Beware of Board, Bad Faith Claims during the Coronavirus Crisis
Cooperative and condominium boards often have inside information about real estate deals in their buildings. Boards should tread carefully when they learn of Coronavirus “fire sales” by owners who are challenged economically or just want to escape to a perceived safer location. With their approval rights or right of first refusal, coop and condo boards have to be careful to act in good faith if they have purchase aspirations in mind.
Boards don’t want to end up like the coop board at 420 East 72nd Tenants Corp. which just got hit with a substantial judgment against it for acting in bad faith, refusing to approve buyers in order to purchase the apartment for the coop to convert into a gym. The New York Supreme Court decided on March 30, 2020, after a trial, that the coop board’s actions were reprehensible and awarded $101,201 with 9% interest from 2017, plus attorneys’ fees and costs to be determined, against the board.
The Court didn’t award punitive damages, but it struggled with that decision because of the evidence of bad faith. The Court explained that “[a]lthough plaintiff presented evidence that tangentially seemed that the defendant Board may have illegally required higher prices for other apartments, as well as plaintiff’s, the proof does not rise to the level of clear and convincing sufficient to support an award of punitive damages. For instance, no other shareholder testified about their experiences with the Board in relation to their sales price.” Had such evidence been introduced at trial, the Court may have slammed the coop board with punitive damages.
Here are some of the Board’s bad acts:
(1) the Board initially asked the seller to hold off marketing the apartment;
(2) the Board made a lowball offer;
(3) the Board then refusal to consent to a proposed outside purchase for higher pricing and then tried to influence the parties regarding pricing;,
(4) the Board delayed for months and months to take official action on the outside purchase application;
(5) the Board refused to take action on the outside purchase application until forced by court order; and then
(6) the Board rejected another offer well above the Board’s offer.
With Coronavirus impacting everything right now, boards have to be careful when faced with approval or waiver of right of first refusal decisions. If your Board is considering injecting itself in a purchase it should definitely get professional advice concerning what it can and cannot do. Fighting bad faith claims like the 420 East 72nd Tenants Corp. had to do for over five years, can make a hot deal become extremely expensive.
Read the decision here.
