Andrew P. Brucker in Legal/Financial on October 27, 2020
When property owned by a single-asset entity is sold, the purchaser frequently buys the ownership interest in the entity, rather than buying the actual property. If a corporation owns a jet plane, for example, a purchaser could gain ownership of the jet by purchasing all of the stock in the corporation rather than by buying the jet itself. Before the law was changed in 1980, transferring ownership of the entity rather than the property itself was the preferred way to sell real estate in New York City. Why? Because the seller could avoid paying the city's real estate transfer tax.
What happens when a co-op apartment is sold by an entity? The proprietary leases of almost all co-ops provide that in the case of an assignment of the lease and transfer of the shares, the board must approve the transaction. But if the co-op apartment is owned by an entity and the ownership interest is transferred rather than the shares (and lease), does the board have the same right to approve or reject the transaction? Does this type of transaction circumvent the normal rules of selling a co-op apartment? That was the question to be answered in Big Deal Realty on Green St., Inc. v. 60G 133 Greene St. Owners, LLC.
Big Deal Realty had this fairly common provision in its proprietary lease: “The Lessee shall not assign this lease or transfer the shares...until consent (was given by the board of directors).” In addition, the lease required the payment of a flip tax when there was a sale.
60G, a limited liability company (LLC), had previously bought the two shares of the cooperative corporation that were allocated to Unit 1 and the basement unit. But years later, in order to satisfy a debt, the owners of the LLC transferred their interest in the LLC to the creditor, without selling the shares in the corporation or assigning the proprietary lease.
The co-op board was upset for two reasons: It wanted the right to approve the transaction, and it wanted to collect a very large flip tax. So the board brought a legal action against 60G. The question for the court was: Could the owners of 60G transfer their ownership interest in their LLC and circumvent the proprietary lease’s requirement for board consent and the payment of a flip tax?
In the court’s decision, it took note of the fact that it is well settled law that in dealing with commercial leases, the transfer of an interest in a tenant does not constitute an assignment of a lease. In fact, this is a common circumstance with commercial leases, and it’s why commercial landlords typically require that the lease specifically state that assignment of the lease requires the landlord’s consent, and that a transfer of some specified percentage of ownership interest in the tenant (often 50%) will be deemed an assignment.
The court noted that there was nothing in the cooperative’s proprietary lease that stated that the transfer of the ownership interests of the entity that owned an apartment would be treated the same as the transfer of the shares and the assignment of the lease. Therefore, the court had no choice but to find that the transfer was valid, even though there was no board consent and no flip tax was paid. The board had no right to approve this transfer or collect a flip tax since the proprietary lease had no provisions in regard to this type of transaction.
There is an important lesson here. It is currently common for shareholders to request that their shares be transferred into the name of an entity. While in most cases a trust is the entity in question, we have received many requests for transfers to an LLC. Every board should be aware that regardless of the entity, special care should be given to the effect that this latest court decision might have on such a transfer. The board should insist that as a condition to any approval for the transfer to any entity, that it be clear, in a written agreement, that the transfer of the ownership interest or beneficial interest in the entity will be deemed a transfer of the apartment itself. In the case of a transfer to a trust, special care should be taken in regard to the party who has the right to use the apartment. Without this type of agreement, the cooperative risks having a transfer that has not been approved by the board and, perhaps worse, a transfer for which a required transfer fee has not been paid.
Andrew P. Brucker is a partner at the law firm Armstrong Teasdale. The statements and views in this article are his own and not necessarily those of the firm.
Co-op and condo board business broken down into bite-sized bits - 2 stories each week. Read now on all digital devices.
A free digital resource for co-op/condo board directors. Published twice a month. Read now on all digital devices.