A Corporate Entity as Your Neighbor? - Law Offices of Richard Klein

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Richard Klein, Partner, Law Offices of Richard Klein. Should a co-op’s board of directors reject a purchase when the buyer is a corporate entity?

BACKSTORY I represent a small cooperative in downtown Manhattan. This past year, a shareholder whose unit was on the market found a buyer who was willing to pay a very substantial price. The only problem for the co-op was that the buyer was an extremely wealthy European and, for privacy reasons, did not want to submit any financial disclosure information to the cooperative’s board of directors. Moreover, because of potential United States tax consequences, this individual wanted to buy the unit in the name of a corporate entity. Further complicating this transaction, the sole shareholder of this corporate entity was a foreign corporation. Additionally, this individual insisted that his name not appear on any of the cooperative’s operating documents because of his concern that there not be any possible way to show he had any legal or beneficial ownership of the co-op’s shares of stock.

The other shareholders in the building wanted to accommodate this sale, if possible, but without opening up the co-op corporation to possible liabilities and potential problems that could result from a corporate entity owning the shares. Therefore, the cooperative’s board sought my consultation early in the process.

Clearly, the major concerns were what would happen if there is a default in the payment of maintenance, how do we control who lives in the unit, and who do we sue if there is a problem that is not resolved?

By seeking legal counsel early in the process, the board was able to work productively with the seller and purchaser, and their counsel, to achieve the transaction while protecting the board’s legitimate concerns. On behalf of the board, I negotiated a maintenance escrow agreement that would place a substantial amount of money into escrow to cover any defaults in the payment of maintenance or other charges for a fairly significant amount of time.

We also negotiated an occupancy agreement that severely restricted which individuals could occupy the apartment. This document put restrictions on what actions the corporate entity could take that could affect the co-op, and required that the corporate entity acknowledge that any such actions taken without the prior consent of the cooperative would be null and void as far as the co-op was concerned. We also required that the transaction proceed without any financing so that the individual had a significant financial stake in the unit and would be less likely to walk away. We also required that a local individual be designated for the receipt of service of process on behalf of the corporation, in addition to the secretary of state. Based on the foregoing, to the satisfaction of all of the parties concerned, the transaction was able to close several months ago.

COMMENT Many co-op boards have knee-jerk reactions when a potential purchaser seeking to buy a unit is a corporation or some type of trust. There are always legitimate concerns in such situations, especially when there is minimal financial disclosure, or the financial disclosure provided does not show much. However, does that mean that a board should always reject such a deal? As demonstrated from the situation above, I would counsel a board to see if there are ways to resolve the concerns. Clearly, a maintenance escrow agreement of some amount is necessary and a refusal to do so by the buyer would have meant the deal would not go forward.

The same goes for a strongly worded occupancy agreement. Again, if the buyer had said no to such an agreement, there would not have been a closing. As for the lack of financial disclosure, based upon the amount of money that was placed into escrow under the maintenance escrow agreement (and also because the buyer agreed to forgo using any financing to pay for the unit), the board was comfortable going forward with limited disclosure. Indeed, as we discussed, how many boards go through stacks of documents of financial disclosure only to find that months after the new shareholder moves into the building, his/her financial situation drastically changes and he/she stops paying the maintenance?

While the board had legitimate concerns about allowing such a transaction to take place, by seeking legal counsel right away it was able to receive advice and consultation that explained the problems and discussed the possible ramifications, but more importantly, offered solutions to those problems and devised ways to protect the cooperative corporation as best as possible. Accordingly, the lesson that can be drawn from this transaction is that when you want to close, you have to do so with your eyes open.

From the Desk of RK:

There was an attitude issue with the condo unit-owner who refused to remove a piece of furniture he had placed in a common area that did not conform to fire codes. With a C of O pending, the board had to get the violation removed. The reason he refused? The furniture was custom-built.