Richard Klein in Featured Articles on November 8, 2011
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 to possible liabilities and potential problems that could result from a corporate entity owning the shares. Therefore, the co-op board members sought my consultation early in the process.
Clearly, the major concerns were:
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.
As well, we 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. 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 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.
Richard Klein is a partner at at his namesake firm.
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