Absolute Power (Almost)

The decision in Weisner v. 791 Park Avenue Corp. by New York’s highest court established the right of a co-op board to reject apartment sales for any reason – or for no reason. In other words, New York, unlike some other states, does not require a justification for a rejection of an apartment transfer. The crux of the decision, which precludes discrimination in cooperative housing based on race, color, religion, national origin, or ancestry, is that, unless there is evidence of these statutory standards, “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.”

The Weisner case has been cited in New York to support the proposition that the directors of a co-op housing corporation have an absolute right – except in cases of prohibited discrimination – to restrain the transfer of stockholders’ interests in a co-op where the proprietary lease requires that board consent be obtained. The decision offers a degree of security and reflects an implicit policy in New York that courts should avoid second-guessing board decisions involving co-op sales.

By contrast, outside New York, various states have adopted policies on transfer restrictions that are inconsistent with the approach taken by the New York courts. Decisions in Illinois, North Carolina, Pennsylvania, California, and Connecticut have all concluded that consent can be withheld only on some reasonable basis in the light of the significant needs and purposes of the co-op.

For example, in North Carolina, refusal to consent to a sale was justified by the co-op corporation’s policy of limiting apartment occupancy to owners, where the proposed purchaser had said he intended to sublease the apartment.

Although not at issue in Weisner, both federal and New York State constitutional and statutory prohibitions on discrimination based on race and religion have always presented a brake on arbitrary restraints in the co-op transfer process. The Civil Rights Act of 1866 and the Fair Housing Act of 1968 prohibit discrimination on the basis of race, color, religion, national origin, or ancestry. Similarly, and directly applicable to cooperative housing corporations, is a provision of the New York Civil Rights Law, enacted in 1971, which provides that “no corporation formed for the purpose of the cooperative ownership of real estate...shall withhold its consent to the sale or proposed sale of certificates of stock...in such corporation because of the race, creed, national origin, or sex of the purchaser.” This statute has been the basis for a number of cases in New York dealing with allegations of anti-Semitism in the rejection of co-op apartment purchasers.

Members of co-op boards in New York must square the broad discretion they are given in approving or disapproving apartment sales with both constitutional and statutory discrimination prohibitions. Confronted with this dilemma and particularly when considering an application involving protected classes, if a co-op board decides to reject a purchaser, it becomes incumbent upon the co-op, through either its managing agent or counsel, to offer valid reasons for the rejection. This should be done at the same time as the decision to reject is made. That way, a board can refute any later claim of discrimination by a rejected applicant or the seller of the apartment.

Reasons that should justify rejection of a purchaser might include any of the following, all of which should be spelled out in confidence:

(1) Insufficient income or income history to meet rental and purchase money obligations.

(2) Insufficient or non-liquid assets so that rental and purchase money obligations may not be met.

(3) Assets held outside the United States and not subject to judicial process, particularly if located in countries with unstable political regimes.

(4) An unfavorable credit report, indicating a tendency for late payments or defaults.

(5) A history of involvement in certain types of litigation.

(6) Involvement in bankruptcy or other insolvency proceedings.

(7) False, misleading, vague, unresponsive, or inconsistent statements contained in the purchase application, financial statement, tax return, or personal interview that cast doubt on the truth and veracity of the purchaser.

(8) Impression from the interview of the purchaser that the applicant is unlikely to abide by the policies, procedures, and house rules of the co-op, especially with respect to pets, subleasing, noise, nuisance, or alterations.

(9) Other indications that the applicant will display undesirable social behavior if approved or would adversely affect the reputation of the co-op.

(10) The likelihood of excessive traffic in the co-op as a result of the applicant’s occupancy.

(11) Risks to the security of the co-op or its occupants because of the fame or notoriety of the applicant.

(12) Excessive burdens that may be placed on the co-op because of security measures required for the applicant; for example, if the individual is a present or former governmental official.

(13) The possibility that the applicant might assert diplomatic immunity.

(14) The apartment is inadequate in size for applicant’s needs; for example, a studio or one-bedroom apartment will be too small for a couple with one or more children.

(15) The applicant intends to acquire the apartment for investment or speculative purposes and does not intend to occupy it as a primary residence.