New York's Cooperative and Condominium Community
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Is a new proposed bill fair or harmful to board service?
The Fair and Prompt Co-op Disclosure Law: fair or harmful? A proposed law to lay out rules for resale practices and penalties could harm co-ops.
You’re on the board admissions committee of your cooperative and you agree with your colleagues: there is a serious financial problem with the proposed buyer for Apartment 6A. He has an interest-only mortgage and a history of bankruptcy. Plus, he has stated in his application that his job takes him out of town frequently for months on end – which makes you suspect he may try to illegally sublet his apartment. Of course, when your board rejects him, you say nothing of this. After all, you don’t have to, since under the law, a co-op board does not have to disclose its reasons for rejecting someone (unless those reasons discriminate against a “protected class”).
But… What would you think of a world where you had to state all your reasons, in writing, for rejecting an applicant? A world where you had to swear to the truth of those statements, and face financial penalties if you didn’t? A world that invites brokers and/or would-be buyers to sue you if they don’t agree with those reasons, forcing you to defend yourself in court, no matter how frivolous the charges may seem?
If Democratic Councilman Hiram Monserrate has his way, that’s the world co-op owners may soon be entering. Monserrate has proposed a bill (dubbed “The Fair and Prompt Co-op Disclosure Law”) in the City Council that would lay out rules for resale practices – and penalties if you don’t obey them. Among them:
“Whenever any co-op corporation withholds consent to the sale…the corporation shall provide the purchaser with a written statement of each and all of its reasons for withholding consent no later than five business days after it has made its decision to withhold consent.
“The statement…must set forth each reason for withholding consent with specificity. This requirement includes identifying: each element of the purchaser’s application which was found to be deficient, any specific ways that the application failed to meet any specific policies, standards, or requirements of the cooperative corporation, and the source of any negative information…for withholding consent.
“…The statement…must include a certification by an officer of the corporation, sworn or affirmed under penalties of perjury, that the statement is…true…
“…any cooperative corporation that fails to comply…shall be liable…in an amount no less than $1,000 and no more than $15,000 for the first instance of non-compliance; and no less than $5,000 and no more than $20,000 for the second instance…and no less than $10,000 and no more than $25,000 for the third or any subsequent instance of non-compliance…
“Any proper party may commence an action in any court of competent jurisdiction alleging a failure to comply with the requirements [of the law]. Such action must be commenced within six months of the time when compliance was required…[if] non-compliance was willful, the finder of fact may award punitive damages.”
The advocates of the bill say it is simply a question of basic fairness. “If someone gets turned down for a department store credit card, they get to find out why,” notes Craig Gurian, executive director of the Anti-discrimination Center of Metro New York, a non-profit organization that had a hand in drafting the proposed law. “When somebody gets turned down for a home that the co-op owner wants to sell and they want to buy and the bank wants to lend, it’s not too much to ask that a written statement be given.”
“When someone is turned down, apparently unfairly, there seems to be no remedy,” adds JoAnne Kennedy, chief operating officer at Coldwell Banker Hunt Kennedy, a real estate brokerage. “The problem is that co-op boards are beholden only to themselves. They seem to have arbitrary power. And they don’t even have to report back to their shareholders about how many they turned down. I would say that the majority of co-op boards do the best they can. It’s not an easy job to serve on a board. The problem is the people who like the power.”
Opponents take a different view, arguing that the proposed law will have a chilling effect on board service in a co-op. They also argue that this is a remedy for a difficulty that doesn’t exist – and that there are already remedies in place.
“In my opinion it’s unnecessary, it’s counterproductive, and it’s also disruptive to board operations,” notes Bruce Cholst, a partner in the law firm of Rosen & Livingston. “It’s unnecessary because, in my opinion, applicants who are improperly rejected are already adequately protected by the discrimination statutes. The one illegal basis of rejection is illegal discrimination, and there are the federal statues, state statues, and city statues already that protect them and preserve their legal remedies. It’s counterproductive because it’ll foment litigation. One of the reasons for not disclosing reasons for rejection is whatever you say can and will be used against you. As soon as you tell people with specificity [why they were rejected] that’s just fodder for frivolous suits. It would be disruptive to board operations because it would prevent board members from deliberating freely and frankly if they know that they’re going to have to go on record. The detail of explanations which this statue requires, under significant penalties of fines, would take up a lot of the board’s time. And they have only five days in which to respond.”
“It’s a terrible piece of legislation,” adds Stuart Saft, a partner at Wolf Haldenstein Adler Freeman & Herz, a law firm with one of the largest co-op practices in the city. “It’s trying to solve a problem that doesn’t exist, because even the Human Rights Commission says there’s a negligible amount of rejections. It comes from a misconception of the extent of the problem. From what I’ve seen, it is not citywide or large enough to require this type of response. What this bill requires is that board members certify that they’re not aware of anybody having done anything discriminatory and puts time limits on the board [for responding]. Whoever wrote it had no idea how boards operate. It will keep people from serving on boards.”
Saft and Cholst both say that if there is a discrimination suit or even a complaint that passes muster with the Human Rights Commission, that organization will issue a charge. “At that point, it would require a defensive explanation by the board. These are very detailed statements, substantive statements designed to convince Human Rights that there’s no probable cause for finding discrimination so that Human Rights will dismiss it in the first instance,” Cholst notes. “If they bypass the Human Rights Commission and start an action in court, then the co-op is bound by all the discovery rules and, in the course of discovery, will have to disclose its reasoning. So it’s not as if board members are never held accountable.”
Gurian admits that the discrimination problem is not as widespread as some have claimed. “In my view, a majority of co-ops do not discriminate,” he says. “There is no suggestion whatsoever that all co-ops are doing that. However, in this context as in others, illicit activity flourishes, if given the opportunity to exist in darkness. I’m not the first one to say that sunshine is a great disinfectant. When you don’t have reasons on the table, you have anomalies. Some of them are merely the arbitrariness of a particular board, some of them are discrimination.”
But Kennedy thinks that co-op discrimination is subtler. “You call for an appointment and the board just doesn’t get back to you.” And, she adds, Human Rights Commission complaints are not a genuine indicator of discriminatory practices, since, oftentimes, rejected applicants don’t bother to sue and just move on. “We had one applicant who was African-American. There were no financial problems; he had great credentials; he was an attorney. He applied, and in six months the board did not act on it. Finally, they turned him down. Now, is this person going to sue? I don’t know. And if someone sues, then the next board [who interviews him] is going to say, ‘Oh, we can’t take him because he is litigious.’”
Opponents, however, argue that the bill’s sponsors misunderstand the basic nature of a co-op. “From their earliest advent, housing cooperatives have had the right and responsibility of learning about prospective purchasers and determining whether or not to allow them admittance to the cooperative,” Mary Ann Rothman, executive director of the Council of New York Cooperatives & Condominiums, said in testimony about an earlier version of this bill before the City Council in September 2005. “It is important to be able to determine that a prospective purchaser – partner in the maintaining of the building and in ensuring a safe, comfortable, and congenial community – be clearly able to meet the financial obligations of ownership and that they understand and be ready to accept their responsibilities as shareholders…Decades of case law confirm the right of housing cooperatives to make these admissions decisions, and protect their right not to give reasons for a rejection.”
Gurian argues that “nobody is talking in this bill about changing the bundle of rights that co-ops have. If a co-op takes a particular amount of time – this bill says nothing about that. If it says you have to have assets twice the purchase price, even after you paid for the apartment, this bill doesn’t say anything about it. Just disclose why.”
He adds that the bill, if enacted, “will make discrimination easier to prove. There’ll be some deterrent effect, which is ideal. The goal is not to have lawsuits. I think that actually there will be a beneficial side effect of the bill, where the prospective purchaser, who’s been turned down, finds out something about himself that in the future he will try to correct – ‘See that student loan delinquency is still showing up on my credit report.’ You know there are a variety of things like that. So all around, we think that will wind up being helpful.”
The proposed law, which some think could be passed by the end of this year, will undoubtedly lead to litigation, both by rejected buyers and by co-op corporations.
“Let’s say the board rejects somebody for economic reasons, which is virtually always the situation,” Saft says. “So, then you send a letter to the buyer or the agent for the buyer and you say, ‘We’ve decided to reject your buyer because we don’t think his finances are adequate.’ Then the board will get sued because the buyer will say, ‘But my finances are good enough.’ Every board will wind up being in a lawsuit for five years and spend hundreds of thousands of dollars in legal fees having to defend a decision that the guy’s finances weren’t good enough or he had too much debt.”
Saft predicts that co-ops will end up challenging the law in court. “But,” he adds, “in the meantime you’re going to have more and more qualified people saying, ‘I don’t want to be on the board.’ How does this help anybody?
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