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Sponsors Busted: Reserve Fund Law Plain Meaning Upheld

By Adam Leitman Bailey


The board of managers of a conversion condominium hired Adam Leitman Bailey, P.C. to pursue the condominium’s sponsor for construction defects in the condominium. Because it was a conversion and not a new construction condominium, recourse for construction defects is limited. Adam Leitman Bailey, P.C. investigated and discovered that the statutorily required reserve fund was underfunded.

The sponsor used insider discount sales prices as the prices it used to calculate the amount of the reserve fund, rather than the price to outsiders, which was the appropriate price to use based upon a strict interpretation of the statute. Adam Leitman Bailey, P.C. asked the court to rule that the condominium sponsor used the reduced insider purchase prices to calculate the reserve fund even though those prices had expired before the relevant date for calculation. The court agreed that the statute should be read literally and that the price that must be used is not the price in effect during the exclusive purchase period, i.e., the so-called insider’s price, but rather the last price…offered to tenants in occupancy prior to the effective date of the plan.

The court held that despite the sponsors attempt at getting the case dismissed, the case must move forward to discovery to give the plaintiffs the opportunity to present evidence that the prices were in fact raised after the exclusive period ended. Because Adam Leitman Bailey, P.C. has evidence to support the fact that sponsor raised prices to outsiders, this decision was an important victory for this board and for boards of conversion condominiums through the five boroughs.

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS