A Slippery Slope

In 1995, a kings county Supreme Court justice decided what appeared to be a mundane case, Heffernon v. Baltictown, involving an apartment alteration in a co-op. The case has generally gone unnoticed in the co-op/condo community. While viable arguments can be made both for and against this little known and unreported decision, the situation presented is instructive and offers a mechanism to avoid similar conflicts in the future.

The Baltictown Cooperative Corporation granted its approval to a shareholder to combine two cooperative units into one large apartment in 1978. No alteration agreement was executed, nor did Baltictown require that the shareholder amend the building’s certificate of occupancy in regard to the combination. Additionally, Baltictown did not amend its C of O (which, at the time, was a requirement of the New York City administrative code. The rules concerning apartment combinations in the city were amended in 1997 to essentially eliminate the need to amend a multiple dwelling’s certificate of occupancy upon the combination of two apartments).

In 1987, the board gave its approval for Heffernon to purchase the shares and leases of the combined apartments. One stock certificate reflecting the combined shares and one proprietary lease representing the unified apartment were issued. Baltictown said nothing to the purchaser concerning the combination of the apartment and made no demand that the selling or purchasing shareholder correct a condition which, at the time, was illegal.

Eight months after Heffernon purchased the shares and lease, the co-op received a violation concerning the combined apartment, demanding that plans be filed and a new certificate of occupancy be issued. At the time, the co-op took no affirmative action with regard to the violation and did not notify Heffernon of its issuance.

In 1994, the cooperative sought professional advice in regard to removing the violation. Upon learning that it would be costly to cure the illegal combination, the board sent, via its attorneys, a notice to cure the condition. It demanded that the shareholder restore the units to their original state (by installing the necessary appliances and creating two separate and independent apartment units). The notice advised the shareholder that a failure to restore the two units would result in Baltictown terminating the shareholder’s lease and starting a proceeding to remove him from the apartment.

Heffernon sued, seeking to enjoin the co-op from terminating the lease, canceling the shares of stock, or otherwise interfering with Heffernon’s rights to the combined apartment.

In its decision, the court found:

(1) The co-op was legally bound to get the C of O amended. The court went on to say that, although the co-op could have shifted that burden by contract, there was no evidence that it had done so.

(2) The co-op, having given its approval for the combination of the two apartments and having failed to carry out its duty to obtain an amendment to the building’s certificate of occupancy, could not now cast this responsibility on the current tenant-shareholder, who was unaware of the illegality of the combined unit.

(3) Under the circumstances, the appropriate remedy would be to require the apartment corporation to legalize the combined unit. The court said it would be entirely inequitable and untenable for the plaintiff to be deprived of his purchase of the larger unit.

What should have been done to avoid this conflict? Whether you agree with the ruling or believe that a subsequent purchaser assumes the obligations of his predecessor in interest (and, at all times, must occupy and maintain the apartment so that it conforms to code), there are “good practices” that every co-op should take to avoid such a dispute, and the cost and uncertainty of litigation. Here is a preventative checklist:

(1) Review the co-op’s proprietary lease to assure that no alterations (structural or non-structural) can be performed without the board’s approval and that such alterations must be code compliant. If your lease lacks any of these elements, amend it.

(2) Check the alteration provision in the co-op’s proprietary lease. If it does not require the use of an alteration agreement, amend it so that it does.

(3) Amend the proprietary lease so that a tenant-shareholder assumes the obligations of all of his predecessors for those modifications deviating from the building standard.

(4) Handle all transfers of apartments by way of assignment and assumption. Do not cancel the existing lease and execute a new one. Such a method of closing will transfer the obligations of the former tenant-shareholder to the new one.

(5) Modify the existing assignment and assumption agreement used for apartment transfers. Include a specific assumption of all obligations, covenants, and conditions of the selling shareholder or his predecessor.

(6) Be sure that a tenant-shareholder does not begin work within an apartment without notifying the board, executing an alteration agreement, and having the plans and specs reviewed by the building’s architect to insure code compliance.

(7) Have the building’s architect review all permit applications and work permits actually issued, and regularly check the work in progress to assure the co-op that the work complies with the plans and permit applications.

(8) Require a substantial security deposit from the shareholder, which does not get returned until the building’s architect reviews the completed alteration and all of the required sign-offs to assure the proper completion of the project.

(9) Make certain that the building’s alteration agreement requires the shareholder to comply fully with building codes, assume the obligation to maintain each and every part of the alteration (whether required to do so under the proprietary lease or not), and obtain from any subsequent purchaser an assumption of all of the obligations contained within the alteration agreement.

The building must be vigilant to protect its many shareholders from bearing the expense of correcting the improprieties of a shareholder who modifies his unit. However, the buyer’s counsel must also be vigilant. A buyer’s counsel should investigate, determine, and obtain representations concerning the legality and code compliance of the unit that his clients seek to purchase, and that any prior alterations made to the unit had been approved by the co-op and by the city of New York.