Changing Succession Rights Is a Tricky Puzzle for Co-op Boards

Tricky succession issues are cropping up in many co-ops when it comes to who can inherit apartments when a shareholder dies. Old, and often outdated, proprietary leases stipulate that upon the death of a shareholder, his or her cooperative shares and accompanying proprietary lease may be transferred to a surviving spouse without the consent of the cooperative board. With the definition of family changing, however, boards need to make sure their corporate documents reflect the times — and the will of the majority of shareholders.

Because most proprietary leases do not allow an automatic-transfer provision to domestic partners and adult children of shareholders, boards have wide discretion in approving or rejecting these transfers. Once these automatic-transfer provisions are added to the proprietary lease, however, these shareholders will not need board consent to assume full ownership of the shares and leases upon the death of the initial shareholder. Because any changes to succession transfers without board approval can affect bottom lines and building quality of life, boards need to carefully balance the needs of the co-op against shareholder desires.

Expanding the category of consent-free transferees brings a certain level of risk to the co-op. The board loses the ability to consider the financial health of potential owners as well as their character as prospective neighbors.

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There's a budgetary consideration as well. The consent-free addition of new shareholders may be a drain on the co-op's flip tax, also known as a transfer fee, which is paid by the seller to the co-op when an apartment is sold. Generally, flip taxes are between 2% and 3% of the sales price or fair market value of the apartment and can represent a healthy injection of capital. Since no money changes hands during automatic transfers upon the death of a shareholder, however, they may be exempt from the flip tax. If a board expands the class of transferees without considering the language in an existing flip tax or a possible future one, that may deprive the co-op of an important source of income. One possible middle ground may be to require a flip tax even for certain consent-free transfers.

It is becoming increasingly common for cooperative ownership to be held by trusts with occupancy agreements that spell out who may reside in the apartment. However, these agreements generally provide that if those occupants die or vacate the apartment, no change of occupancy or ownership is permitted without the consent of the board, which may be denied for any reason or no reason at all absent any violations of law. And at many co-ops where the lease provides that ownership can be transferred to adult children or other family members if they are financially responsible, they would have to provide financial information and be vetted by the board.

Every co-op has to come up with its own succession plan, based on its own unique circumstances. But if amending your proprietary lease is something your board wants to embark on, you should be prepared to assess the impact of consent-free successions on the co-op's flip tax, and you should present a draft of proposed lease amendments, prepared by your building’s attorney, to shareholders. Then call an informational meeting so all shareholders can discuss the amendments.

Deciding who can live in a co-op apartment is one of the board's most important duties. Changing the rules on who can be admitted to the co-op without board approval is a step that should be taken with great care — only if it is clearly in the best interests of the co-op.

Ingrid Manevitz and Jeremy Cohen are partners and Dennis Greenstein is of counsel at the law firm Seyfarth Shaw.