State Lifts Cap on Application Fees for Co-ops and Condos

The pushback against the Housing Stability and Tenant Protection Act has begun. And for co-op boards, it has produced its first burst of good news. 

The New York Department of State has just issued a Guidance for Real Estate Professionals that addresses one of the law’s numerous provisions that had infuriated many co-op boards and their managing agents: a $20 limit on application fees. As originally written, the law prohibits landlords, lessors, sub-lessors, brokers, and salespersons from collecting an application fee greater than $20 from a potential tenant. Since co-ops have a landlord-tenant relationship (unlike condominiums), co-ops fell under the purview of the rule. 

Many co-op boards, attorneys, and managing agents cried foul, noting that the cost of processing purchase applications can run into hundreds of dollars – and sometimes as high as $1,000. One attorney even called co-ops “unintentional roadkill” by a law that was designed to protect rental tenants but had unforeseen ramifications for co-op boards, co-op shareholders, and condo unit-owners. 

The new guidance issued by the Department of State decrees that the $20 cap does not apply when an apartment is being sold in a co-op or condominium. 

“It’s a big deal for co-op boards and their managing agents, that’s for sure,” says Ken Jacobs, a partner at the law firm Spolzino Smith Buss & Jacobs. “I’ve had numerous meetings with boards and managing agents, trying to figure out ways to deal with this. What if we switched the fee from the purchaser to the seller? What if we made it a post-closing processing fee? Now, with this guidance, application fees are a moot point.” 

Maybe not in all cases. “The only thing that’s still up in the air is sublet fees in co-ops,” says Peter von Simson, chief executive at New Bedford Management. “I expect the Department of State will say that shareholders have to pay that fee to the co-op, which is the landlord.” 

Other provisions of the law continue to rankle co-op advocates. Security deposits, for instance, are limited to the amount of one month’s rent or maintenance. This will affect numerous co-op boards that have approved purchases or sublets by marginally qualified applicants if they 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 or subletter paid monthly charges on time for a prescribed number of months. The law ends that practice. 

Other areas of concern are the limiting of late fees to $50 or 5 percent of monthly maintenance, and the law’s provisions that make it more costly and time-consuming to evict residents who fail to pay their maintenance or rent or who breach the terms of the proprietary lease. These provisions have inspired co-op and condo advocates to push back against the unintended consequences of the law. 

“I’m putting together a coalition of all the groups that have co-ops and condominiums as members,” says attorney Stuart Saft, chairman of the Council of New York Cooperatives & Condominiums. “We asking co-op shareholders and condo unit-owners to write to their state legislators asking for a simple change to this law. Namely: provide in Section M that this law does not apply to any cooperative or condominium in New York State. That would solve our problems.”