BY BARBARA DERSHOWITZ
The co-op and condo community has become increasingly litigious over the past decade, and the area of admissions is a hotbed of opportunity for potential lawsuits. To help residential property decision-makers better navigate the often peril-ridden admissions process, on Thursday evening, November 19, 1998, AKAM Associates, Inc., a full-service residential management firm, sponsored Admissions 101: Effective Admissions Policies and Procedures for Co-ops and Condos, as part of the company's ongoing What You Need To Know Series of educational publications and seminars. Mr. Stuart Saft, partner in the Manhattan law firm of Wolf Haldenstein Adler Freeman & Hertz, Chairman of the Executive Board of the Council of New York Cooperatives, and a member of the Attorney General's Task Force on Cooperatives and Condominiums, was the featured speaker. What follows is a summary of the most salient points Mr. Saft made during his presentation.
THE ULTIMATE CONCERN: PROPRIETARY LEASES AND BY-LAWS
The greatest issue facing co-op and condo Boards is the need to protect themselves and their properties from lawsuits claiming discriminatory admissions policies and procedures. To this end, it is strongly recommended that Boards not reject any applicant until they have discussed the situation with their legal counsel. This is advisable because, whereas most people believe that a co-op Board has complete authority over admission-related issues and that condo Boards conversely are powerless when it comes to approving or disapproving potential owners, this belief is, in fact, inaccurate.
The extent of a co-op Board's authority relative to admissions depends on that individual co-op's Proprietary Lease, which contains specific language regarding the Board's right to accept or reject potential purchasers and subtenants. Unfortunately, however, most Boards have never consulted their Proprietary Lease to see what authority they actually do have. In cases where the Proprietary Lease limits the Board's authority over admissions issues, Boards can take action to amend the Proprietary Leases to provide this authority.
Similarly, many condo Boards believe that their only authority is the Right of First Refusal to purchase the apartment when the unit owner wants to sell. However, recent court cases have interpreted the Board's Right of First Refusal to give the Board the right to require an admissions application, to ask questions at an interview and to seek background information of applicants seeking to buy or lease a condo unit. In addition, the Condominium Act provides procedures through which a condo Board may amend its property's by-laws to give the Board greater authority when it comes to admissions.
Finally, because Board members are the only ones covered by Directors and Officers liability coverage, it is strongly recommended that a property's Admissions Committee be composed only of Board members, and that the Board be certain that it is covered by the most current and comprehensive liability insurance.
Key Points: Consult with your property's legal counsel to determine the extent of your Board's admissions-related authority, and make sure that your Board is protected with adequate insurance coverage.
THE ISSUE OF UNSOLD SHARES
When sponsors began converting multi-unit residential buildings to co-op or condo status, the units they were unable to sell fell into the category of unsold shares (even though they may have been sold to investors). Among the rights of holders of unsold shares are the right to freely sell, lease, finance, combine and basically do anything they want with those unsold apartments without consulting the Board and without Board approval.
But recent court cases have resulted in the provision to Boards of additional discretion when it comes to the disposition of unsold shares and have said that a holder of unsold shares must be designated as such by the original sponsor and that the original sponsor must reaffirm the purchase guarantee extended to the holder of unsold shares. This makes sense, because the sponsor is at risk for the maintenance payments of the holder of unsold shares and also because Boards need to be protected. What this means is that in buildings where the holder of unsold shares has operated from the position that he can do whatever he wants, this is no longer altogether true.
In addition, it's also important for Boards to be familiar with their Property's Offering Plan relative to holders of unsold shares. Some Offering Plans, for example, say that the Board has no authority to approve or disapprove transfers of unsold shares but that the managing agent has this right and cannot unreasonably withhold its consent. Such a stipulation is significant because it gives the property additional rights with regard to the transfer of shares in the presence of holders of unsold shares.
Finally, some Offering Plans provide that the sponsor is required to provide 'financially responsible individuals' to buy the shares. This stipulation is in place is because prior to the Tax Reform Act of 1986, the owners of apartments had to be individuals as opposed to entities such as corporations, partnerships and limited liability companies. Most sponsors of older plans never went back to the plan to change this condition, so properties with Offering Plans older than 1986 that are unhappy with who the sponsor or holder of unsold shares has conveyed those units to, should consult the latest generation of the Plan to see if they can, indeed, challenge the sponsor's transfer of shares.
Key Point: Consult with your property's attorney to determine your property's rights relative to holders of unsold shares.
THE LOW DOWN ON ADMISSIONS PROCEDURES
The admissions procedure should be two separate steps. The first step should be the requirement of a written application containing all of the background information a Board wants and can legally request. The second step, which is the in-person admissions interview, should be scheduled only if and when the Admissions Committee is satisfied with regard to the prospective purchaser's credentials as evidenced on the application. Even in the face of often compelling pressure from the selling owner and from real estate brokers, under no circumstances should a Board arrange interviews until they have received and reviewed the complete admissions package and have determined that the applicant is acceptable on paper.
If the application package is incomplete or raises legitimate concern or questions, Boards should direct their managing agent to send a letter to the applicant requesting the additional information. Only when that information has been provided and reviewed should an interview be scheduled.
In the event that a Board decides to reject an applicant based on the application package, Boards are advised to call their legal counsel to discuss the matter and to apprise their attorney of their reasons for the rejection. After consulting with legal counsel, Boards then should instruct their managing agent to write a very short, very simple letter to the applicant stating only that the application has been rejected. (In self-managed buildings, the letter should come from the attorney. This letter is important because under the standard sales contract, such formal notification is required for the buyer to get his deposit back and for the seller to be able to begin showing the apartment again.) In any case, under no circumstances should a Board divulge the reasons for the rejection to anyone but their legal counsel. If queried by the seller, the Board's appropriate response is, "On advice of counsel, I can't answer the question."
If, on the other hand, the Board has preliminarily approved the application and wants to move forward with the interview process, notification of this decision likewise should come from the managing agent. During the interview process, it is important for Boards to do everything possible to commit their personal observations and feelings about the applicant to memory but not to paper. This is so because the notes of such admissions interviews can and often have been subpoenaed when discrimination suits have been brought against Boards.
Key Point: To avoid admissions-related litigation, Board should be careful to be discreet and should follow a specific protocol throughout the admissions process.
LEGITIMATE REASONS FOR REJECTION
According to New York City law, it is discriminatory to reject someone because of their actual or perceived race, creed, color, national origin, gender, age, disability, sexual orientation, marital statues, alienage or citizenship status, livelihood, or because children are or may be residing in with the applicant. The strongest reason to reject someone is because of finances, and Boards can legitimately reject applicants because their income is insufficient to meet the property's monthly carrying charges.
But finances are not the only legitimate reason for rejection. For example, if a Board discovers that a prospective owner or subtenant has been excessively litigious with prior landlords, that is legitimate reason for rejection. There is also the question of whether Boards can reject because the selling price is too low and would adversely impact the value of the other units in the building. This issue has arisen several times in the courts, and a judge recently ruled that a Board can, indeed, reject based on this reason.
It is also important to note that Boards can withdraw an initial approval if it is discovered that the applicant provided false or untrue information either on the application or during the admissions interview.
Key Point: Boards may not reject applicants for discriminatory reasons, and should discuss rejection decisions with their attorneys prior to issuing the formal rejection notice.
APPROVAL OF FINANCIALLY UNQUALIFIED APPLICANTS
Boards that are troubled about an applicant's financial situation but that do not want to reject the applicant have the option of requiring either a guarantor or a maintenance escrow arrangement as a stipulation of sale.
In the cases of a guarantor, a third party is named who will guarantee the carrying charges on the apartment. This stipulation can be written into the sales contract, and is flexible to the extent that it can be lifted under certain conditions, such as the shareholder's income reaching a certain level after a period of time.
Similarly, with the stipulation of a maintenance escrow agreement, the Board can require that six months' or a year's worth of maintenance be put into an escrow account, thereby allowing the Board to draw on that account if the shareholder falls into arrears, and requiring subsequent replenishment of the account until the Board determines that such an arrangement is no longer necessary to protect the interests of the property.
Key Point: Boards that don't want to reject a financially unqualified applicant should consult their attorney to discuss arrangements that would allow the sale to proceed.
THE ISSUE OF SUBLEASING
Subleasing has become a major political
issue in New York City over the last decade. On the one hand, people don't want
a lot of transients in their buildings. On the other hand, at times when people
find it hard to sell their units, or cannot sell them for enough to pay off
their loans or mortgages, Boards have often revised otherwise stringent sublease
policies. In general, it is within a Board's authority to create subleasing
policies that respond to the needs of their residential community and the dictates
of the real estate market, and it is then the Board's obligation to administer
those policies uniformly.
Key Point: Subleasing policies should be appropriate to the building and
should be uniformly applied to all owners.
Should a board have written admissions guidelines? While guidelines are helpful in knowing what a Board looks for in new owners and subtenants, Boards must decide whether or not to commit such guidelines to paper. Once written down, the Board may lose its flexibility. In any case, guidelines should be uniformly applied and can be changed as long as they are applied consistently henceforth.
Key Point: Admissions guidelines
can be created within the parameters of the authority legally granted to a Board,
and should always be uniformly applied.
AKAM Associates, Inc., is an award-winning, full-service residential management
organization. The law firm of Wolf Haldenstein Adler Freeman & Hertz represents
more than 200 cooperative and condominium associates throughout metropolitan
New York.