When Buying Into a Co-op, Better Do Your Due Diligence

Back in 1974, a cooperative at Park Avenue and  84th Street took 25 percent of the floor area of Apartment 1A, a professional office, and combined it with the adjacent superintendent’s apartment. In doing so, the co-op removed an entrance that could have been used by someone in a wheelchair but never filed alteration plans with the city’s Department of Buildings (DOB).

It also never reduced the shares allocated to Apartment 1A, even though its square footage was substantially smaller. Fast forward 40 years to 2014, when Anna and Edward Wachtel purchased the apartment from another shareholder for use as a doctor’s office. All was uneventful until December 2016, when the DOB issued violations against the co-op based on the 1974 alteration. 

The Wachtels sued the co-op and a board member, claiming the co-op had to cure the DOB violations and re-install the entrance, which had complied with the Americans With Disabilities Act (ADA). Apparently during the 1974 construction, a step had been installed inside the egress door. The Wachtels also claimed that because the co-op took 25 percent of the square footage of the apartment without reducing the shares, they should receive a return of 25 percent of the maintenance they had paid. The Wachtels relied both on a statute and on a provision of the bylaws, which stated that if the size of an apartment is changed from a typical plan, the number of shares affected by such change may be ratably changed by the board.

The co-op claimed that the bylaw provision that  discussed reallocation of shares was discretionary (using the word “may”). The board also showed that in May 1974, the shareholders voted to approve the expansion of the superintendent’s apartment, which the board then ratified. In April 1975, the co-op’s managing agent issued a memo to shareholders that Apartment 1A had been sold with its original share allocation to a doctor. That doctor sold to another, who sold to the Wachtels in August 2014.

With respect to the entrance, the co-op’s 1974 alteration was performed 18 years before the ADA statute would require an accessible entrance. Therefore, there could be no liability for the co-op’s failure to comply. The Wachtels also argued that owners of multiple dwellings (that is, the co-op corporation) must keep entrances and other areas in “good repair.” But the co-op claimed that “good repair” did not mean that the co-op warranted that the entrances will be compliant with laws. Indeed, the proprietary lease states that it is the tenant who is obligated to comply with all laws with respect to the apartment. Under these circumstances, the court ruled that the co-op was not liable for the ADA entrance.

Finally, as to the allocation of shares, the court explained that it would not question the reasonableness of a board’s decision absent a breach of fiduciary duty. There was no proof here that there was a breach, and therefore the court decided not to disturb the board’s decision. 

The Wachtels also made a claim based on a statute that says shares must be equal to all other shares. But the court said the shares of Apartment 1A were not unequal to the other shares – meaning the Wachtels had not argued that they were charged more per share. Rather, they’d argued that because they had more shares, they were paying more per square foot than others. While that may be correct, it is not protected by the statute. 

Lessons of the Case

This case raises a number of interesting issues. As a purchaser, it is important that you do your due diligence.There are representations that should be requested in a contract, but there is no indication here that the seller even knew there was an issue with the entrance or with the share allocation. Moreover, it is unlikely that any lawyer would seek to look at minutes going back 40 years, nor is it very likely that a managing agent would provide them. 

Having said that, the ADA-non-compliant step was obviously in place, and the purchaser could have inquired about it and retained an architect to look into DOB records.

It's worth noting that someone purchasing even a small home outside of Manhattan will likely order a home inspection, yet someone buying a far more costly apartment will often do no physical or architectural due diligence at all. While it may cost more in the short term, asking an architectural professional to look at an apartment and public records might save money in the long term.

As to the share-allocation issue, the court was able to rely on the business judgment of the board in part because the board had records that showed that the determination concerning the share allocation was made in accordance with proper corporate governance. This is important. Boards should make determinations at board meetings; minutes of those meetings should accurately reflect what took place; and those minutes should be maintained. 

Dale J. Degenshein is a partner at the law firm Armstrong Teasdale. The statements and views in this article are her own and not necessarily those of the firm.