The First Refusal

Ruth Ford is a former contributing editor at Habitat.

What happens when a condominium board exercises its right of first refusal – to reject an applicant purchase a unit up for sale itself? Nine times out of ten, the answer is nothing. As long as the board meets the asking price of the seller, there is usually nothing more involved. A unit goes up for sale, a potential buyer is rejected in favor of the board buying the unit, and the sale is completed. End of story.

Or so the board members of the Bennett condominium at 736 West 187th Street would wish. Life took a difficult turn for the group in December, when the board and its management company, Tudor Realty, were named as defendants in a lawsuit charging them with discrimination under the Fair Housing Act for rejecting an application for purchase by a nonprofit group representing adults with mental retardation. The organization, YAI/National Institute for People With Disabilities Network, submitted an application to purchase two of the Bennett’s units in August of 2006. After a back and forth with the board that lasted through the end of October, the board rejected the application. And, on December 22, YAI filed suit.

While efforts to reach the board members were unsuccessful, and Tudor Realty declined to comment, the lawsuit lays out a worrisome case. According to the plaintiff, YAI, the seller of the units, Abbas Kashani, submitted an application to the board on August 31, 2006, for the sale of the two apartments to YAI. In a letter dated September 5, 2006, Tudor Realty rejected the application on the grounds that YAI’s plan to combine the units violated the condominium’s bylaws, New York City zoning resolutions, and the building’s Certificate of Occupancy. After YAI protested the rejection, pointing out that the reasons cited seemed to contravene the state’s Mental Hygiene Law, members of the board and residents of the Bennett turned out at a public hearing on the purchase to further raise concerns about YAI wanting to put a group home in the building.

According to Thomas Dern, associate executive director for YAI, at the public hearing, hosted by Community Board 12 (under the Mental Hygiene Law, all proposed group homes must be announced publicly and the public given time to comment), the questions coming from the Bennett residents ran from the “ridiculous” – would the residents be using the common space? – to the “offensive” – would the residents try to assault children in the building? “I was at the meeting – those were the words that were used,” recalls Dern. While a spokesman for Tudor, who requested anonymity, says he had never been notified of the public meeting and could not comment on what was said by the participants, Dern says that several times people raised concerns about not only the potential behavior of the YAI residents but also the effect their moving into the building might have on the value of the other units.

Two days after the community board voted to approve the purchase, an e-mail was sent to YAI from Tudor requesting information about the possible impact on property values when residences for people with mental retardation open in a neighborhood. Dern says that they supplied the information, as requested.

On September 26, 2006, the seller resubmitted his application to the board of managers to sell the two units to YAI. Two days later, the board of managers sent a letter to Kashani announcing that a resident of the building wanted to purchase one of the units. When Kashani protested, explaining that the application package included both apartments, the board of managers wrote again on December 12, 2006, announcing they had found two buyers.

On December 22, YAI filed suit in federal court, alleging the board of managers had violated the Fair Housing Act and the Americans with Disabilities Act by attempting to keep the nonprofit from purchasing the units. From YAI’s side of the fence, the case looks like a slam dunk. Each time the board of managers set up a roadblock, the nonprofit jumped as high as it could to surmount it. But what may look like an open-and-shut case of housing discrimination could in fact turn out to be much more complicated, say several attorneys not connected with the case. While a condominium board’s exercise of its right of first refusal is done in only rare cases, condos can do it for almost any reason.

“Under the Business Judgment Rule, a board can act and make a decision for any reason, except for a discriminatory reason,” explains Steve Troup, a partner in Tarter Krinsky & Drogin. Typically, there are three reasons why a board will purchase a unit. First, if the sale price is lower than what the board thinks is appropriate, the board may step in and purchase the unit itself to hold it and resell it at a higher price later.

Boards may also take the step of buying a unit if they are concerned that the potential owner will have an ill effect on the building’s quality of life. For instance, in his 20 years of practicing condo law, says Troup, he has only seen a board do that once, when it rejected a celebrity “who they were concerned would bring a media circus to the building.”

The third reason a board may use to purchase is that the condo association needs the space for a super’s apartment or a community room.

But usually, the primary reason that a board will exercise its right of first refusal will be to prevent a low purchase price, say the attorneys. And even then, it is very rare that a board will step in to exercise its right. “I’ve been practicing condominium law for 20 years and I’ve seen it maybe 10 times in 20 years,” says Ron Sher, a partner in Himmelfarb & Sher. “It just doesn’t happen that often,” agrees James Glatthaar, a partner in the White Plains law firm Bleakley Platt & Smith.

And if a board is going to exercise its right of first refusal, then it needs to follow its bylaws to the letter to avoid problems down the road.

Most bylaws allow a condo board 20 to 30 days after an application for sale is submitted to either exercise or waive its right to purchase the unit. In some instances, the board may need a simple majority of unit-owners to give it the power to purchase, while in other instances, the board may need permission from two-thirds of the owners.

“In a typical situation, a condo board has a certain amount of time to process an application,” points out Mark Axinn, a partner in Brill & Meisel. Where boards get into trouble is when they don’t adhere to the timeline laid down in the bylaws, and make themselves vulnerable to charges that they are deliberately dragging their feet. That’s when you have to start to wonder, say the attorneys. Does the board have a legitimate interest to protect, or is it being discriminatory?

One person familiar with the YAI-Bennett lawsuit says the board of managers has been very careful to follow its bylaws. “They crossed their t’s and dotted their i’s,” the source insists, sidestepping a question on whether the Bennett’s actions could be perceived as discriminatory. The board of managers are settled in for the long haul, says the source, who predicts: “This is going to be a big, long, drawn-out, messy, nasty, expensive, dirty fight.”