; “Good Cause Eviction Law” Signed By Governor

CTA UPDATE. On April 18th, the Treasury Department issued additional guidance affecting whether cooperatives, condominiums and homeowners’ associations will need to report their beneficial owners to FinCen, the government’s financial crimes enforcement agency. The update is framed in question-and-answer format.

Question C10 asks, “Are homeowners associations reporting companies?” In response, FinCen states that a HOA that was not created by filing with the Secretary of State or a comparable office, or an HOA that qualifies for an IRC Section 501(c)(4) exemption [social welfare organization], is not a “reporting company.” Otherwise, it “may” fall within the definition.

Question D13 asks, “Who is a beneficial owner of a homeowners association?” In response, FinCen states that a beneficial owner is any individual who, directly or indirectly, exercises “substantial control” over a reporting company, or owns or controls at least 25% of the reporting company. Thus, a Sponsor who owns more than 25% of the units in the association would have to report even if it does not control the Board. Likewise, senior officers, persons who have authority to appoint or remove certain officers or a majority of directors, “important decision-makers”, and anyone else who might be deemed to have substantial control over an HOA would qualify.

Under the Internal Revenue Code, a “homeowners association” [HOA} includes cooperatives, condominiums, and typical HOA’s. Based on these excerpts from the FinCen guidance, it looks even more likely that community associations will be required to disclose their “beneficial owners.” Further, it looks like the reporting obligation will extend to the executive officers and possibly even other Board members (since they can remove senior officers). As set forth in our March E-blast, it looks like community associations’ best hopes to avoid being swept up in the Act lies in passage of H.R.5119.

The full text of FinCen’s CTA update is available at https://fincen.gov/boi-faqs

“EVICTION FOR GOOD CAUSE” LAW PASSES. The Governor approved the “Good Cause Eviction Law” as part of the state budget package. Fortunately, it has been modified from its original form to make it slightly more palatable to landlords, including co-ops and condos. Some key features and changes from the original version include:

  • Units owned in cooperatives or condominiums are exempted, i.e., the exemption now covers both the associations and individual shareholders or unit owners who lease their units.
  • Units in buildings for which a “red herring” offering plan has been submitted are also exempt.
  • “Small landlords” (who own 10 or fewer units, directly or indirectly) are exempted.
  • Increases in rent by more than (i) 5% plus the CPI inflation increase, or (ii) 10%, whichever is lower, are subject to a rebuttable presumption that they are unreasonable. (Previously the floor was 3% or the CPI.)
  • In deciding whether an increase is unreasonable, the court must take into account real estate taxes, and may take into account increases in operating costs and significant repairs.
  • Buildings for which a TCO has been issued in 2009 or later are exempted for 30 years after issuance.
  • The law “sunsets” in 2034 (ten years).
  • The law applies to New York City immediately. Communities outside NYC may “opt-in” and establish their own standards for unreasonable rent increases and exempting “small landlords.”

The law requires a court order in order to evict a tenant on the relevant permitted grounds in the law. Landlords must also comply with detailed notice and procedural requirements for renewing leases and going to court. A separate “Good Cause” law notice also must accompany most leases, renewals, notices of non-renewal, and petitions. All of these requirements will greatly slow down the pace of (and increase the cost of) evictions.

The final version of the law incorporates many nuances and additional notice and compliance requirements as well as some potentially significant ambiguities. A comprehensive review of the law exceeds the scope of this E-mail blast, but the law itself can be reviewed here.

Alabama Federal District Court Declares Corporate Transparency Act Unconstitutional

Earlier this month, a federal court in Alabama ruled that the Corporate Transparency Act (“CTA” – See our January E-blast) was unconstitutional as applied to the plaintiffs, the National Small Business Administration and associated individuals. According to the court, the disclosure requirements for officers and directors in the CTA exceeded the government’s federal powers.

The government argued that the disclosure requirements in the Act flowed from the government’s right to regulate interstate commerce; its jurisdiction over national security and foreign affairs; and its taxing authority. However, the court found that “incorporation” of a business (which triggers the disclosure requirements for individual principals) is a purely local act, with no effect on interstate commerce. Likewise, the national security justification was based solely on a Congressional finding that “malign actors…seek to conceal their ownership of [U.S. entities];” the court determined that such a vague finding did not justify regulating purely domestic activities like forming a business. Finally, although the court acknowledged that the Act’s disclosure obligations could have been linked legitimately to the government’s taxing power, it found no such language in the Act. Read the full decision.

The Alabama court decision only applies to the plaintiffs named in that case. Unlike some other 5th Circuit courts, here the Alabama Court did not purport to issue a nationwide injunction or expand the decision to include other entities. The government has appealed the decision, but the CTA compliance clock is still running. Stay tuned.

Implications: This decision implicitly supports the efforts of cooperatives and HOA’s to delay compliance with the provisions of the Corporate Transparency Act. We can make no predictions as to whether the CTA will be further delayed or modified; during an election year, the Democratic majority may be reluctant to limit a law that the Biden administration supports. We will keep you informed as the case and legislation progresses.

“Eviction for Good Cause” Bills Remain on Agenda in Albany

Assembly and Senate sponsors have reintroduced bills (A4454 and S305) that would bar landlords from refusing to renew leases without “good cause” (e.g., nonpayment, nuisance or other lease violations, or an immediate need for personal use). More important, any rent increase above 3% (or 150% of the CPI increase) per year would be presumed “unreasonable” and grounds for nonpayment unless the landlord could justify the increase. The current bill would apply not just to rental landlords, but also to unit owners and shareholders who lease (or sublease) their apartments.

We lack the space to fully analyze how many ways this bill would hurt real estate owners. It wrongfully applies to condo and cooperative owners. If landlords can’t preserve the ability not to renew a lease with a  “problem tenant” after the first year,  they will screen prospective tenants even more carefully, making the task of finding affordable housing even harder for marginal tenants. Evictions would be significantly delayed while the court reviews tenant claims of unreasonable cause. Annual rent increases would be artificially limited on one hand, and promoted to the maximum level (3%) on the other. Ultimately, the law would further discourage construction of new affordable rental housing and maintenance of existing housing in the name of promoting “tenant stability.”

This year, backers of the Good Cause Eviction bill have made it part of the State Senate’s “One-House Budget” resolution, the Senate’s statement of budgetary goals. They hope that it will be hitched to the budget which is being voted on now. Please urge your local representatives to consider how these bills will affect property values (particularly for owners of small buildings and individual condominium and co-op apartments) before they vote.

Correction: Application of Property Condition Disclosure Act to 1-4 Family Dwellings.

Our January E-blast stated that the new PCDA regulations apply to single-family homes. In fact, they apply to owners of one to four-family homes. Owners should take note accordingly.

Ken Jacobs Featured in Habitat Magazine Addressing the Hard Insurance Market: Strategies for Boards

Rising insurance premiums and dwindling coverage have co-op and condo boards at the mercy of what’s called a “hard insurance market.” This is largely because insurers’ are trying to offset billion-dollar losses with higher premiums, lower coverage and exclusions. In the face of escalating costs, boards are forced to explore different ways to reduce liability and safeguard their communities.

Read the full Article

Congress Likely to Kick “Corporate Transparency Act” Compliance Down the Road

As reported in our January E-Blast, the Corporate Transparency Act (“CTA”) disclosure requirements went into effect on January 1, 2024, compelling most corporations to report personal information about Board members to the Treasury Department. [See E-BlastHere.] Most co-op and HOA attorneys are advising their clients to delay compliance with the CTA until later in the year while community associations lobby their federal representatives to exclude them from the Act.

The House has passed, and the Senate is considering H.R. 5119, which would delay the deadline for compliance with the CTA for an additional year, until January 1, 2026. While this is hardly a panacea, it does give co-ops and HOA’s more breathing room to seek an exemption. The Legislative Action Committee for the New York chapter of Community Associations Institute (the national education and advocacy organization for condos, co-ops and HOA’s) has written to Senators Schumer and Gillibrand requesting that they support such an exemption. [See letterHere.] Surprisingly, CAI’s national liaisons have advised us that they are meeting resistance from elected representatives to approve an exemption. Apparently Congress is concerned that adding exemptions at this stage would invite additional “interest groups” to request exemptions for their members as well.

This should not prevent associations from reaching out to your elected representatives, particularly since Senator Schumer is (currently) the majority leader and owns a co-op himself. Please feel free to crib from the CAI letter and add your own thoughts as voters! In the meantime, we reiterate our prior advice to shelve compliance questions until later in the year, and hopefully into 2025 as well.

NY State Publishes “Property Condition Disclosure Act” Forms For Single-Family Homeowners – Or, Aren’t You Glad You Live In A Co-Op Or Condo?

 The New York Department of State has published the new disclosure forms intended to comply with the changes to the Property Condition Disclosure Act (“PCDA”), RPL §462(2).  The new form, a 7-page  marathon, is availableHere.

Single-family homeowners are required to provide a completed disclosure form before a contract is signed. The new form includes additional disclosure regarding flood risks (Questions 11-17) in addition to the extensive environmental and building condition disclosures already required. Note that homeowners can no longer offer a $500 credit in lieu of providing the form (under the prior statute). No lawyer we know of had ever recommended that their clients actually fill out the prior form, but attention must now be paid.

The form requires owners to “represent” building conditions “to their actual knowledge.” Thus owners have potential liability if they know of a condition that they fail to disclose. As in the prior version, the form is rife with questions without time limits, such as “Are there or have there ever been fuel storage tanks…” or “Has the water been tested…” However, you are allowed to check off “Unknown.” Thus there is a strong temptation simply to check “Unk” for anything that actually requires research or speculation as to past events.

Brokers also may need to tread carefully before presenting the forms to purchasers, as brokers have been held liable for failing to disclose conditions about which they have knowledge, even if their clients do not (or have instructed them not to reveal). Some brokers have records going back to prior owners as well as the current seller.

Co-op and condo unit owners do not have to furnish this onerous form when they sell, but they still have to provide flood plain disclosure information. For further details, see our November 2023 E-BlastHere.

Seeking Review Under CPLR 5704: A Powerful Tool in the Arsenal of Legal Remedies

Navigating the legal landscape often requires a deep understanding of procedural rules, especially when faced with the challenges of obtaining timely relief. CPLR 5704(a) emerges as a valuable provision in the New York Civil Practice Law and Rules, offering a remedy where the trial court refuses to issue a temporary restraining order (TRO) for your client – or grants one against your client without notice.

Your client may require immediate relief against such an order, especially when stakes are high, and the clock is ticking. CPLR 5704(a) stands as a potent remedy for parties seeking relief when faced with urgent circumstances or substantial infringement of their rights.

In one such case, the Supreme Court granted an ex parte TRO freezing our client’s bank accounts – bringing the entire business operation to a grinding halt. We immediately filed an emergency application by way of an order to show cause (OSC) to vacate/modify the TRO. However, the trial court denied our application.

Since time was of the essence, we immediately filed an application before the Appellate Division, Second Department for a review of the denial order under CPLR 5704(a). The Appellate Division conferenced the case and rendered a favorable decision within 24 hours, lifting the restraint on our client’s bank accounts and granting our TRO.

In another instance, the Supreme Court signed an ex parte order to show cause against our client and appointed a temporary receiver. The Court ordered our client to hand over its bank accounts and business operation to the receiver. We immediately sought review of the ex parte order under CPLR 5704(a) before the Appellate Division, which expeditiously conferenced the case and rendered a favorable decision staying the appointment of the temporary receiver.

CPLR 5704(a) Review: An Avenue for Relief

Before examining how CPLR 5704(a) has become a powerful tool for obtaining expedited relief from the court, it is crucial to understand the concept of ex parte orders. Ex Parte, derived from Latin, translates to “for one party,” signifying motions or orders granted at the request and for the benefit of one party only. These orders are often temporary, such as restraining orders or account freezing orders, pending a formal hearing or in response to an emergency request for a continuance.

CPLR 5704(a) grants authority to the Appellate Division to review ex parte orders issued by a justice of the Supreme Court, a judge of a Family Court or Court of Claims, or a surrogate to issue a provisional remedy that was refused by the lower court, or to modify an ex parte order granted by such lower court. Importantly, this provision comes into play only when the order is granted without notice to the adverse party. If both parties were heard or appeared before the court, the order is not ex parte.

Procedures for Seeking Review

When faced with a situation where a judge signed an OSC against your client, the remedy lies in an application to the Appellate Division under CPLR 5704(a). At the same time, CPLR 5704(a) offers dual purpose and provides relief where a lower court refuses to sign an OSC for your client.

The effectiveness of CPLR 5704(a) lies in its expeditious response. In most cases, the Appellate Division, Second Department issues orders within a day or so after reviewing the application. This swift response underscores the efficiency and importance of this provision in obtaining prompt resolution.

When faced with critical and time sensitive situations, practitioners and litigants should not overlook the potential relief offered by CPLR 5704(a). By providing a mechanism for swift appellate review, this provision enables parties to address issues such as TROs and ex parte orders that may significantly impact the course of litigation. Seeking review under CPLR 5704(a) can lead to quick and decisive outcomes, making it a valuable tool in the arsenal of legal remedies.

The Right to Sue for Specific Performance

A potential purchaser is right to invest ample time, money and effort in the due diligence process before signing a real estate contract of sale. Once the contract is signed, the purchaser can finally allow themselves to dream about the tantalizing possibilities presented by the acquisition.

It is therefore frustrating – if not downright devastating – when a seller improperly reneges on its commitment and refuses to close in accordance with the signed contract. Under these circumstances, what recourse does the purchaser have and what remedies are available?

The purchaser can sue for specific performance.

It is widely recognized that real property is unique and that, if a seller breaches a real estate contract and refuses to close, monetary damages may not suffice to make the purchaser “whole.” The purchaser can sue for specific performance – an equitable remedy under which the court may compel the seller to perform and close on the contract.

However, the right to specific performance only attaches under certain circumstances. To prevail on a claim for specific performance, the purchaser must be able to show that:

  • It substantially performed;
  • It was ready, willing and able to perform its remaining obligations under the contract;
  • The seller was able to sell the subject property;
  • And the buyer had no adequate remedy at law.

Additionally, a purchaser’s right to seek specific performance may be circumscribed by the terms of the contract of sale. If the contract of sale contains a so-called restricted remedies provision – a clause which specifies the relief that may be available to the purchaser in the event of a breach – the contract provision will govern. This means that only those remedies made available under the contract can be pursued.

Courts are not in the business of rewriting contracts.

This is especially true of real estate contracts negotiated by sophisticated parties. So, if the contract denies the purchaser the right to specific performance in a given situation, the purchaser should not expect the courts to rewrite the contract on their behalf. Instead, the purchaser may have to accept that they are limited to recovery of the down payment or other damages specified under the contract.

At Smith Buss & Jacobs, our attorneys represent a diverse client base in litigations that arise from a variety of complex real estate transactions. If you are a buyer or seller with questions or concerns about a real estate sale, please feel free to give us a call.

 

Co-Ops and HOA’s Caught In “Corporate Transparency Act” Net

In its ongoing effort to limit “money laundering, terrorist financing, corruption, tax fraud, and other illicit activity,” Congress passed the “Corporate Transparency Act” (“CTA”) in 2021 requiring certain business entities to file reports with Treasury identifying the beneficial owners of the entity. In 2022 the “Financial Crimes Enforcement Network” of the Treasury Department (“FinCEN”)  passed final rules to implement the CTA. The rules go into effect on January 1, 2024. Happy New Year!

Unless an entity is exempt from filing under the CTA, any entity created by filing with the secretary of a state or similar office is considered a “reporting company.” (More about what companies are exempt from filing below.) This would include most corporations and LLC’s. In that case, relevant information regarding the “beneficial owners” of the reporting company must be filed with FinCEN as well. FinCEN is supposed to keep this information confidential.

A ”reporting company” means “an entity that is (a) a corporation; (b) a limited liability company; or (c) any entity created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.”

A “beneficial owner” is anyone who (a) exercises “substantial control” over a reporting company, or (b) owns or controls at least 25% of the reporting company.  “Substantial control” includes service as a senior officer; authority over the appointment or removal of a senior officer; or “substantial influence” over important matters affecting a reporting company through “any other contract, arrangement, understanding, relationship or otherwise.”  Under the FinCEN regulations, Board membership may be considered  one form of substantial control.

The information required to be produced to FinCEN includes the entity’s name/address/state/TIN. In addition, beneficial owners must produce certain personally identifiable information. Both an individual beneficial owner and the reporting company can obtain unique FinCEN identifiers, though, and the reporting company can submit the identifier in lieu of individually identifiable information for beneficial owners. Filing forms and instructions can be obtained at https://www.fincen.gov/boi.

Reporting companies have one year to submit their first report, and 30 days to file changes. Penalties for intentional noncompliance by companies and beneficial owners can run from $500 to $10,000 per day, plus fines or even prison time. (The same penalties also apply to persons who intentionally disclose such information after it has been filed.) The statute does not specify penalties for inadvertent noncompliance. In addition, the person submitting the certificate of incorporation or articles of organization of a company to the state must report their own info to FinCEN when applying. (It’s not clear whether that would also apply to corporate service companies that make most filings.)

Are Cooperative Corporations Required to Report under the CTA? Unfortunately, most cooperative housing corporations in New York must report, unless they fall under one of the relevant exemptions. Exempt entities include entities formed under IRC Section 501(c) and entities that have more than 20 full-time employees and report gross receipts of at least $5,000,000 per year.  (The other statutory exemptions are not relevant to community associations.) Thus, the largest private housing cooperatives might be exempt, and many co-ops formed under the Private Housing Finance Law would be relieved from filing.

Individual Board members appear to fit the definition of “beneficial owners” for purposes of the CTA in that the Board obviously exerts control over corporate decisions. Therefore, they would need to provide their information to their co-op or HOA for reporting as well, unless they have obtained a separate FinCEN  identifier. If a co-op appointed a non-Board member as a “senior officer” such as Treasurer, they too would need to report. Officers with ministerial authority (such as signing stock certificates) would not.

What about Homeowners Association? Homeowners associations in New York are formed under the Not-For-Profit Corporation Law. They typically seek exemption under Section 528 of the Internal Revenue Code. Though, rather than under Section 501(c). Therefore, they would have to file under the CTA. Likewise, Board members and senior officers would need to file as well.

What about Condominiums? In New York, condominium associations are formed by recording the Declaration of Condominium with the county clerk, not the Secretary of State’s office. Furthermore, they are neither corporations nor LLC’s. Therefore, condominium associations currently appear to be exempt from the definition of a “reporting company” under the CTA. However, we must note that the Condo Act also contains a requirement that a copy of the Declaration be sent to the Secretary of State when the Declaration is recorded, and the Secretary of State has begun to claim that condos must file with them as a condition of organization as a result of that requirement. The DOS also has begun to identify condo associations in a separate database. Therefore, condominium associations also might be deemed to be caught in the CTA net.

How about Managing Agents? Some commentators have argued that managing agents exert “substantial control” over associations because they have substantial influence over corporate decisions; hence they are required to file as “beneficial owners” of reporting associations. We would judge not to do so, though. First, agents might advise corporations, but do not “control” them in the traditional sense. Second, their role is governed by their employment contract alone, not by their inherent relationship with the association. Third, most managing agents will have independent reporting requirements. Finally, we doubt that most associations have ties to terrorists or money launderers (despite what you may think of your Board), so extending reporting requirements to  managing agents probably does not serve the underlying purposes of the statute.

We will monitor the CTA regulations in the hope that Congress will see fit to include community associations as “exempt entities.”

New Law Reduces Maximum Construction Retainage To 5%; Time Limit Set For Release After Completion

Governor Kathy Hochul just signed a new law, S.3539/A.4167, intended to address delays in payment after “substantial completion” of a construction contract and to establish a 5% cap on the amount retained from progress payments under the contract. Specifically, Section 1 allows contractors to submit their “final invoice” after substantial completion rather than upon ”performance of all the contractor’s obligations under the contract.” Section 2 establishes a 5% cap on the retainage that developers and contractors are allowed to hold back from progress payments in construction contracts, and requires retainage to be released within 30 days after approval of the construction by the owner.

“Retainage” is an amount held back from progress payments in construction contracts to form a de facto reserve pending final approval of the work. Under General Business Law §756-c, owners were entitled to hold back a “reasonable amount” as retainage from contractors (and contractors from subcontractors in subcontracts). Customarily a 10% retainage has been considered “reasonable”. The retainage would be released upon final approval of the project by the owner or their representative.

Contractors (and subcontractors) complained that the 10% retainage unduly interfered with their ability to pay their employees on an ongoing basis, especially if the project was delayed so progress payments were also delayed. Furthermore, owners would fail to release the retainage for several months even after the project was completed.

The new law imposes a 5% cap on retainage (in place of “reasonable” retainage) and requires that owners release any retainage within thirty (30) days after “final completion” of the project. The law also applies to subcontracts; the retainage held by a contractor under a subcontract is also capped at 5% of each progress payment (and in no case more than the retainage under the master contract).

Obviously, a reduction in the retainage reduces owners’ leverage in persuading the contractor to complete its work to the owner’s satisfaction. Owners may now need to negotiate for a lower up-front mobilization payment to retain the same leverage. In addition, since contractors can now submit final invoices after substantial completion, owners should review the criteria for payment of invoices against the criteria for final completion. Under the law, interest on delayed payments accrues at 1% per month.

The law does not address retainage held by lenders. Frequently a construction or capital improvement loan requires an equity injection before the bank is required to make any payment, and the bank is still permitted to hold back a retainage from disbursements. Casualty restoration clauses in a mortgage also call for insurance proceeds to be paid to the lender, but the lender is still entitled to hold back a retainage from any progress payment paid jointly to the borrower and the contractor during the restoration.

Since the bank is not a party to the construction contract, it is not likely to be bound by the reduced retainage requirements in the new law. Therefore, borrowers should negotiate for reduced retainage in their loan documents, or they may need to go out of pocket even after they have met any “equity injection” requirements imposed by the lender, or during restoration when cash flow may be at a premium.