Unintentional Roadkill

This summer, the New York State Legislature passed a sweeping 75-page piece of legislation called the Housing Stability and Tenant Protection Act that inspired rejoicing by many renters and outrage among many landlords. Lost in the uproar is the little-noticed fact that the law has major implications for co-op boards, co-op shareholders, and unit-owners in condominiums.

“Co-ops are unintentional roadkill in this blunderbuss legislation,” says Bruce Cholst, a shareholder at the law firm Anderson Kill. “I don’t think the legislature’s purpose was to hurt co-ops; it was to expand tenants’ rights. But co-ops got caught up in the dragnet because co-op boards are considered landlords.”

Cholst and other lawyers note that the new law will affect numerous aspects of co-ops’ operations, including the application process, collection of arrears, and eviction proceedings. It will also make it more difficult for sponsors to convert rental properties into cooperatives or condominiums. Here are the most significant changes co-op boards and their property managers and attorneys need to be aware of when navigating this new landscape.

The Application Process
Application fees charged to prospective tenants or purchasers, including background and credit checks, cannot exceed $20. Since the cost of processing applications usually exceeds this amount – and can run as high as $750 – boards may want to pursue an alternative course. “I advise they pass the cost on to the seller,” says Eric Balber, a partner at the law firm Smith, Gambrell & Russell. “After all, the seller is the one applying for consent to a transfer.”

The law says that co-op boards and other landlords are now prohibited from refusing to rent apartments because “the potential tenant was involved in a past or pending landlord-tenant action or summary proceeding,” an expedited proceeding in Housing Court. Despite this new prohibition, Cholst still advises his co-op clients to conduct litigation checks, in addition to standard background and credit checks. “A neighbor’s proclivity to litigate, or an antisocial background, portend future trouble for the community and therefore could easily militate in favor of rejection of their application,” he says. “While a previous landlord-tenant history of litigation should not be the sole basis for rejecting an applicant, if there are other types of litigation an applicant has engaged in, that information is still pertinent.”

Security Deposits
This is major. The new law limits security deposits to the amount of one month’s rent or maintenance. Many co-op boards have approved purchases or sublets by marginally qualified applicants if the applicant agreed to put up a substantial security deposit, sometimes equal to one or two years’ worth of maintenance. This “escrow maintenance” was frequently refunded if the buyer paid maintenance on time for a prescribed number of months. This practice now ends.

“There’s no way around this ban,” says Balber. “Either you accept people from whom you would have demanded a security deposit – or you turn them down. This strikes me as a disservice to both buyers and sellers.”

The law does not affect any security deposit arrangements for leases that were entered into before July 14, 2019. If a cooperative had a maintenance escrow in place prior to that date, the cooperative may continue to hold the escrow, draw upon it, and, if provided in the agreement, require replenishment. Other options include securing a maintenance guarantee from a third party, or demanding that the applicant obtain a line of credit from a bank that can be drawn on in the event of a maintenance default.

Collecting Arrears
A penalty for late payment of monthly maintenance has been a valuable tool for co-op boards. The new law limits late fees to $50 or 5 percent of monthly maintenance, whichever is less.

“If the penalty is as trivial as $50, it’s almost silly,” says Balber. “This is going to invalidate every late charge in the city. The only remedy, if arrears start to creep up, is to send it to a lawyer for collection.”

Cholst adds: “Obviously, this limitation does not facilitate timely payment of maintenance. However, boards should continue to assess late fees as permitted by law, and we recommend that, pending legislative or judicial clarification to the contrary, the late fees should be assessed monthly. Boards should also more carefully scrutinize purchasers’ financials at the time of admission, push banks to pick up shareholders’ arrears more aggressively, and move faster to commence nonpayment proceedings in Housing Court, which is now the mandatory forum for seeking payment of rent arrears.”

Most notice and cure periods in summary proceedings in Housing Court have been materially extended, which will further delay collection of arrears. Tenants now have 30 days to cure defaults even after a determination against them in a summary proceeding. The previous limit was 10 days.

Evictions
The new law will make it more expensive and time-consuming to evict residents who fail to pay their rent or maintenance or who otherwise breach the terms of the proprietary lease. Only maintenance (including assessments) can be collected in Housing Court, where summary proceedings do not include the discovery process found in Supreme and Civil Court. It is only in these latter courts that co-op boards can collect other unpaid charges, such as late fees, attorney’s fees, utility costs, and fees for use of amenities.

Some attorneys advise co-op boards that currently itemize buildingwide charges to change that policy. Instead, they should consider baking those charges into the monthly maintenance. This will make it possible to collect the money in Housing Court without resorting to the more cumbersome procedures in Supreme and Civil Court.

Unlawful evictions are now deemed criminal, classified as a Class A misdemeanor punishable by up to one year in jail and a fine of not less than $1,000 and not more than $10,000 per offense.

Conversions
The conversion of rental properties into cooperatives and condominiums may suffer a fatal blow from this legislation. The law ends eviction offering plans altogether, and it requires that the sponsor have contracts to sell at least 51 percent of the units to tenants before a non-eviction plan can be declared effective. This is a major jump from the previous level of 15 percent. The law also gives tenants exclusive right to purchase their apartments for 90 days after the plan has been declared effective. If the sponsor moves to sell an occupied apartment in the future, the tenant has a six-month right of first refusal to buy the unit. Finally, tenants who elect not to purchase and who are elderly or disabled will receive preferential rent for as long as they live in the building.
“This means the sponsor will have to discount prices a lot,” says Balber. “The scuttlebutt I’m hearing is that this will kill the conversion market.”

As you may have surmised by now, the Housing Stability and Tenant Protection Act has not won a lot of fans in New York’s cooperative and condominium world – or among landlords. Stuart Saft, chairman of the Council of New York Cooperatives & Condominiums and a partner in the law firm Holland & Knight, offers a blunt assessment of the law: “This is an egregious invasion of the right of a corporation’s shareholders to agree on their corporate rules, and it treats a co-op shareholder as if he or she was a rent-controlled tenant.”

In its latest newsletter, the law firm of Spolzino Smith Buss & Jacobs offers a strategy for pushing back against the law: “New York State continues to impose regulations on cooperatives and condominiums without considering their unique characteristics. If you believe that your building will be injured by these new laws, please write to tell your legislator – again – that nonprofit co-op corporations are not the same as for-profit landlords, and that shareholders who comply with their obligations should not have to bear the burdens of protecting the co-op against shareholders who breach them.”

But until changes come from the legislature or the courts, one thing is certain. Says Balber, “This law means that co-op boards will have to change some of their current practices.”