If you live in New York City, chances are that you have been subjected to a co-op board's interminable and often arbitrary scrutiny (or know of someone that has undergone the ordeal).
Potential purchasers of a cooperative apartment must usually undergo an interview and secure the approval of the entity's board of directors before the seller may transfer his/her proprietary lease and shares of stock in the cooperative corporation. And to the chagrin of many, there are currently very few regulations governing the process by which co-ops make these determinations.
While discrimination laws prohibit decisions based upon "prohibited categories" including, but not limited to, race, creed, color, national origin, gender, age, disability, family composition, military status, citizenship status, sexual orientation, and marital status, since co-op boards are under no legal compunction to disclose the reasoning behind a rejection, violations of these laws are not readily uncovered.
Critics claim that this silence discourages New Yorkers from seeking homes in cooperative apartment buildings, interferes with the housing market, and reinforces economic, racial, and other forms of segregation. Moreover, a rejected applicant must usually resort to a costly and time consuming lawsuit in order to find out why they were denied approval and even then, unless some form of "bad faith" can be independently established, the chances of securing the pertinent information can still be quite remote.
There are additional pitfalls associated with this cloak of secrecy: sellers are unable to hold purchasers in default should the latter fail to cooperate with board requirements. By way of example, in Rosenthal v. Oakes, Oakes refused to return Rosenthal's down payment on an apartment after the co-op board declined to consent to the apartment's transfer.
Since the board's rejection was supposedly not attributable to any "bad faith conduct" on Rosenthal's part, the New York County Supreme Court and the Appellate Division, First Department, both concluded that Rosenthal was "entitled to cancel the contract for the sale of the apartment and to the return of the escrowed down payment." Arguably, disclosure of the co-op board's reasoning might have triggered the seller's ability to find the purchaser in breach and might have entitled the seller to retain the contract down payment.
In response to these and other concerns, New York City Council Member Hiram Monserrate has sponsored a new bill (the "Fair and Prompt Coop Disclosure Law," Intro 119 ) which would require co-op boards to disclose to prospective purchasers the reason(s) for a rejection.
The bill proposes that whenever a co-op withholds consent to a sale, the purchaser must be given a written statement detailing the reason(s) for the denial. That statement must also include the number of applications received, as well as the number rejected, for the three year period preceding the decision.
Under that law, the statement must be given within five business days of the co-op's decision. Following a twenty day grace period, a non-compliant entity may be subject to fines, penalties, and legal fees. [i]
In theory, the statement should convey sufficient information to enable the purchaser to remedy the deficiencies in an application or for the seller to avoid a future rejection of a subsequent applicant.
While the bill is supported by two-thirds of the Council, it has met with considerable resistance from co-op boards and various council members, including Council Speaker Christine Quinn .
Opponents claim that the new law will discourage people from serving on co-op boards, invite lawsuits and incite ill will. We agree.
While some form of explanation is certainly better than none, we're of the opinion that the proposed requirements will likely cripple boards' decision-making processes and open the floodgates to seemingly endless lawsuits.
Fasten your seatbelts!
For a copy of the Appellate Division's decision, please use this link: Rosenthal v. Oakes
For a copy of the Fair and Prompt Coop Disclosure Act, please use this link: Int. No. 119
[i]Fines for first-time violations would range from $1,000 and $15,000. By the third infraction, fines may be as high as $25,000.
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UPDATE:
We regret that many of the links (appearing above) are no longer operational. (The City Council modified its website and deactivated the links to the proposed bill.)
To view a subsequent (2011) version of a proposed law, that was to be known as the Fair Cooperative Procedure Law, please click here.