What is a REBNY Alteration Agreement?
The REBNY Alteration Agreement is the most common proprietary lease modification form used in pre-war co-op and condominium buildings in New York City, particularly in Manhattan. The agreement is a contractual document containing provisions that govern the construction process of capital improvements to units within the cooperative or condominium. Capital improvements generally include alterations that improve the physical condition of the unit, are not commonplace in the building, and which are not required to be performed by law, pursuant to a regulation, or a mortgage agreement. Under the terms of the REBNY Alteration Agreement, an owner is permitted to make an alteration to a unit, provided that the owner has obtained all necessary consents from the building’s sponsor, board of directors , and any mortgage lenders.
The creation of the Alteration Agreement in 1954 by the residential subcommittee of REBNY (Real Estate Board of New York) was an attempt to standardize the document used to regulate renovations of residential apartments. However, the Alteration Agreement includes many provisions that are ambiguous, boilerplate, and problematic. The Alteration Agreement affects almost every owner of a co-op or condominium in New York City, and is therefore especially prominent in Manhattan. Customary delays in the Mold Remediation Process, the Sprinkler System, and the On-Site Superintendents Systems, are just a few examples of potential problems trusted lawyers often overlook when representing clients. Consequently, homeowners underestimating the time and cost involved in filing paperwork, paying additional fees, and obtaining approvals, may be surprised when they discover that little of the money and time they anticipated was required for the renovation of their homes.
REBNY Alteration Agreement Components
A REBNY AA typically sets forth details regarding the scope of work (i.e., work to be performed), including the timing for providing any required Geneva Building Department approval and/or The Landmarks Preservation Commission approval (i.e., if the building is listed on the New York City Landmarks Preservation Commission’s calendar) with respect thereto. It further requires (and this is a big one) the full disclosure of the relevant employment rules, applicable to the alteration work. This includes a reference to the current prevailing wage rate schedules (which should also be attached to the REBNY AA). These schedules will include the work rules as set forth in the various Collective Bargaining Agreements that affect the particular job site and will also provide the payment rates for certain represented and non-represented trades or craft workers. A REBNY AA will also typically contain appropriate insurance requirements applicable to the tenants’ contractors or subcontractors, as well as provisions that restrict drilling through floors and preventing close work (i.e., work affecting multiple floors) during the winter months that could impact the heating elements. Additionally, it will require that the contractor make repairs to any damaged "timber" flooring (in addition to the floor slabs) unless otherwise indicated in the contract plans.
Alteration Approval Process
The benefit offered to shareholders and condo unit owners comes with an obligation to comply with the approval process. The approval process generally requires the shareholder or unit owner to submit plans and specifications for the proposed work for both board and managing agent review and approval. Once plans are approved, the approved plans must be submitted to the Alteration Agreement Committee, who will either approve the alteration as proposed or request additional information. Once all information and clarifications have been received, the Alteration Agreement Committee will issue a final written approval, which will be required to be executed by the building and the shareholder or unit owner prior to the shareholder or unit owner proceeding with the work. Should anything significant change in the scope of work during the course of the project, the concurrence of the Alteration Committee must be obtained.
As before, the final approval will require that the disclosed contractors and architect, engineer and/or management, all being licensed and insured, as well as the fee for the Alteration Agreement has been paid, the certificate of liability insurance has been received and named the building association as additional insured, and a required fee has been paid to the managing agent for its record-keeping.
Legal Implications and Obligations
A prospective tenant, once it receives a lease proposal in the form of a REBNY Lease Agreement, and has become a tenant, will generally be required to file plans for any proposed alterations based upon the provisions of the REBNY Lease Agreement which state that in the absence of a permit for the proposed alteration, the landlord shall have a right to require a tenant to restore the space to its original state.
The REBNY Alteration Agreement was drafted to cover a broad range of forms of alterations from simple items such as painting of walls to extensive work such as the construction of new office space. Landlords and tenants may move away from using the REBNY form by entering into their own negotiated form of Alteration Agreement.
There is no requirement that a landlord enter into a REBNY Alteration Agreement when negotiating the terms of a new lease. A landlord may insist upon having a provision in the lease permitting the landlord to require restoration work if the Alteration Agreement is not signed. The language contained in the REBNY Alteration Agreement is intended to protect landlords and their interests in the event the parties do not sign an Alteration Agreement with a full set of building rules attached. A recommendation is to negotiate with the landlord so that the Alteration provision in the lease agreement follows the REBNY Alteration Agreement, including the building rules.
Although a tenant may see some of the REBNY building rules in the Alteration Exhibit attached to the REBNY Alteration Agreement, there are likely other building rules which are not attached (Rs. 1 through 16 as well as condition number 17). In addition, a tenant may be responsible for compliance with any of the several NYC codes and regulations, which may apply (e.g., the NYC Building Code, the NYC Fire Code, the NYC Fire Prevention Code, Title 14 in the Rules of the City of New York ["Local Law 141 of 1968" – Rules Pertaining to Asthmatic Persons], the NYC Construction Codes, and the NYC Zoning Resolution).
Common Issues and Challenges
Having prepared thousands of Alteration Agreements through the years, I know first-hand that there are many opportunities to get tripped up along the way. Here are some common issues that my clients have experienced and some pointers on how to deal with them.
Is the REBNY Alteration Agreement "life friendly?"
Not always. We represent clients who have just negotiated a robust Owners’ Agreement with the same sponsor and are often aghast at suddenly being told that the overbearing Building Owner (and not the cooperative) will sign the REBNY AIA A202 General Conditions that will replace these negotiated provisions. Most common of which seems to be the deletion of the waiver of Consequential Damages or the Owner’s exposure to Workers Compensation and Commercial General Liability Insurance. Rather than refuse to sign at all, I simply add language that says "the insurance limits provided for herein shall remain as set forth in the Owners’ Agreement . " A simple solution that doesn’t jeopardize the alteration approval, but protects my clients.
Negotiate your own Alteration Agreement.
The standard Alteration Agreement is intended to be a starting point for those who either do not have an Owners’ Agreement or are not familiar with the type of items that would be included therein. In my experience, it is really beneficial to have an attorney prepare your alteration documents so that any unusual provisions in the Owners’ Agreement are specifically incorporated into the building’s alteration package. This can often make the process much smoother. It is also important to have the appropriate counsel for this kind of project – your corporate counsel is probably not intimately familiar with the building’s "personality" and may not understand the complex intricacies of how the building is governed by both the Owners’ Agreement and their governing documents.
Tips for Managing Alterations
A. Planning and Re-planning. When the tenant first occupies the space, the parties need to be on the same page with respect to the usual extent of the tenant’s build-out to ensure that the alteration process proceeds smoothly and costs are properly budgeted for.
B. Advance Notice to Landlord. This is a key provision under the REBNY format. However, the term "advance notice" should not be confused with "commencement of work." Almost all landlords require a certain amount of advance notice (usually four weeks) for obtaining certificates of insurance, filing the plans with the DOB and receiving all other necessary approvals prior to the commencement of construction.
C. Sign off by Architect. To ensure that the plans have been reviewed thoroughly, it is highly recommended that they be signed off by the tenant’s architect or engineer (but not the project manager).
D. Cost of Alteration Deposit. In the Manhattan office market, cost of an alteration deposit typically runs between $50-$100 per square foot.
E. Coordination with landlord’s contractor. Whenever possible, the tenant should coordinate with the landlord in order to acknowledge that the work performed is independent of the work being performed by the landlord’s contractor to avoid any dispute as to the responsibility for latent defects. The tenant needs to ensure that the work being implemented under the approval of the landlord does not affect the work performed by the landlord.
F. Losses caused by Force Majeure. Although the U.S. economy is currently improving, all too often, a tenant’s employees may be affected/furloughed by force majeure events. To ensure that all parties are on the same page, the parties should clarify if such a situation arises whether the period of time in which the tenant is not able to comply with the terms of the REBNY alteration agreement will extend the timeframes and/or terminate the alteration agreement. If such event occurs, the tenant needs to ensure that its lender is on the same page in order to avoid defaulting under the loan agreement.
Frequently Asked Questions
Frequently Asked Questions About a REBNY Alteration Agreement
How much will a REBNY Alteration Agreement cost?
Of course this is one of the first questions that owners and their architects will ask. The fee for the REBNY Alteration Review application is currently $1,000, but there are additional fees due depending upon the extent of the changes that are proposed. When an architect submits the Alteration Review application with the plans to the board they must also submit a check along with the other documents. The check is made out to the building’s owner or managing agent, not the REBNY Alteration Review Committee. In addition to this fee, a guest bedroom fee is due upon submission. This fee is based on the square footage of the proposed guest bedroom and is currently $15 a square foot. So if a unit consists of three bedrooms, all greater than 150 sq. ft., (which is typical in a unit this size) the guest bedroom fee is for 450 sq. ft. x $15 = $6,750 in addition to the Alteration Review application fee. It is important to note that this fee is separate from the Unit Owner Builder’s Deposit, which is another post I’ll discuss in the future.
How will a REBNY Alteration Agreement impact the sale of my apartment?
Most buyers are aware of these review requirements prior to making an offer and so they are not caught off guard. In addition , certain attorneys will always include language regarding the REBNY Alteration Agreement in their contracts and point it out to their clients as an exception to their right to cancel. Some sellers will be required by their boards to include an REBNY Alteration agreement as an exhibit to their contract terms sheet. This adds to the overall cost of completing the transaction and should be addressed up front.
What happens if an owner does not have a REBNY Alteration Agreement and alters their apartment?
This is not something that happens very often, but it can happen. If that is the case, the first thing the board should do once they have become aware of the unapproved work is to send a letter to the building’s attorney asking them to send a letter to the owner explaining why a REBNY Alteration Agreement is required pursuant to governing documents. Next, the board should ask the owner to remove the unapproved work within a certain amount of time. An example of this would be 30 – 60 days. If they do not comply the board should consider turning the matter over to the attorney to pursue legal action. This will likely involve commencing a court case or having the attorney contact the owner about needing to enter their apartment and . . . well you can probably see where this is going. In certain situations boards will want to consider entering into settlement negotiations with the owner. You can read more about this in my post with regard to the Board’s Options when the Unit Owner Files an Alteration Application. In any event, all of this should be discussed with legal counsel with the board making the ultimate decision.