Stay Ready, So You Don't Have to Get Ready
October 26, 2010
It Seems Simple Enough
When an offer is accepted for a co-op or condo, the seller’s broker usually delivers the offering plan and financials to the buyer’s attorney to start the due diligence process. Most offering plans have any number of amendments that have been filed since the time that the plan was first accepted by the New York State Attorney General’s office. The buyer expects his or her attorney to carefully review all of the governing documents for the particular building. But what if the documents cannot be located or no longer exist?
The Modern Offering Plan as Historical Document
The quality and level of sophistication of offering documents have changed radically over the past forty years. Pick up your basic offering plan today and the “Special Risks” section usually runs ten or fifteen single spaced pages, chock full of potential issues, and in some cases, traps for the uninitiated. In most cases, although painful to plow through, a review of contemporary offering documents gives the reader a relatively clear view of what a buyer is getting into by buying a unit in that development. Particularly in our tenuous economy, many condo developments have gone through numerous changes in the offering process. Those material changes are reflected in amendments filed by the sponsor with the AG’s office, in order to disclose to the public and to the parties under contract, how the project is evolving.
But What if Amendments are Missing?
When the attorney gets the offering documents from the seller’s broker, the document is sometimes incomplete or amendments may be missing. The buyer’s attorney then begins the scavenger hunt to find the missing documents so that an appropriate review can be completed. Although organizing the due diligence materials should begin when a listing agreement is executed, that often does not happen. Finding the amendments can be frustrating, and in some cases, not possible. Further, the Attorney General’s office does not maintain amendments that are more than twelve years old. As a result, an attorney can be faced with the conundrum of simply not being able to review all of the amendments to the offering plan as they can’t be found or no longer exist.
But Does it Really Matter?
Yes and no. When developments have unique features or amenities that benefit only a limited number of apartments, the rights, benefits and privileges associated with those features or amenities are usually spelled out in the offering plan, as amended. Sometimes a feature initially provided in the original offering plan is changed or eliminated by amendment. The proprietary lease (in the case of a co-op) or declaration (in the case of condo), may or may not clearly describe those features or benefits or clearly document how those amenities were altered by amendments to the offering plan. If someone is buying an apartment with no unique aspects (such as outdoor space or structures, storage or ancillary rooms or fireplaces), then the inability to completely follow the paper trail of the offering, particularly with older buildings, will not raise a significant risk of overlooking something material to the apartment. On the other hand, when an apartment does have unique features, like a rooftop atrium or other additional space allocated only to that apartment, the inability to review all relevant documentation, can raise concerns.
Can You Go Forward Without Reading All of the Amendments to the Offering Plan?
We approach a very slippery slope. With an aging housing stock, there are situations when amendments to plans, and sometimes the plans themselves, cannot be located. Sometimes only an incomplete document is available. It’s a fact of life. Under those circumstances, a buyer has to make an informed business decision as to whether he or she should go forward without his or her attorney having had the opportunity to review all of the governing documentation. In most cases, a review of the minutes, financials and offering documentation that is available, as well as meaningful discussion with the managing agent will suffice to provide an accurate picture of the past and present history of the co-op or condo in question. However, if a question has been raised about the validity of a particular feature or amenity, if material litigation has impacted the development of the seller’s unit, if there are owner occupancy issues, or if there is any other material issue impacting the building or the particular unit--not having access to the complete offering documentation may be a reason not to go forward with the transaction. In any event, with developments less than twenty years old, the entire offering plan, as amended, should be reviewed. No excuses accepted.
How Do You Know if You Have all the Amendments?
If amendments are missing, call the managing agent, attorney for the co-op or condo, or Board president. Hopefully, someone will have a complete set of the offering documents. If you are unsure whether you have all of the documents, the Real Estate Division of the New York Attorney General’s Office can tell you how many amendments were filed and the date of the last amendment. You can then make an online Freedom of Information Law request to review and copy (at 25 cents a page) all of the amendments that are still on file at the AG's office in Manhattan. As this tedious process can take weeks to complete, if you are missing documents, the request should be made as soon as possible.
As Frank Lovece points out in his recent Habitat Magazine article, one title company is setting up an online database where digital copies of the plans and amendments can be obtained for free during the beta testing of the site. Although finding plans is somewhat hit or miss at this point (based upon my own anecdotal search), it’s definitely a step in the right direction and will ultimately make finding documents easier as the online database grows.
Residential Reality: Stay Ready, So You Don’t Have to Get Ready
Reviewing the governing documents is a mundane but important part of due diligence. Make the process easier and faster, by having the documentation ready that the buyer’s attorney will need to move the deal forward. Start copying…