Completing the Conversions

The future of co-op apartment buildings in New York State has reached a critical crossroads with a case now before the state's highest court. The decision promises to affect all future conversions and the state's rental regulations in a manner no one — sponsor, tenant, or legislator — had envisioned.

The particulars of 511West 232nd Owners Corp v. Jennifer Realty Co. have been previously reported ("Case Notes," Habitat, December 2001). Now, with the court of appeals expected to issue a decision by spring, the enormity of the case's implications are becoming clear.

In brief: a 66-unit apartment house in the Riverdale section of the Bronx went co-op under a non-eviction plan in 1988. The sponsor was Brooklyn-based Jennifer Realty, whose principals include attorney Arthur Weiner (others at Jennifer's unlisted phone number/address include Talia Management and United Management Corporation). Jennifer made few if any attempts to sell apartments. Ten years later, it still owned 62 percent of the corporate stock, representing 41 formerly rent-regulated units, which Jennifer rents at market rate.

On August 9, 2001, the supreme court's appellate division ruled unanimously that although the offering plan imposed no time limit on selling the remaining apartments, "the purpose of the plan" itself, wrote Justice Alfred D. Lerner, "was to form a stable cooperative." If the court of appeals upholds the decision, this would clear the way for a breach-of-contract suit the co-op board filed against Jennifer.

The implications of the case spread far beyond one co-op and one sponsor. Banks balk at finance arrangements for co-ops in which the sponsor holds the majority of shares. This largely prevents owner-occupiers from selling their own apartments, since lenders generally refuse share loans to prospective buyers of co-ops that have a low percentage of resident-owners. Owner-occupiers cannot exercise self-determination when sponsors hold the majority of board seats. Renters provide a co-op with less stability than homeowners. And one less-noticed aspect might be the most far-reaching: the discontinuation of rent regulations through an unforeseen back door.

Even the defendant's law firm concedes these points, while raising its own. "It's probably not in the interest of co-ops and condos to continue to have apartments that are rented out, whether for the long-term or the short- term, as the concept is owner-occupancy of units," says Elliott Meisel, a founding partner at Brill & Meisel. "Without taking issue with that underlying concept, we still believe the appropriate remedy is not judicial fiat which purports to find an obligation to sell apartments when no such offer has been made and no conditions of sale have been set out, in violation of several fundamental concepts of private-property ownership."

This works both ways, however: owner-occupiers unable to sell their apartments have their own private-property ownership compromised.

"The important fact is one of disclosure, not of mandating sponsor conduct," says attorney Arthur Weinstein, vice president of the Council of New York Cooperatives and Condominiums (CNYC). "When the sponsor has more than a majority of the shares, tenant-shareholders often incur significant damage — they're unable to sell their units, they're unable to refinance — and buildings have had difficulty getting decent mortgages. I think the court is creating an obligation for the sponsor to sell all its units that never existed under law or practice. On the other hand, the sponsor certainly had an obligation to disclose risks of harm that the buyers would face."

"The decision to buy an apartment is one of the most important decisions you make in your life, like buying a house," says plaintiff attorney Beatrice Lesser. "You're investing your family's money and future in what you hope will be a nice place to live and to sell later. My clients couldn't sell their apartments for 10 years. We have a family who bought a one-bedroom there 10 years ago before they had kids. Now they have three kids — one of whom is seriously disabled — and they couldn't sell and move to a bigger place. What good does this do anybody? What public policy is served here? You thought you were buying into a co-op, not into what is a co-op in name only."

The August 9 decision by the appellate division found what's known as an "implied promise" to convert the building to a viable co-op. This is not new legal ground. To use an extremely simple example, a toaster does not have to be sold with a document stating that it will, in fact, toast; there are "implied warranties of merchantability and reliability" that implicitly state it will, respectively, work and work properly. Similarly, no one buys a co-op with the expectation that they will not be able to sell their property.

Holding onto cooperative apartments for free-market rental rather than sale occurs "all over New York City," says CNYC president Stuart Saft. "This is the first case to get this far." The organization has a committee called the Task Force on Completing the Conversion that addresses the issue. Oliver Rosengart of the state attorney general's office says: "We're waiting for the court of appeals decision" before taking action.

Compounding matters in this particular case are sponsor actions that have raised complaints by the residents. "There was a federal drug raid" of a rented apartment, says Lesser, which left the apartment's front door missing. "Weiner replaced it with a non-matching door. The place looks like a slum one year later. We've had a lot of complaints from parents saying they can't let their kids out into the hallway to take out the garbage because they're afraid of who they'll meet."

Additionally, she says, "a sponsor who holds this many apartments can get his way by threatening to withhold maintenance. In a Brooklyn building on which we were attorneys, I had to file suits for 100 co-op apartments."

"We do not believe that the court below has dealt with the issues with a manner that will serve the long-term interests of the co-op and condo communities," says Meisel. "And it certainly has not articulated a basis for either sponsors or co-ops to determine how they should proceed in the future. I think it will create a great deal of litigation."