After Carveout, Co-op Boards Can Once Again Collect Legal Fees

This should sound familiar. Once again the state Legislature has acted to exempt housing cooperatives from the unintended consequences of a new law that was designed to protect rental tenants from unscrupulous landlords. 

This time around, the issue is legal fees. Last summer, Gov. Kathy Hochul signed a law that prevents landlords from collecting legal fees from tenants unless they first obtain a court order — a costly and time-consuming process. Since co-op boards have a landlord-tenant relationship with shareholders, boards were ensnared by the letter, if not the spirit, of the law.

Howls of protest arose immediately. Co-op advocates met with the bills’ sponsors and the governor’s staff. Stuart Saft, head of the real estate practice at the law firm Holland & Knight and chairman of the Council of New York Cooperatives & Condominiums, drafted a letter urging his co-op clients and their property managers to sign it and forward it to the governor’s office. The letter stated: “(This bill) negates the standard provisions of existing proprietary leases, alteration agreements, corporate bylaws and other legal documents that require co-op shareholders to reimburse the cooperative housing corporation for legal fees.” 

On Wednesday, these efforts paid off. The state Assembly joined the Senate in passing a bill that carves co-op boards out of the 2021 law. The bill’s language is unequivocal: “The provisions of this subdivision shall not apply to a shareholder of a cooperative housing corporation, provided, however, that the provisions of the subdivision shall apply with respect to any tenant or subtenant of such a shareholder.” 

In other words, co-op boards can continue to collect legal fees from shareholders for such routine matters as drafting an alteration agreement, but shareholders who sublet their apartments will need a court order before they can pass legal fees on to their tenants.

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“It’s another big win for the co-op community,” says Geoffrey Mazel, a partner at the law firm Hankin & Mazel and counsel for the Presidents Co-op & Condo Council. “Several groups, along with the Real Estate Board of New York, partnered on this to produce what’s called a chapter amendment, which carves co-ops out of the law.”

The need for the carveout was simple, according to Mazel: “The language of the law is so broad that it could be argued that shareholders could avoid paying legal fees even for expenses incurred on their behalf, such as the drafting of an alteration agreement, reviewing sublet applications and trusts, and transfers of shares. The law had the unintended consequence of punishing compliant shareholders and protecting noncompliant ones. It’s the exact opposite of how a housing cooperative should work.”

The bill now goes to the governor, who has stated she plans to sign it into law. When she does, it will add to an impressive string of recent legislative victories for co-op and condo advocates. Last year, those advocates lobbied successfully to carve co-ops out of numerous provisions of the Housing Stability and Tenant Protection Act of 2019, including limits on application fees, late fees and security deposits, and a prohibition of escrow accounts, which had enabled many applicants with marginal financial qualifications to purchase co-op apartments.

Mazel says he’s gratified that lawmakers appear to be waking up to the unique qualities of housing cooperatives. “Even state legislators are starting to understand that co-op boards and their shareholders have a different relationship than landlords and their tenants,” he says. “They see that co-ops are not-for-profit enterprises run by volunteers. Our message is finally penetrating Albany.”