Co-op Boards Are Not Quality-Control Watchdogs

Copyright by, and republished with permission of, Habitat Magazine.

Wade and Vanessa Johnson thought they were getting a “triple mint” luxury unit when they bought a gut-renovated apartment from the sponsor of a cooperative conversion at 1150 Fifth Avenue. But after the closing, the Johnsons learned that there were numerous conditions in the apartment that were not up to code – or actually dangerous – most of which had been concealed.

The Johnsons alleged that the renovations were defective and noncompliant with requirements of the building code and co-op policies. For instance, the bathrooms were not properly waterproofed. Two bathrooms shared a wall between the bath in one bathroom and the shower in the other, with tile installed over studs with no waterproof boards or membranes in between. They also alleged that water pipes throughout the apartment had no insulation. At some locations, the water pipes run above open and unprotected electrical boxes, posing a danger should condensation on the uninsulated pipes drip onto the electrical wiring. The air conditioning and climate control panels were not in working order.

As a result, the Johnsons were unable to move in and were forced to find alternative living arrangements for their family, and they claimed that they would have to make extensive and costly renovations to the apartment to make it safe and habitable. The Johnsons sued by the apartment’s sellers and the cooperative.

As part of the purchase agreement, the sellers had made a number of representations regarding the legality of their renovations. The Johnsons claimed that these representations were fraudulent. The cooperative had not made any representations to the Johnsons, but the Johnsons claimed that by not informing them of conditions in the apartment prior to their purchase, the cooperative had “negligently misrepresented” the facts.

The trial court dismissed the claim of misrepresentation made against the cooperative, ruling that the cooperative had no liability because it was not a party to the sale transaction. On appeal, the Appellate Division upheld the dismissal, holding that “the co-operative does not owe a fiduciary duty to purchasers of units with respect to conduct that occurred before the purchase.”

The lesson here is two-fold: apartment buyers need to perform extensive due diligence and not simply rely on a seller’s representations; and co-op boards are not watchdogs for bad behavior by sellers.