Untangling the Co-op Sales Conundrum

Co-op boards are often faced with this conundrum: “How can we assist one of our shareholders to sell an apartment to a person with questionable income, when the board cannot impose a requirement that the buyer post a security deposit that is greater than one month’s maintenance?”

In the past, many co-op boards approved the sale of an apartment to such a buyer, but conditioned the sale upon the incoming tenant-shareholder posting a substantial maintenance guaranty. The amount of the guaranty was often equal to six months or a year’s worth of estimated maintenance charges, and it was designed to protect the cooperative against a buyer who might default in paying maintenance. The security deposit would be used to cover not only the maintenance default but also the legal costs of collecting the unpaid maintenance and, if required, of evicting the defaulting tenant-shareholder.

The Housing Stability and Tenant Protection Act of 2019 limits the amount of lease security that a tenant may be required to deposit to one month’s rent. This law, intended to protect tenants in rental properties, effectively bars a co-op board from requiring a tenant-shareholder to deposit a maintenance guaranty that exceeds one month’s maintenance charges. This is so because co-op boards, unlike condo boards, have a landlord-tenant relationship with shareholders. As a result, boards that cannot obtain financial protections against a lease default will reject the questionable buyer.

How can a board obtain financial protections so it can approve such a sale? The solution is to obtain a third-party guaranty of the tenant-shareholder’s proprietary lease obligations from a person that is not a member of the tenant-shareholder’s immediate family (who usually has the right to live in the apartment with the tenant-shareholder). The logical party to offer such a guaranty is the selling tenant-shareholder. In addition to obtaining the guaranty, a board can ask the guarantor to post a security deposit for the guarantor’s obligations. By having the guarantor post a security deposit in the amount of one year’s maintenance, the board is not violating the new law and is obtaining financial security in the form of an easily collectible fund securing the guarantor’s obligations under the guaranty.

There may be relief on the horizon for co-op boards. Two bills have been introduced in the New York State Legislature seeking to exempt cooperatives from the Tenant Protection Act. If either of those bills becomes law, cooperatives will no longer be limited to receiving security deposits equal to one month’s maintenance charges from new tenant-shareholders.

David Berkey is a partner at the law firm Gallet Dreyer & Berkey.