There are several situations where ownership of real estate in New York generates the need for an accounting procedure. When a new owner takes over a property as a result of a lawsuit or successful foreclosure action, the property in question may have been managed by third parties, such as a managing agent, over a period of time after a new owner has legal title to the property, but before the new owner can hire a new managing agent and transition from prior ownership to new ownership.
Other similar situations occur when there are multiple owners of a property, but where not all owners take an active role in the property management. There may come a time where the “inactive” owners feel that they are not receiving their fair share of the property’s profits, or simply want an accurate accounting of the income and expenses from the property in question.
Finally, there may be a situation where a managing agent is hired by an owner to run the property, and the owner feels that the managing agent is not accurately reporting the property’s profits or turning over the profits as is their legal obligation.
When these situations occur, the legal remedy is generally an action for an accounting. An action for an accounting is a formal legal request that the entity in control of the property’s books and records account for the income and expenses of the property in Court.
The first step in an accounting action is a formal demand that the books and records be produced, and that an accounting of income and expenses be given. This request should be in writing, and sent by the attorney for the party seeking the accounting. The written demand should include a date by which the accounting should be produced, as well as a location for the accounting, which can be the local courthouse, or the offices of the attorney for the property owner. If the party from whom the accounting is sought refuses to comply with the demand for an accounting by the deadline set, then legal action should be promptly brought.
A formal legal complaint for an accounting must allege that the party who is in control of the books and records of the property refuses to produce same for an accounting, after being formally noticed to do same. It should also allege that the party demanding the accounting has a legal right to same, due to their ownership of the property or their legal relationship to the party managing the property. Another allegation that may be made, depending on the circumstances, is that the party managing the property may not have properly turned over all profits to the property owner. Of course, due to the necessity of an accounting, there can be no allegation of specific amounts, merely that the property manager may, after an accounting is held, be compelled to turn over such amounts to which the property owner is entitled.
After the action is filed, the Court may order that an accounting be held if the allegations in the complaint are not disputed, or, after motion, the plaintiff establishes their legal right to an accounting. In such circumstances, the Court may appoint a referee to formally demand the books and records and commence the accounting. The referee is then legally obligated to compel production of all books and records, and may threaten any non-complying party with a contempt of court citation. After the referee has had an opportunity to examine all financial documents, as well as taking, if necessary, a sworn deposition under oath of all parties, they must produce a report to the Court recommending action. This report would state the conclusions of the accounting, including all income and expenses, and would also state whether the property manager owes the property owner any funds which they had previously failed to turn over to the owner. After formal submission to the Court, the Court will then issue a judgment based on the recommendations of the Referee.
In summation, in any circumstance in which a property owner feels that a property manager is not properly fulfilling their duties, and refuses to account for the property’s profits, an accounting proceeding is the recommended course of action.