Separate but not Equal

Paul Hachmeyer is frustrated. One of the reasons he lives in a lovely 1920s co-op apartment building in Brooklyn's Bay Ridge neighborhood is because of the nature of a cooperative. In a co-op, he felt, you could get to know your neighbors and also have some control over the quality of your life. But Hachmeyer's frustration has mounted precisely because of his neighbors. In open defiance of the house rules, a number of residents have brought in pets, while others have allowed their children to skateboard in the halls. Then there are the noisy folks upstairs who play their music loudly and refuse to install the carpeting required by the building regulations.

Hachmeyer is a board member but his hands are tied. The reason? Those rowdy residents are not owners but are rent-stabilized tenants. Out of 86 units, the sponsor still controls about 40 rent-regulated and free market apartments. "Short of revoking the lease and getting the attorneys involved, we have little control," says Hachmeyer with a sigh. "We don't want to go to court because we're low-budget and try to keep it that way."

Hachmeyer's case is not unique. Talk to Mary Cavataro, board secretary at a 72-unit White Plains cooperative. Her building has spent a number of frustrating years dealing with two holders of unsold shares. "They are a real pain in the neck," she says. "They don't have to answer to anybody and they put whoever they like in these apartments. We have one apartment now where we know at least seven adult males live there." The board only became aware of their presence when a fire broke out in that unit and the fire department reported there was evidence that a number of people lived there. "They found six beds in a two-bedroom apartment."

The other holder of unsold shares is equally "horrible," notes Cavataro. "He's actually a bit of a slum lord. He owns the apartment above me. People have been there for 15 years and he hasn't painted once. He hasn't fixed the fixtures and, because of that, a fixture beneath the sink broke and I woke up at six in the morning to water pouring through my living room ceiling. He reimbursed me for out-of-pocket expenses, but he wouldn't reimburse the co-op. He said they had insurance that would cover it. He's not responsible."

Many cooperatives and condominiums contain renters who live in investor- or sponsor-owned apartments. And although those tenants live in the same building as the resident-owners, in some cases, they might as well live in a different world.

"You get a tension between those who chose to buy and those who chose not to buy," observes James Samson, a partner in the law firm of Bangser, Klein, Rocca & Blum. "In those buildings that converted in the 1980s, you still have a substantial population of rental tenants and each of these rental tenants has a different set of rights and obligations."

Boards that don't recognize and deal with the special needs and challenges of the different types of residents can find themselves facing unexpected headaches, including lawsuits.

A Different World

When the big conversion boom took place in the early 1980s, the vast majority of buildings that converted to cooperative status did so under what is called a non-eviction plan. Many sponsors had originally started out with eviction plans, which required that at least 35 percent of the building's tenants purchase their apartments. Under these plans, tenants could generally buy their units for about 40 percent of their value on the open market. As prices rose, however, it became more difficult for renters to come up with the money to buy. Thus was born the non-eviction plan.

A non-eviction plan only requires that 15 percent of the tenants purchase their units. Those who don't buy can stay in their homes and still take advantage of applicable rent control or rent stabilization laws Those who buy can either flip their apartments immediately and, since they bought at an insider's price, resell them for a profit, or else stay on as homeowners. But the original sponsor either retains the shares representing renter-occupied apartments or else sells them to outside investors. These holders of unsold shares become the renters' landlords, so even though renters live in the same building as resident-owners, they have different expectations.

Rent-controlled/rent-stabilized. Although often lumped together, rent-controlled apartments (a diminishing number of pre-1969 units) and rent-stabilized ones (post-1969) have slightly different sets of rights. For one thing, rent-controlled tenants do not have leases - renewal, with increases, is automatic and rights are statutory - while rent-regulated residents do and are offered a choice of one- or two-year leases. In both situations, an outside party - the original sponsor or an investor who bought the unit at conversion or later - is the owner of the apartment. As "landlord," he is responsible for dealing with the requests and complaints of the renter as they pertain to the interior of the apartment. He collects the rent and, for rent-stabilized tenants, issues new leases.

Free market. The conditions governing these units are the same as in rent-regulated apartments with two important exceptions: the sponsor/investor can charge anything the market will bear for rent and the renter is not immediately entitled to a lease renewal when the term is up. According to Samson, if the unit was free-market before conversion, the renter gets to keep rights he had up until conversion. Those who bought post-conversion are subject to the rules and regulations of the co-op. "They're not continuing a tenancy that existed before conversion," he explains, "so they don't have any special rights."

Complaints Are Futile

Besides those general distinctions, there are more specific areas that a board should care about. For instance, if a house rule contradicts a provision of the lease a rent-stabilized or free-market tenant has with the apartment's owner, then the lease provision prevails. "The rent-regulated tenants are governed by the terms of their leases," explains attorney Arthur Weinstein. "It's very difficult for co-ops and condos to impose different conditions on them, however reasonable they may seem.

Therefore, if the original lease allows the tenant to own a dog in the unit - even though the co-op or condo house rules clearly prohibit such ownership - the renter can keep the dog. And there is nothing the board can do about it. "The odds of your co-op being able to enforce a new no-dog policy against an existing rent-regulated tenant are very low," says Weinstein. "The courts would probably say that the co-op cannot impose an obligation on its shareholder that cannot be achieved as a matter of law."

"Rent-controlled and rent-stabilized tenants are not subject to the rules that everybody else lives by," Samson says flatly. "There is no obligation for them to observe the house rules. Their rules, rights, and obligations are spelled out in rent stabilization codes and the rent regulation guidelines. A co-op board neither has the power nor the right to change those rules." Samson adds that renters usually have rights that were grandfathered in at the time of the conversion. "Ownership doesn't matter, it's the rights the tenants originally had, not who currently owns the apartment, that matter."

Noise complaints are another issue, however. Those can be addressed not under the house rules, but under city regulations and ordinances that govern quality-of-life issues and are just as applicable to renters as they are to resident-owners.

"Noise is covered under basic contract law and real estate law," observes Weinstein, "so, if the rent-controlled tenant was creating a nuisance in the building, the co-op could probably force a shareholder to enforce a general rule of law prohibiting nuisance. If it's actionable under landlord-tenant law, the co-op could force the owner of the apartment to take action."

Similarly, Samson adds, "if the house rules are parallel with the city's regulations, you're fine. If the city law says you can't do work in a residential apartment after five o'clock in the evening, and your rules say five o'clock, then you're okay. If the board rule says four o'clock, however, you can't restrict the renters to that time. You can't take away the rights the tenants had."

But dealing with such complaints requires spending money on a lawyer. "Ultimately, you have to go to court," Weinstein says. "The only way to ever seek enforcement of anything is through the court system. There's very little that's self-enforcing. You can't collect fines by going to somebody's bank account and getting the money. You have to get a judgment."

Nonetheless, it is still questionable whether a court would actually support fines - or evict a tenant - unless the breach of the lease was substantial. Weinstein notes that a persistent pattern of violating the house rules might offer grounds for eviction "but the eviction would have to be brought by the owner of the apartment, so enforcement by the co-op is a very problematic thing."

Who Does It?

Equally tricky for boards is the question of repair work inside apartments. In rental buildings, the landlord is responsible for repairing leaky faucets and malfunctioning refrigerators, and also for repainting the apartment every few years. In a co-op, however, those tasks are the responsibility of the resident-owners.

"We had a situation where a toilet leaked on the weekend," recalls Hachmeyer, the Brooklyn board member. "The renter insisted we get a plumber in on the weekend to repair it. It was the super's day off and the option we chose was to shut the water down rather than pay a plumber weekend rates to fix a minor leak on a toilet. That upset the renter. Now I understand the tenant is refusing to pay the rent because a cabinet fell off its hinges and wasn't fixed by the super. Our super doesn't want to deal with that tenant any longer because of an attitude problem, and the sponsor doesn't jump on it. Next thing you know they may be having a rent strike and the sponsor could end up taking him to court to pursue eviction, all over a silly thing."

Confusion can arise when the co-op's staff performs repair work - or the managing agent hires contractors - for renters and the absentee owner is not billed for the job. "In many buildings the rental tenants try to get the building superintendent to do appliance repairs," Weinstein notes. "That's not the obligation of the building staff. And that's an area of tremendous concern, especially if the managing agent is providing management services for the owners of those apartments on an across-the-board basis. Sometimes that line is not properly followed. They will do work and not bill it back to the shareholder. It's not the obligation of the co-op to provide landlord-type services. They have to apply minimum required statutory services, like heat and hot water. Anything else is extra."

Most professionals say it is crucial to have a managing agent who understands the differing responsibilities of the resident and non-resident owners. "The last thing you want to hear from your managing agent is that 'the shareholder doesn't have a right to that' - especially if he does," warns Samson. "That could get you into a lawsuit. The managing agent may advise you not to provide the service, and the tenant is entitled to the service, and you get caught in a fight with the owner of the unit as to who's to provide it and pay for it."

In some cases, that is less of an issue because a separate agent handles the rental units. But in cases where the manager supervises all the apartments - owner- and nonowner-occupied alike - special care has to be taken. Peter Burgess Management, for instance, employs customized computer software that indicates all the pertinent information. "It's coded in the software what needs to be done. We know who to call, who to give credit to, and the overall status of the unit," says Burgess, the president of the company. "Most of the time, they want us to handle it and bill them. Generally, the owner doesn't want to be bothered."

Limits

If the co-op or condo reduces services, the renter could be entitled to a rent reduction. While this does not directly affect the co-op or condo - the owner of the unit makes up the difference between rent and maintenance/common charges - it can cause bad feelings between the owner and the board, which could also lead to the courtroom.

"This is a concept board members often don't understand," says Greg Carlson, executive director of the Federation of New York Housing Cooperatives & Condominiums. "They want to take away a service and don't realize that there may be consequences. They say, 'We own the building and we can do what we want.' They do not know - nor do they want to know - anything to the contrary. And they can be at loggerheads with the sponsor, who is trying to protect the rights of his rent-regulated apartments. He doesn't own the building but he has rights. And he may take direct legal action to protect those rights."

There are cases where renters clearly go too far. May a rent-controlled tenant living in a co-op use her apartment as a bed-and-breakfast establishment? In one case, Norman Peck owned shares and held the proprietary lease for a rent-controlled apartment at 325 West End Avenue in Manhattan. The renter, Lily Lodge, ran a business called Oldest Daughter Enterprises. Lodge booked "affordable" accommodations for out-of-town visitors in the homes of its Manhattan "clients." She used her apartment as one of these "homes," claiming the guests were friends or roommates.

When the board found out, it contacted Peck, advising him that Lodge was operating a bed-and-breakfast in violation of his proprietary lease. The co-op informed Peck that Lodge's stream of transient tenants was compromising the safety of the other residents, and that he had to remedy the violation or possibly lose his $1.5 million worth of shares as well as his leasehold interest in the premises.

Peck took his renter to landlord-tenant court and, after a hearing, the renter, Lily Lodge, lost and had to give up the unauthorized business or be evicted. Eviction from a rent-regulated apartment is warranted, says attorney Richard Siegler, a partner at the law firm of Stroock & Stroock & Lavan, "only where the violation of such a substantial obligation - i.e., use of a residential rent-controlled or rent-stabilized apartment as other than a private dwelling - is significant."

Here, the court held that the evidence produced by Peck established that Lodge's use of her apartment as a bed-and-breakfast greatly diverged from the character of the residential building, seriously threatened her landlord Peck's $1.5 million in shares and his lease, and significantly disturbed the building's other tenants in the peaceful use of their apartments.

"The facts of this case led the court to conclude that the defendant was operating a bed-and-breakfast establishment in a co-op, which is inimical to the underlying purpose of a co-op enterprise," Siegler notes. "Transient occupancy involves a commercial enterprise, which has no place in a building designed to provide housing for its shareholders. The courts invariably frown upon such operations."

Understanding the Other Side

Your best approach to dealing with renters and nonresident owners is to try to see things from their point of view. "Boards sit in a room saying, 'I don't see why we can't convert the elevator to a self-operating elevator?'" says Samson. "Well, you can but there will be consequences. If you renovate the elevator, the owner then files for an MCI [major capital improvement] rent increase with the city. The tenant then opposes it by saying, 'That's not a capital improvement, that's a reduction of services.' The owner argues, 'We've got a whole new modern electrical system,' and the tenant argues, 'Yeah, but I've got reduced security in the building now.' The owner does not get an MCI rent increase, but the tenant gets a rent reduction, so instead of paying $400 rent, the renter pays $350. But maintenance is still $1,000 a month, so the owner of the renter's unit pays more - and maybe he's angry because he has just paid $10,000 in assessments on his units. So he may turn around and sue you."

You may win such a nuisance suit, but you still have to put out money to defend it. Or take this scenario, suggested by Robert Tierman, a partner in the law firm of Litwin & Tierman: "You've got a free-market tenant who is renting a year at a time and he's creating a nuisance so the co-op wants him out. The investor may say, 'Let him be. He's only got six months left on his lease and then I won't renew. I'm not going to waste my time suing someone who's only got six months left on the lease.' But the co-op gets tough and serves a notice to cure both on the investor-owner and the subtenant. The landlord will then sue his tenant in landlord-tenant court. If he doesn't do so, the co-op can default the two of them, which takes time, money, and the chance of getting legal fees back is not that great."

To what end? A better approach would be to talk with the nonresident-owner and work something out. "The co-op might cut them some slack," Tierman says. "There is no advantage for the investor to have a disruptive tenant. The investor will probably want to have a good relationship with the co-op, too."

Boards that have followed this approach have found success. In Greg Carlson's 450-unit co-op in Forest Hills, for example, the sponsor stills owns 20 percent of the units but Carlson reports clear sailing. "He lets the co-op do what it wants; all he asks is to be informed when there is a big expenditure." The board not only informs him, its members ask advice, which he freely gives. "If we're going down the wrong road, he'll let us know. He looks at the co-op as a whole and says what's good for the co-op is good for him."

Sherry Frankel, president of Caran Properties, agrees. Besides managing co-ops, she also sits on two Manhattan boards as the representative of the holder of unsold shares. "I've heard about situations where boards and sponsors don't get along," she notes. "That can be troublesome. It seems to me that if the sponsor takes a much more active role in a positive way, the sponsor would have a much more beneficial relationship. The building is the sponsor's investment, too. If you have a good working relationship, you have more opportunities for improving the building and improving everyone's assets. In the end, the sponsor can sell units without approval but who wants that kind of relationship? It's much better to have a good working relationship, where they rely on you and they have trust and faith in you to make improvements together."

Frankel adds: "If you have a good relationship, maybe the co-op will take into account the sponsor's position before making a decision [that affects the sponsor's income]. A bankrupt sponsor is not going to be helpful in the long run. A sponsor with insufficient cash flow can impact business for a co-op; it can limit the number of banks that will lend to a building because of that."

A bad relationship with the sponsor can lead to unnecessary problems. If he desires, for instance, he can withhold information that the co-op needs for a tax certiorari challenge. "You need to know the rental income," explains Carlson. "If the sponsor doesn't give that, the filing may be judged incomplete. My advice is never try to be confrontational. Cooperation is more effective."

Indeed, the board should realize that it is better to get along with its renters and nonresident shareholders than to be confrontational. "Even if there was a troublesome conversion, there's no reason not to create a better relationship," says Frankel. "It's very foolish not to. After all, you're in it together."