New York's Cooperative and Condominium Community

Habitat Magazine October 2020 free digital issue



Perspectives: Richard Siegler

As the "case notes" columnist for Habitat for most of the past 20 years, and as a regular reader of Habitat since 1982, I have observed all of the legal developments affecting co-op housing and condominiums during this 20-year period.

Habitat's birth in 1982 came amid the conversion boom when a vast number of buildings were being converted from rental housing to co-op housing. At that time, the co-op movement had existed in New York for more than 100 years, tracing its roots to the post-Civil War era. Condominium development was still in its infancy, being a creature of statutory law in 1964 and thus a less well-known form of ownership, which over the next 20 years has become increasingly popular. Today, because of the flexibility and the diminished economic interdependence of condominium owners vis-à-vis co-op owners, the creation of new co-op units is virtually nil, with most shared ownership housing units coming onto the market in condominium form.

In 1983, New York State enacted the roommate law, which expanded occupancy of apartments beyond the named tenants and members of their immediate family.

In the early 1980s, several cases construed the statutory warranty of habitability (enacted in 1975) to be applicable to co-ops, thus providing an ultimate weapon for shareholders to require boards to provide premises fit for human habitation. As a result, a shareholder could, in a non-payment proceeding, assert the defense of a breach of the warranty of habitability and require a court to judicially determine what abatement of rent, if any, was required for the breach.

In 1985, in FeBland v. Two Trees Mgt. Co., the Court of Appeals held that a co-op board lacked the authority to impose a flip tax upon the transfer of an apartment. The court held that this was tantamount to a lease amendment, which required a shareholder vote. The court also held that flip taxes had to be share-proportionate to satisfy the requirements of the Business Corporation Law. In 1986, the state legislature reversed the share proportionate requirement by amending the Business Corporation Law to permit disproportionate share transfer fees under certain circumstances.

The Tax Reform Act of 1986 changed the definition of "tenant-stockholder" to include persons, not merely individuals, and facilitated compliance with Section 216 of the Internal Revenue Code, which provides tax deductions for co-op shareholders. By 1987, coping with asbestos in apartments had become a concern in many co-op and condominium buildings. Prodded by the attorney general's regulations, many buildings abated asbestos to remove environmental concerns. Ten years later, the same properties were seeking to deal with lead-based paint hazards. Today, the newest environmental issue is indoor air quality and mold.

In 1990, the Court of Appeals decided the most significant case of the past 20 years, Levandusky v. One Fifth Avenue. This decision adopted the business judgment rule as the standard for review to be applied by New York courts to determine challenges to decisions made by co-op and condominium boards. In this case, New York's highest court directed courts to afford great deference to the determinations of co-op and condominium boards and made it more difficult for unit-owners to challenge board decisions.

By 1994, the issue of corruption in co-op and condo management became the most prominent issue facing the industry. The Manhattan district attorney indicted close to 100 persons. This led to a rethinking about the fiduciary duties of managing agents and conflicts of interest. As a result, many managing agents sought to adopt procedures to prevent dishonesty in their business. Although proposed, no reform legislation was ever enacted. This corruption inquiry coincided with a downturn in the economics of the real estate market.

In 1996, the tax court determined that a housing co-op was governed by Subchapter T of the Internal Revenue Code. Since 1985, the Internal Revenue Service had sought to apply Section 277 to co-ops (as defined in Section 216). This case cleared up much uncertainty about the taxation of co-op housing entities. The result was favorable for co-op owners. To date, it remains unclear how the Internal Revenue Service will apply Subchapter T to housing co-ops.

In 2000, the Court of Appeals, in Biondi v. Beekman Hill Housing Apartment Corporation, raised various concerns about personal liability of board members for punitive damages. The court held that the co-op should not bear the burden of indemnifying its directors for punitive damages imposed for acts of bad faith. The court held that the board denied a sublease application on the basis of race. The director, therefore, knowingly exposed the co-op to liability under the civil rights laws. In the court's judgment, the director's willful racial discrimination could not be considered an act in the co-op's best interest.

While punitive damages are normally awarded to plaintiffs under extraordinary circumstances, the mere threat of an award of punitive damages has raised a serious problem for virtually all co-op and condo board members. This is because punitive damage awards may be very substantial and far beyond any actual loss. The result of this decision, however, should be to deter egregious conduct by board members involving a high level of moral turpitude.

Today, with the number of cooperative and condominium units having increased in dramatic proportions since 1982, board members and managers in this field are numerous and constitute a force to be reckoned with in the real estate industry, the New York City government, and throughout the metropolitan area. A far cry from the early days of May 1982.

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