How to Buy in a Building with Pending Litigation in NYC: What Every Buyer Should Know
How to Buy in a Building with Pending Litigation in NYC: What Every Buyer Should Know
Finding your dream apartment in New York City is an exciting process, but it can also be full of surprises. One of the most common and intimidating surprises that can arise during the due diligence phase is the discovery of a pending lawsuit against the building.
For many buyers, this is an immediate red flag that can make them want to walk away. But what exactly does "pending litigation" mean, and is it always a deal-breaker? The short answer is no. With the right real estate team and a thorough due diligence process, you can confidently navigate a purchase in a litigious building. In some cases, you may even find a unique opportunity.
This guide will break down everything you need to know about buying in a building with pending litigation, from understanding the risks to knowing what questions to ask and who to trust.
What is "Pending Litigation" and Why Does It Matter?
In simple terms, pending litigation means there is an active lawsuit against the co-op or condo association. These cases can range from minor disputes to major, multi-million dollar claims. The discovery of a lawsuit is so critical because of the potential financial and legal risks it poses to the building and, by extension, to you as a prospective owner.
The most significant concerns for a buyer are:
Financial Impact: A lawsuit can be costly. If the building loses, it may be forced to pay a large settlement or legal fees. To cover these expenses, the board may levy a special assessment on all shareholders or unit owners. This is an extra, one-time fee that can be thousands or even tens of thousands of dollars, depending on your unit's size and the total cost of the lawsuit.
Difficulty with Financing: This is often the biggest hurdle. Lenders are risk-averse. A pending lawsuit can make a bank hesitant to provide a mortgage, as it represents a potential financial liability that could impact the borrower's ability to pay their mortgage and maintenance/common charges. Some banks may outright deny a loan to a buyer in a building with litigation, especially if the suit is for a large amount or relates to structural issues.
Board Approval Issues: In a co-op, the board has the power to reject a buyer for any reason (as long as it's not discriminatory). A lawsuit, particularly one that is financially significant, may make the board more cautious about approving new shareholders.
The Due Diligence Checklist: Your Step-by-Step Guide
The key to successfully buying in a building with litigation is a deep dive into the details. Your real estate attorney will be your most important ally in this process. Here's what needs to be done:
Get the Facts from the Listing Agent: As soon as you discover the litigation, ask the listing agent for details. They should have a general understanding of the situation. Your attorney will then formally request more in-depth information.
Engage an Experienced NYC Real Estate Attorney: This is non-negotiable. A good attorney is your shield. They will know what questions to ask and how to interpret the complex legal and financial documents. They will review the litigation file in detail.
Scrutinize the Building’s Financials: Your attorney and mortgage lender will closely examine the building's financial statements. They'll be looking for:
Adequate Reserves: Does the building have a substantial reserve fund? A healthy reserve can show that the board has the financial means to handle a potential loss without a special assessment.
Budgetary Allocation for Legal Fees: Is the board setting aside money to pay legal fees? This indicates they are actively managing the issue.
Review the Board Minutes: This is one of the most critical steps. Board minutes provide a blow-by-blow account of the board's discussions. Your attorney can review them to get the full story on the lawsuit:
When was it first discussed?
What are the specific allegations?
What is the potential financial exposure?
What is the board's legal team's opinion on the case's strength?
Talk to Your Lender: A pre-approval letter is just the first step. You need to have an open conversation with your mortgage lender about the specific litigation. They will determine if their bank has a policy against lending in that building or if they are willing to underwrite the loan with a potential risk.
Assess the Type of Lawsuit: The nature of the lawsuit is as important as the amount. Your attorney can help you understand the difference. For example:
Type of Litigation | Potential Impact |
Construction Defect | High Impact. Can relate to serious structural issues, such as a faulty facade or a leaking roof. Could lead to a significant special assessment for repairs, even if the building wins the lawsuit. |
Shareholder/Owner Dispute | Variable Impact. Can be a dispute over a past renovation or a noise complaint. While often less financially catastrophic than a construction lawsuit, it can signal a contentious board or community. |
Personal Injury | Low to Moderate Impact. A slip-and-fall case or other personal injury claim is typically covered by the building’s liability insurance. Your attorney will confirm the policy is in force and the building is adequately protected. |
Is It a Deal-Breaker or an Opportunity?
For many, a pending lawsuit is an automatic deal-breaker. However, if the litigation is minor, well-managed by the board, and not a threat to the building's financial health, it could be an opportunity for a savvy buyer. A seller in a building with litigation may have fewer interested buyers, giving you leverage to negotiate a lower purchase price.
If you're an all-cash buyer, you'll have an even greater advantage since you won't be subject to a bank's lending policies.
Tips & Takeaways
Don't panic. A pending lawsuit is not an automatic deal-breaker. It is, however, an automatic call for intense due diligence.
Assemble a top-tier team. Work with an experienced NYC real estate agent and, most importantly, a skilled attorney who has specific experience with co-op and condo transactions.
Read everything. The board minutes and financial statements will tell you the real story. Don't rely on hearsay.
Negotiate. A lawsuit can be a powerful negotiating tool. Work with your agent to determine if the perceived risk of the litigation justifies a lower offer.
Prioritize communication. Maintain an open dialogue with your attorney and lender. They are the experts who can tell you if the risk is manageable.
A pending lawsuit adds a layer of complexity to the buying process, but it doesn't have to be a dead end. With the right information and professional guidance, you can make an informed decision and potentially secure an amazing new home.
Ready to navigate the NYC real estate market with confidence? Contact Yeo Real Estate today for a personalized consultation. Our team of experts is here to guide you every step of the way.