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Succession issues in co-ops regarding the inheritance of apartments upon a shareholder's death are prompting boards to update proprietary leases to include domestic partners and adult children, but considerations such as financial impact and occupancy rights must be carefully weighed.
AUTHORIngrid Manevitz, Jeremy Cohen and Dennis Greenstein
It may not rival the high drama and palace intrigue among the family members in TV’s “Succession,” but tricky succession issues are cropping up in many co-ops when it comes to who can inherit apartments when a shareholder dies. Old, and often outdated, proprietary leases stipulate that upon the death of a shareholder, his or her cooperative shares and accompanying proprietary lease may be transferred to a surviving spouse without the consent of the cooperative board. With the definition of family changing, boards need to make sure their corporate documents reflect the times.
Because most proprietary leases don’t allow an automatic transfer provision to domestic partners and adult children of shareholders, boards have wide discretion when asked to approve these transfers. Once these provisions are added to the proprietary lease, however, these shareholders will not need board consent to assume full ownership of the shares and leases upon the death of the initial shareholder (provided they have a right of survivorship by law or if the ownership of the shareholders stated in the shares and lease provides for the right of survivorship). Because any changes to succession transfers without board approval can impact bottom lines and building quality of life, boards need to carefully balance the needs of the co-op against shareholder desires.
Amending a proprietary lease by expanding the category of consent-free transferees who may be included on shareholder stock certificates brings a certain level of risk to the co-op. The board loses the ability to consider the financial health of potential owners as well as their character as prospective neighbors by creating a new class of consent-free transferees.
The addition of new shareholders on the share certificate and proprietary lease may also impact a current or future flip tax, also known as a transfer fee, which is paid by the seller to the co-op when an apartment is sold. Generally, flip taxes are between 2% and 3% of the sales price or fair market value of the apartment at the time of the transfer and can represent a healthy injection of capital. Automatic transfers upon the death of a shareholder, however, may be exempt from the flip tax. If a board expands the class of transferees without considering the language in an existing flip tax or a possible future one, that may deprive the co-op of an important source of income.
For example, if a child is included as a shareholder on the proprietary lease, the co-op won’t collect a flip tax when the apartment is transferred to the child if the flip tax exempts transfers to children of the shareholder. The co-op will only collect the flip tax in that instance when the child sells the apartment, perhaps years or decades later. Because of this, working to get a supermajority of voting shares to agree to this proprietary lease amendment might encounter resistance from shareholders who don’t have additional family members on their stock certificates or don’t plan to include them. If that’s the case, one possible middle ground may be to require a flip tax even for certain consent-free transfers.
Who Can Live In the Apartment
Another issue confronting boards is whether to allow adult children to continue to live in or move into an apartment as shareholders after the death of their parents. It is becoming increasingly common for cooperative ownership to be held by trusts with occupancy agreements that spell out who may reside in the apartment. However, these agreements generally provide that if those occupants die or vacate the apartment, no change of occupancy or ownership is permitted without the consent of the board, which may be denied for any reason or no reason at all absent any violations of law. And at many co-ops where the lease provides that ownership can be transferred to adult children or other family members if they are financially responsible, they would have to provide financial information and be vetted by the board limited to that criteria.
However, if a board amends its lease to allow children and/or consents to children being added to the share certificate and proprietary lease during the lifetime of their parents’ ownership or the legal ownership provides for the right of survivorship, it will have no authority to deny automatic right of ownership and occupancy. Accordingly, the board would have no review of the financial ability or character of the children.
No One Size Fits All
Every co-op has to come up with its own succession plan, considering its own unique circumstances. But if amending your proprietary lease is something your board wants to embark on, you should be prepared to do the following:
- Identify the current “consent-free transferees” under your proprietary lease.
- Review the applicability of an existing flip tax resulting from an assignment of a proprietary lease to add a child or other family member.
- Discuss experiences in other buildings with similar issues, and compare the culture of your own building.
- Present a draft of proposed lease amendments, prepared by your building’s attorney, to shareholders and hold an informational meeting to discuss them.
Deciding who can live in a co-op apartment is one of the most important duties a board of directors holds. Changing the rules — by amending your building’s proprietary lease or consenting to the addition of certain family members (other than spouses and including relationship partners recognized to be the equivalent by law) — should be undertaken with care, thoughtfulness and in the best interests of the co-op.
Ingrid Manevitz and Jeremy Cohen are partners and Dennis Greenstein is of counsel at the law firm Seyfarth Shaw.