Co-op Board Powers Under Siege

Attorney Richard Klein sees it happening more and more frequently: a buyer with seemingly rock-solid financials submits an application to buy a co-op apartment, only to be turned down by the board without any indication as to why.

Klein recently represented the owners of a co-op who found all-cash buyers for their unit. But three months after the buyers submitted their application with all the requested documentation, the board rejected them. An offer to put the equivalent of two years of maintenance in escrow made no difference. The deal was dead.

“I don’t know what the problem was here,” Klein says. “Does the board have it in for my clients? You don’t know.”

That’s because co-op boards are not required to let you know. As managers of a private corporation, boards are fully within their rights to reject an applicant for any reason or no reason – so long as it’s not discriminatory or done in “bad faith,” such as self-dealing or preferential treatment. Federal and state laws prohibit housing discrimination based on numerous factors, including race, color, national origin, religion, sex, family status, disability, age, marital status, military status, and sexual orientation.

“Boards have vast powers, but they have to exercise them in good faith,” says attorney Abbey Goldstein, a partner at Goldstein & Greenlaw. “As long as they’re acting in the best interests of the corporation and within the scope of their authority, courts will not generally second-guess boards.”

But some lawyers and real estate agents argue that many boards treat buyers and sellers unfairly by dragging out the decision process, offering no hint as to what their expectations are, and then rejecting seemingly qualified buyers without explanation.

“Some boards act irresponsibly,” Goldstein says. “They leave people in the dark. It’s more and more frequent to see rejections because the price is too low. In my opinion, that’s outrageous. You can’t reject a sale based on price without letting the seller know.”

But Goldstein stops short of advocating that boards be required to give the reason – or reasons – for rejecting every sale. Bills aimed at speeding the application process and making it more transparent have been periodically introduced at the city and state levels for at least a decade, to no avail. “If you say boards have to give a reason for rejecting a sale,” Goldstein says, “it will give rise to litigation and may make boards hesitant to exercise their authority.”

Arthur Weinstein, a co-op and condo attorney, goes even further in “Navigating the Admissions Process,” his e-learning class at Habitat U. “Once the board has decided to decline the application,” Weinstein advises, “they should immediately turn the file over to their attorney. The attorney should send out a very short letter to both the purchaser’s attorney and the seller’s attorney, stating that the building has declined. That’s the only way. Any discussion by a board member with the applicant or seller, or their brokers or lawyers, can only lead to trouble.”

Weinstein adds, “The board should let its attorney know its reason for declining the application, because that’s confidential between the board and its legal counsel. Occasionally, legal counsel may give the purchaser’s attorney the reasons for rejection. That’s constructive because you’ve got human beings involved… The board stays out of this, and the attorney must use judgment as to how far to go in disclosing reasons.”

Efforts to rein in board powers are routinely met with stiff resistance from cooperative advocacy groups. Earlier this year, the state Senate approved legislation requiring co-op boards to respond to applications within 45 days of receipt. But the bill died after strong opposition from cooperative advocacy groups.

“To impose a timeline on these volunteer boards is cruel and unusual punishment,” says Mary Ann Rothman, executive director of the Council of New York Cooperatives & Condominiums.

Nevertheless, the bill will be re-introduced early next year, says Michael Kelly, director of government affairs for the New York State Association of Realtors. “We don’t think it’s a heavy lift to ask a co-op board to respond to applicants in a timely fashion,” Kelly says.

The bill, like its many predecessors, is sure to be met with strong pushback from co-op advocates. Stay tuned.