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What’s the problem with unsold shares?
AUTHORAndrew Stern, Tane Waterman & Wurtzel
Some people believe “unsold shares” in a co-op is a dirty word. What’s the problem with them?
The problems come from their history. Paragraph 38 of the standard proprietary lease that's been in use for years throughout New York City accords holders of unsold shares special rights and privileges. These include the rights to sell, to sublet, to charge fees – they run the gamut. This creates an expectation that people who fit into this category will be treated differently from other shareholders.
How can this difference play out?
I have a co-op client with a sublet policy that involves the imposition of a sublet fee, and they were charging it to any shareholder who sublet his or her apartment. And we were contacted by a shareholder who asserted that because he was a holder of unsold shares, he was not required to pay the sublet fee. He was asking the co-op to refund to him the revenue they'd gotten from the sublet fee. It was a sizable chunk of money. But more important than that, if they had done it for him, they would have to do it for other shareholders in the building who were similarly situated, and that would have had an impact on their bottom line. It would have created a financial problem.
And a bad precedent for the co-op, I’m guessing. So what did you do?
I attacked it by hitting the books. What I learned was that the First Department [of State Supreme Court] has been issuing decisions over the last 15 years that essentially eliminate the special privileges that are in Paragraph 38. In fact, they’ve said it’s illegal to create special privileges for certain shareholders that aren't extended to others. In our co-op, we had the good fortune of everybody listening to reason. So we were able to have an open conversation with counsel for the shareholder and share the recent legal precedents.
Going back to 2004, the Appellate Division had been steadily reinforcing this line of cases, and it did so again during the course of our negotiation, issuing a decision in 2019 that essentially decimated the special privileges that are written into Paragraph 38. As I said, we had an attorney who was prepared to listen to reason, and we were able to reach a resolution that was satisfactory.
The co-op held onto those fees?
What’s your takeaway for others?
Treat all shareholders equally. It's really hard to go wrong if you enact and enforce policies that apply the same to all shareholders.