Edward T. Braverman is senior partner of Braverman & Associates, a Manhattan law firm that specializes in cooperative and condominium law.

"There is no reason why the owners of the cooperative apartment house could not decide for themselves with whom they wish to share their elevators, their common halls and facilities, their stockholders' meetings, their management problems and responsibilities, and their homes." Weisner v. 791 Park Ave. Corp. (1959) N.Y. Court of Appeals

With Weisner v. 791 Park Ave. Corp., New York's highest court unquestionably established a co-op board's right - subject to certain limitations - to arbitrarily accept or reject a proposed applicant, for any reason or for no reason.

Although normally a restriction on the right to freely transfer stock certificates would be deemed unlawful, New York courts have recognized that a co-op is, in effect, a symbiotic community of homes and that the tenant-shareholders should have the privilege of selecting their neighbors and of securing the financial well-being of the community by assuring themselves that each new member will be financially responsible to meet the building's needs as they accrue.

Every board should establish a fixed procedure to be followed by purchasers. That should include:

1. The establishment of building guidelines for financial acceptability. These criteria should take into account the purchase price and the monthly maintenance charges, juxtaposed against the assets and income of the prospective tenant-shareholder.

   To assure continued financial stability, the co-op may wish to establish the maximum percentage of financing permitted. Some boards may want to consider such social criteria as the clubs to which an applicant may belong; his/her friends and business associates; and perhaps even his/her philanthropic endeavors.

2. The creation of an application form and a fixed requirement for supplemental documentation to be submitted, as well as, when appropriate, a personal interview with the board or a committee. The form and supplementary documentation should seek background information concerning the proposed tenant-shareholder so that the board can obtain a snapshot of who the candidate is, and finances, including tax returns, financial statements, brokerage accounts, bank statements, income verifications, mortgage application and commitment, credit reports, litigation reports, reference letters from employers, friends and associates, a letter of reference from existing and former landlords, and any other pertinent material.

In establishing the form of application, care should be taken by the co-op's counsel to assure the fact improper discriminatory questions are not included. Remember, that, as part of the application process, you will be selecting your new neighbor. You should make sure that he or she will be a person with whom you wish to share your meetings, problems, and elevators. Obstreperous dogs, contentious behavior, sloppy personal habits, litigious personalities and the inability to meet one's financial responsibilities will each create additional burdens upon the existing community of homes which may change the quality of life of the present tenant-shareholders. This is to be avoided.

If it should appear, after a review of the package of documents, that the proposed purchaser may be acceptable, a personal interview should be scheduled to "flesh out" the written material previously presented, and to "eyeball" the applicant. As part of that process, the board, or a committee thereof, should meet with the applicant, his or her spouse, and any adult children who will be residing in the apartment. If pets are permitted and one will be kept in the apartment, the board or committee may also wish to have the pet present, since a rambunctious dog may not be a welcome addition.

As with the form of application, there should be a careful screening of the questions presented during the interview so as to avoid any possible claim of discrimination. With the aid of counsel, questions bordering on sexual preference, physical handicaps, race, or creed should be avoided. Queries should be directed toward a fuller explanation of finances, the number of occupants for the apartment, the desire to use it as a primary residence, the pets that will be kept in the apartment, the alterations desired to be accomplished, discussions of former or pending litigations, especially whose with landlords or neighbors.

Discussion and the decision of the board should be reserved until after the applicant has departed the meeting. If it should appear from the proposed shareholders' initial submission that he/she is not an acceptable candidate, whether for financial or other reasons, rejection should be swift and take place without a personal interview. The building's managing agent should immediately notify all parties, concerned of the denial or consent. The board is not required to enunciate any reasons for a denial, and none should be given.

The board must appreciate the need to act relatively quickly, since delay in the application process prolongs the period of time during which the seller must maintain his unit. Moreover, if there is a rejection, a board's failure to act swiftly during the application process may keep the seller's apartment off the market for an inordinate period of time. The board owes a fiduciary duty to its tenant-shareholders to act reasonably quickly.

CONDITIONAL APPROVALS

After a review of the submitted documentation and the personal interview, the board may believe that, while the candidate is generally acceptable, an impediment does exist which can be resolved with a conditional consent. Some examples:

• If the applicant is protected by diplomatic immunity, consent may be conditioned upon its waiver;
• If the assets or yearly income of the applicant fall short of the building's requirements, a guarantor may be demanded or a security deposit may be established;
• If the purchaser is a corporation or trust, an agreement limiting and establishing the occupancy may be created;
• If the price of the unit is substantially below market (a gray area at best), increased price may be a condition;
• If the unit is a professional or medical office, limitations concerning its use may be prescribed (again, a gray area).

The general principle that the board has the absolute power and discretion to approve or reject a proposed tenant-shareholder is tempered by several factors:

1. The business judgment rule and the board's good faith. Provided a board is acting within the scope of its authority, in good faith, and for a corporate purpose, its actions will not be reviewed or "second-guessed" by the court. This rule was established in Levandusky v. One Fifth Ave. Apartment Corp. The case concerned moving a steam riser. The principle is just as applicable to the application process. However, there may be contractual or legal implications which can and will be reviewed by a court.

2. The proprietary lease. While the "standard issue" proprietary lease grants to a board or its shareholders the unfettered right to pass on the sale of a unit, some proprietary leases have placed constraints on that power. Limits on the power of the board to withhold consent to a transfer "for any reason or no reason" may include some or all of the following exclusions: transfers to a spouse or child; transfers to holders of unsold shares; transfers through inheritance.

   Some proprietary leases have even been drafted with a provision wherein the board can neither "unreasonably withhold or delay its consent." Such a limitation upon the board's power will virtually remove all subjective criteria in the building's application process.

   Some buildings claim to be "co-ops with condo rules." In these few instances, sponsors have crafted the proprietary lease (or co-ops have modified their existing proprietary lease), to create a "right of first refusal" in lieu of the standard application process. In a similar fashion to a condominium, a board will be presented with a proposed purchaser and contract of sale. Should the board determine that the purchaser is unacceptable---either financially or socially --- it must purchase the shares and proprietary lease under the same terms and conditions established in the contract.

   Although it may appear axiomatic, it must be remembered that, in exercising a "right of first refusal," a board must first establish that it has sufficient funds on hand to make the purchase or that it has the ability to borrow sufficient funds, and that making the purchase does not violate the terms of its existing mortgage.

3. Transfers by operation of law. Under certain circumstances the law provides that transfers occur automatically (by operation of law). Examples of such instances are those occurring upon death, as part of an inheritance; and in bankruptcy, in connection with a bankrupt tenant-shareholder.

   The leading case concerning such transfers is House v. Lalor, when a small claims court judgement was obtained and sheriff levied on the judgment debtor's interest in an apartment. While the board could not prevent the transfer of title to the shares and lease, the co-op maintained its right to approve the apartment's occupant. Thus, those transfers caused by the law will balance the legal requirement necessary to cause the transfer against the cooperative's need to control the building's occupancy.

4. A board's discriminatory action. New York City, New York State and the federal government have each enacted statutes which prohibit discrimination in housing accommodations. These protect the public in cooperative as well as in rental housing. Accordingly, a board cannot discriminate as part of its application process because of race, creed, national origin, sex, color, age, disability, marital status, children, physical, or mental handicap, sexual orientation, or occupation.

Both portions of the application process - written and personal interview - should avoid queries which could be interpreted as discriminatory. And, of course, no rejection of a proposed tenant-shareholder should be based on any of the prohibited categories.

A failure to heed the statutory restrictions concerning discrimination can be costly to the co-op, and even to the directors personally, as they may be found to have personally breached the statutes. It is not unusual for a court to grant both compensatory and punitive damages should discrimination occur. The compensatory damages may not only include damages for having to secure other space, but may also include damages for emotional distress. In at least one instance, a co-op and its board members were assessed substantial compensatory and punitive damages, not only with regard to the proposed occupant, but also with regard to the existing shareholder.

Because of the difficulty in establishing proof of discrimination, the courts have adopted a special rule in this area which substantially reduces a plaintiff's initial burden (prima facie case). Under this

"discriminatory effect" standard, a plaintiff need only show that:
1. He is a member of the protected class;
2. He applied for and was qualified to rent or buy the housing;
3. He was denied the opportunity to rent or buy the housing; or
4. The housing opportunity remained available thereafter.

Previous court rulings indicate that a person is qualified if he is financially able to rent or buy the unit. In New York, a housing discrimination plaintiff raises an inference of discrimination when he established his prima facie case.

Once the claimant has met the established test, the co-op will be required to come forward and affirmatively establish that its actions were not motivated by prohibited discriminatory considerations. The courts have found, and it should be indelibly noted for every board member, that subjective explanations will be viewed by the court with considerable skepticism. So that rejecting someone for "not fitting in," "being confrontational," or "being litigious" will be deemed pretextual, and may result in substantial compensatory and punitive awards, both as to the corporation, and possibly as to the individual directors.

Beware: a finding of discrimination may not be covered by the building's directors and officers liability insurance policy and similarly may not be covered under the corporate bylaw indemnification provisions.

Generally, a board has great latitude in the application process. It may virtually determine, in an arbitrary fashion, those persons it deems acceptable to share its elevators, hallways, stockholders meetings, and management problems. But when some questions come up, you should consult counsel. Remember: never be cavalier in the application process. You could regret it.

Site Directory:
Welcome | Firm Overview | Attorney Profiles | Practice Areas | Publications | Contact Us | Representative Cases | Opening Photo Page

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Copyright © by Braverman & Associates, P.C. . All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.