This is an expanded version of an article that appeared in the August 2013 edition of The Myers Report newsletter published by the firm.

 

Proposed Laws Would Make the Co-op Approval Process More Transparent

By James E. Robinson, Esq.

 

Buying a home is a complex and sometimes stressful experience, but there’s an added element of uncertainty when the home being purchased is a cooperative apartment.  In this case, the buyer must not only negotiate terms with the seller, but must also obtain approval from the co-op board. 

The law gives the board wide discretion in determining whether or not to approve a buyer.  One court has summarized the general rule by stating that in the absence of a violation of laws prohibiting discrimination, co-op boards have “virtually unfettered discretion . . . to make this decision.”  Matter of Chapman v. 2 King Street Apartments Corp., 8 Misc.3d 1026, 806 N.Y.S.2d 444 (Sup. Ct., New York County 2005).  An earlier decision by an appellate court put it as follows: “absent a prohibited form of racial, ethnic or religious discrimination . . . the board of directors of [a] cooperative [has] the absolute right for any reason or no reason to withhold its approval of . . . a prospective purchaser.”  Rossi v. Simms, 119 A.D.2d 137, 140, 506 N.Y.S.2d 50, 51 (1^st Dept. 1986). 

There are certainly legitimate reasons why an applicant may not be approved, among them a lack of sufficient financial resources.  However, the fact that the co-op board has such wide discretion, coupled with the fact that a denial of approval often comes without any explanation of the reason for rejection, often leaves buyers wondering why they were not approved and whether discrimination or some other improper motive might have played a part.  Another element that comes into play is the time that it takes the board to make a decision.  Here again, there are legitimate reasons why it might take the board several months to make a decision – including a failure by the applicant to provide a complete application or the fact that it’s not uncommon for boards to have fewer (or no) meetings during the summer months – but in certain circumstances an extended delay can also give rise to a concern that the board is intentionally dragging its feet in order to prevent the sale.

These issues have led to a push for laws that would improve the process for the purchaser by requiring boards to act on an application within a set time period and/or to provide an explanation of the reasons for a denial.  As of yet, there are no such laws which cover the entire State of New York, or even the City of New York where there’s the greatest concentration of residential cooperative units, however there are areas in which the situation has been addressed on a local level.

One such area is Suffolk County, where a law was adopted in 2009.  The law is codified as Chapter 391 of the Laws of Suffolk County and consists of a few straightforward provisions. 

• To begin with, every cooperative must develop a standard form of application; and each such application must set forth the requirements for purchasing a unit and contain a notice advising purchasers how they can obtain information concerning fair housing and anti-discrimination laws.  See § 391-3(A). 

• Within 10 days of the receipt of an application, the board must acknowledge receipt of the application and advise the applicant of any aspects of the application that are incomplete.  See § 391-3(B)(1). 

• Within 45 days after the receipt of an application, the board must make a decision, provide the purchaser with written notice of the decision, and, in the case of a denial, provide notice of the grounds for the rejection.  See § 391-3(B)(2).

Suffolk County’s statute does not provide for any specific penalties or consequences if a coop board fails to comply, except to state that a failure to comply may be taken into consideration and/or be used as evidence in proceedings to enforce the County’s anti-discrimination laws.  See § 391-3(B)(3).  The protections of the Suffolk County law cannot be waived or overridden by means of a contract provision or otherwise.  See § 391-3(C).

Two proposals for similar legislation in New York City were made to the City Council in 2010, however neither has yet made significant progress towards enactment into law.  The one which has made more progress is a bill or “Introduction” sponsored by Council Member Lewis A. Fidler and designated as Int 0188-2010.  The proposed law is similar in outline to the Suffolk County law, but its provisions are more detailed. 

• Each cooperative must prepare a standardized application and “a list of requirements for all cooperative apartments subject to the by-laws or proprietary lease” of the cooperative corporation.  The application form must provide notice regarding the requirements for a complete application and regarding fair housing and anti-discrimination laws.  See § 8-1122(a)(1)-(3)  (of the new Chapter 11 proposed to be added to Title 8 of the Administrative Code of the City of New York).

• Within 10 days after an application is submitted, the board must provide the purchaser with notice either acknowledging receipt of the application or advising the purchaser that the application is incomplete.  If such notice is not given within 10 days, then the application would be deemed to be complete.  See § 8-1123(a)-(b).

• Within 45 days after an application is acknowledged or deemed to be complete, the board must notify the purchaser of its decision.  In the event of a denial, the board must also provide a written certification, signed by all of the participating board members, stating that the decision was not based on race, color, creed, age, national origin or any of a variety of other discriminatory grounds listed in the statute.  See § 8-1123(d)(1).

• If the coop board fails to provide the required notice of its decision within 45 days, then the purchaser’s application fee must be refunded.  More significantly, the purchaser would have 10 days in which to make written demand for a decision by the board.  If, within 10 days after receipt of such a demand, the board still failed to provide a decision, then the purchaser’s application would be deemed to have been approved.  See § 8-1123(d)(2)-(3).

• If the board did not meet during the summer and this fact were properly documented in the cooperative’s records, then the board could obtain an extension of the 45-day period with respect to applications filed during the period from July 1 to September 10.  See § 8-1123(d)(4).

• In the event of a cooperative’s failure to render a decision within the required time period, a purchaser could bring a lawsuit against the cooperative corporation, its board of directors and managing agent and, if successful, may recover an amount equal to the greater of (i) three times the fees and costs paid by the purchaser in connection with the application; or (ii) $5,000.  The purchaser could also recover reasonable attorney’s fees.  As an alternative to bringing a lawsuit, the purchaser may commence a proceeding before the New York City Commission on Human Rights and obtain the same monetary award and attorney’s fees.  See § 8-1125(a)(1)-(3).

• In connection with any proceeding in which the cooperative is found to have violated the law, the cooperative would be required to pay a fine to the City as follows: $250 – $2,000 for the first offense, $500 – $5,000 for the second offense, and $2,000 – $15,000 for the third or any subsequent offense.  See § 8-1125(b)(1).

As with the Suffolk County statute, the protections of the law could not be changed or dispensed with through contract provisions or other means.  See § 8-1124.

The other New York City proposal is sponsored by Council Member Brad S. Lander and designated as Int 0326-2010.  This proposal is somewhat different and contains provisions focused on requiring the cooperative to make specific disclosures concerning its decision-making process. 

• In the event that a prospective purchaser’s application were denied, the coop board would be required, within 5 business days after making its decision, to provide a written statement setting forth the reasons for denial.  See § 8-1103(a)  (of the new Chapter 11 proposed to be added to Title 8 of the Administrative Code of the City of New York).

• The statement would have to be quite specific, setting forth information such as each element of the purchaser’s application that was found to be deficient; every way in which the applicant failed to satisfy the coop’s standards; and any source of negative information concerning the applicant that the board took into account.  See § 8-1103(b).

• The statement would also have to contain statistics concerning the number of applications received by the coop over the preceding 3 years and the number of those applications that were denied or not acted upon.  See § 8-1103(c).

• The truth and completeness of the statement would have to be sworn to by an officer of the cooperative corporation.  See § 8-1103(d).

• If a coop failed to comply with the law, then a proceeding to enforce the statute could be brought by the purchaser, a broker who lost a commission on the failed sale, or the City.  If found to be in violation of the law, the coop would be liable for a penalty, payable to the person bringing the proceeding, as follows: $1,000 – $15,000 for the first offense, $5,000 – $20,000 for the second offense, and $10,000 – $25,000 for the third or any subsequent offense.  See § 8-1105. 

• An enforcement proceeding could be brought either in court or before the City’s Commission on Human Rights; and the person bringing the proceeding could, if successful, be awarded attorney’s fees.  See § 8-1106.

The proposed law does not specifically provide that its requirements cannot be waived or altered by contract, though it does more generally provide that the law should be interpreted so as to “deter attempts to evade or delay compliance.”  See § 8-1109.

The proposed legislation at the state level is similar to the Suffolk County law in its relative simplicity, but also incorporates some of the elements of the New York City proposals.  Two bills have been introduced – A.2556 by Assemblyman Charles D. Lavine and A.4388 by Assemblyman N. Nick Perry – however the two proposals are almost identical and there is but one significant change in the later Perry bill, as noted below. 

• Both bills would require coops to develop standardized application forms that set forth the requirements for the purchase of a unit and that indicate where information concerning fair housing and anti-discrimination laws can be obtained.  See § 362 (of the proposed new Article 11 to be added to the Real Property Law).

• Coop boards would be required to acknowledge receipt of an application and provide notice of any incomplete items within 10 days after submission of the application.  Failure to timely do so would result in the application’s being deemed complete.  See § 363(1).

• Within 45 days after receipt of an application, the board would be required to make a decision and to provide the purchaser with written notice of that decision.  See § 363(2).

• Though worded somewhat differently, both bills contain provisions prohibiting discrimination; however the later Perry bill combines this with a requirement that rejections be accompanied by a written statement setting forth the reasons for rejection.  See § 363(3).

• Both bills also provide that a coop board’s failure to render a decision within 45 days after receiving a completed application will result in the purchaser’s being deemed to have been approved.  See § 363(5).

Here again, the proposed laws contain provisions which would prevent them from being circumvented through contract language or otherwise.  See § 364.

While there is opposition to the proposed laws by organizations representing cooperatives and others in the industry – based, among other things, on concerns that the proposed requirements would impose undue burdens on cooperative boards and give rise to a new class of lawsuits – the fact that lawmakers in different locales and on different levels share a belief that there are problems which need to be addressed would seem to suggest that more legislation will eventually be forthcoming.  As long as there’s due consideration and a balancing of the obligations that would be imposed upon cooperatives, the expediency and transparency that such laws could potentially bring to the coop purchase process would seem to be a goal worth pursuing.  

 

Approximately once a month we publish The Myers Report, an e-mail newsletter containing articles similar to this one that we believe will be of interest to our clients, colleagues and friends.  If you’d like to receive The Myers Report then please click here to add your e-mail address to our mailing list.

 

Please note that this article is intended only as a general discussion of issues pertaining to the purchase of a co-op unit and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, transaction or situation.  Circumstances and the applicable legal principles vary and you should consult with an attorney regarding any questions you may have regarding your specific situation.