While the authority for co-ops to impose flip taxes is beyond dispute, the case for condos has been, until recently, unclear. "Flip taxes," as they're colloquially called, arose during the 1980s co-op conversion binge, when sponsors enticed existing rental tenants ("insiders") to purchase their apartments at a discount ("insider prices"). It was sometimes deemed proper for "flippers" — insiders who quickly resold their apartments at market price — to leave some of their windfall profit for the co-op and those purchasers who remained committed to the future of the building. Today, flip taxes are general revenue-raisers and often referred to as "transfer fees."
Can condos also impose these fees? Assuming the offering plan or other governing documents do not confer authority for the condo to do so, then the question arises as to whether the governing documents can be amended to impose a transfer fee. Unlike co-ops, in which buyers are actually only purchasing shares in a corporation that owns the building, condo units are deemed by law to be real property. Thus, real-property law rather than personal-property law applies.
A condo contemplating the adoption of a flip tax should first consider New York State Real Property, Law Section 339-v, which provides that a condo's "bylaws may…provide for…[p]rovisions governing the alienation, conveyance, sale, leasing, purchase, ownership or occupancy of units…" On its face, this seems to allow imposition of a condo flip tax. A second law, RPL, Section 339-u, provides for "modification of or amendment to [condo] bylaws," which is usually done via a supermajority vote of unit-owners (i.e., 2/3 or 3/5 , rather than a simple majority). "Alienation" in this context means "a conveyance of property to another," whether by sale or other method.
Condos, unlike co-ops, have a legal prohibition on unreasonable restraints on alienation. And at least in theory, if a restraint is challenged as unreasonable by one particular unit-owner, then it should not matter that a supermajority of others has voted for and accepted the restraint.
There is no New York court decision of which I am aware that has yet directly decided whether a condo-imposed flip tax is an unreasonable restraint. But New York courts have decided whether certain other restraints on condo-unit sales should be deemed unreasonable, and these cases provide useful guidance.
In Anderson vs. 50 East 72nd Street Condominium (1986), a condo board exercised its right of first refusal and thus precluded potential purchasers from acquiring a unit. The appellate court affirmed the lower court's finding that a preemptive right, such as a condo board's right of first refusal, was not unreasonable since the board had to match the agreed-upon sales price.
On its face, this decision is a victory for condo boards imposing slight restrictions on the transfer of condo units. On the other, the board in Anderson was enforcing rights less onerous than a flip tax, through which seller would not realize the same price but the price reduced by the amount of the flip tax.
The appellate court next visited condo transfer restrictions in Four Brothers Homes at Heartland Condominium II vs. Gerbino (1999). There, a condo board sued to enforce a bylaw provision that restricted leasing, as well as occupancy by non-family members, of condo units. The unit-owners countered that the restriction was improper because of "a significant restraint on the ability of homeowners to fully alienate their property" and thus an "unreasonable restraint on alienation." The court held the provision not unreasonable according to the standards that Anderson set. The court also stated that the condo unit-owners, "in choosing to purchase the home, willingly gave up certain rights and privileges.…"
The owners in Four Brothers purchased their unit fully aware of the leasing/occupancy restrictions. By contrast, if a condo were to impose a restriction on leasing after the purchase by the owner in question, then the owner's expectations arguably would be dashed even if the restriction were properly adopted by amendment to the condo bylaws or other governing documents. The adoption of a flip tax would frequently constitute a comparable surprise to unit-owners, who in purchasing probably believed that they would never be subjected to this type of tax on the sale of their units. Still, the more prevalent condo flip taxes become, the less likely it will be that a unit-owner could claim surprise.
Then came the 2005 landmark case Demchick vs. 90 East End Avenue Condo.
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