Q: What right does a cooperative have to refuse to let me move into an apartment? I have signed a contract to purchase a cooperative unit, and have been informed that I will have to appear before the board of directors of the cooperative and obtain their approval. Is this normal practice, and is it legal? What other protections should I be looking for in the purchase of my cooperative?
A: The right of first refusal is traditional with most cooperatives throughout the country. When you buy a condominium, you buy your unit in what lawyers call "fee simple." This means you have complete title to your unit, and -- subject to house rules -- you are free to use your unit as you see fit. The older condominiums had rights of first refusal similar to cooperatives; in recent years, these refusal rights have been eliminated from most condominiums. r
In a cooperative however, you do not own your unit. A corporation, known as a cooperative association, owns the building (the real estate) and when you purchase your cooperative unit, you will only receive a share of stock or an ownership contract in the corporation.
Additionally, you will receive a long-term lease of the apartment, called a proprietary lease. The word "proprietory" means that you are given a form of ownership, and for all practical purposes you "own" your unit. Legally, however, the ownership is only a lease, and your landlord is the cooperative association.
The landlord has the right to determine who will live in the building. Many buildings, for example, prefer to maintain an adult community, keeping children out. This is legal, as long as there is no discrimination on the basis of race, sex, national origin or religion.
Indeed, the cooperative association has the right to be arbitrary and even capricious in its determination of who will be acceptable to the cooperative.
However, most cooperatives focus on the potential owner's financial situation. The cooperative, acting through its board of directors, is typically interested in meeting you to determine whether you are financially able to carry the monthly obligations of the apartment complex.
Keep in mind that the cooperative pays the taxes and the mortgage, and each shareholder pays a percentage of those expenses to the cooperative. If one or two people are consistently delinquent in their monthly payments, this can create a severe financial drain on the resources of the cooperative itself.
The board of directors might also be interested in whether you can contribute to the voluntary management and committees of the cooperative. They might also be concerned about your intentions as far as renting or occupying your unit yourself, since many cooperatives favor owner occupancy.
Certainly, the cooperative's power to refuse to admit you can be misused, and it can be a tool for discrimination.
If your cooperative rejects you on the basis of sex, race, national origin or religion, you can file a complaint with the Department of Housing and Urban Development and with your local human rights office.
Once you have been approved by the cooperative, here are some suggestions for protecting your interests:
Check the existing title insurance policy to determine that the corporation has good title to the property. Obtain an affidavit from the corporate secretary that the condition of title remains today as it was on the date of your title policy, and that no lawsuits are presently pending against the corporation.
Since you are buying the proprietary lease and stock of the present "tenant," obtain a statement from the secretary of the corporation stating that the stock is owned by your seller and is paid in full.
Furthermore, the statement should indicate that the lease is owned by your seller, free of any sub-lease or other encumbrance.
You should determine in writing that the stock and lease are free from any assessments other than the current cooperative monthly fee.
If you are arranging for your seller to take back financing, have the promissory note carefully reviewed by your financial counselor and your legal advisor. Many cooperatives do not have modern procedures, and often lose track of the existance of the original stock certificate or ownership contract for the unit you are purchasing.
The stock certificate or ownership contract is extremely important, and the purchaser should know exactly where it is, and under what conditions it will be turned over to the purchaser.