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BOARD OPERATIONS

HOW CO-OP/CONDO BOARDS OPERATE

How to Set a Practical and Fair Co-op Sublet or Condo Leasing Policy

Tom Soter and Ruth Ford in Board Operations on August 7, 2012

New York City

Aug. 7, 2012

Fairness is the watchword ...

sometimes people are just in

unavoidable circumstances.

Some boards, for example, oppose subletting / leasing because it complicates the resolution of issues. "It's not as easy for the co-op to go deal directly with a subtenant who's causing a nuisance," says attorney Robert Tierman, a partner at Litwin & Tierman. "You are supposed to deal with the [co-op] shareholder" or condo unit-owner. But trying to compel the apartment-owner to take action against his or her tenant can be difficult. Many times, the shareholder doesn't want to interfere with the flow of rent. In addition, it may be that the apartment-owner is abroad.

When creating a sublet policy, there are a number of issues that need to be considered. Among them:

Setting a term. When it comes to length of the sublease, most boards set one-year terms. "They might let you renew with the same subtenant for an additional year, but the co-op will want the right to deny it, just in case there are some problems going on with that subtenant," says Tierman. "They're not going to grant a two-year lease."

"If it's too short a term you're encouraging transiencies, and if it's too long a term then you get into the issue of whether you want to be restricting or encouraging sublets," adds Bruce A. Cholst, a partner at Rosen Livingston & Cholst. "A lot of boards, for example, will say, 'All sublets have to be at least one year, because that prevents transiencies.' So a lot of boards will say, 'You cannot sublet more than two years or three years out of every five.'" But don't just pick arbitrary numbers — discuss what makes sense and why.

Limiting the number. Banks are reluctant to offer loans to properties with a high percentage of sublets. "You might want to consider saying that no more than 10 or 20 percent of the apartments can be sublet at any one time," notes Donald H. Levy, vice president of Brown Harris Stevens, a management firm. "And, if you happen to be a Johnny-come-lately to the process, you may be out of luck."

At a 41-unit building on East 93rd Street, off Lexington Avenue, for example, the board members decided to implement a sublet policy several years ago that permits shareholders to sublet for only two years, except in cases of hardship. When the policy was introduced, 10 percent of the units were being sublet. To bring the number under control, the board grandfathered in everyone who was already subletting, giving the shareholders a three-year window to get rid of their tenants.

Another consideration is whether or not you want to discourage investor ownership. A lot of buildings are saying you must have lived in the building for a certain number of number of years before you are eligible to sublet.

Charging reasonable fees. A co-op is entitled to charge a reasonable sublet fee. "The amount is a board policy call," says Cholst. "For most buildings, the benchmark is 10 percent of maintenance. A lot of buildings have based it upon a percentage of maintenance, on the theory that you could get more money that way.

But case law has said that the fee should be based upon shares or the reasonable costs of the transaction, if the bylaws of the co-op say so. If you have that kind of language in your bylaws or in your lease, and you're trying to assess a sublet fee of, say, 10 percent of maintenance, or X dollars per share, then your sublet policy is vulnerable to legal challenge."

Conditions under which subletting is permitted. Many buildings seem to be open to the hardship standard. In other words, if there is a short-term hardship where the owner is going to be away for a year for some reason, the board will allow subleasing after performing due diligence.

At the East 93rd Street co-op, for instance, fairness is the watchword, explains Jay Ackroyd, the building's treasurer. "We've worked hard to create a family atmosphere, but sometimes people are just in unavoidable circumstances [and have to sublet]."

 

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