Is It a Condo or a Co-op?

State of the Law

The current (and likely future) state of the law on restraints against alienation precludes condo boards from exercising absolute control over the admissions process wielded by co-op directors; nevertheless it is settled both here (Anderson v. 50 East 72nd Street Condominium, 119 A.D.2d 73) and in other jurisdictions (see, e.g., Oper v. Riverwood Condominium Assn., 563 So.2d 110) that condos may exercise a right of first refusal on such transfers. And though courts have strictly construed the terms of such preemptive rights, condo boards, with judicial approval, increasingly are using the (admittedly limited) leverage of such provisions to demand greater financial information from would-be owners. (See David v. Trujillo, Index No. 120556/97, June 18, 1998, Sup. Ct. N.Y. Co.)

Condo Boards

Condo boards also are assuming more centralized control over building finances by amending bylaws to raise the threshold amounts they can spend on capital (and other) improvements without owner approval, a limitation that can halt projects midstream. Such authorization does not put money in the building's coffers, and borrowing has historically proved difficult for condos because, unlike co-ops, they have no assets to pledge. In an attempt to equalize the situation and afford similar access to loans, Section 339-jj of the Condo Act was added, but thus far the legislation has proved largely ineffective.

In addition, condos look to co-ops, with their more developed body of corporate law (under the applicable Business Corporation Law), to define unit owner rights and the procedures by which to implement them on matters from calling special meetings to mounting proxy contests. For example, while co-op owners have the statutory right (BCL Sec. 624) to the names and addresses of owners, necessary to make such a challenge, condo holders do not, and presently are subject to one opinion recognizing their right to such lists (A&A Properties NY Ltd v. Soundings Condominium Assn., 177 Misc.2d 200) and another denying it (Mishkin v. The 155 Condominium, 177 Misc.3d 1001A).

Given that imitation is the sincerest form of flattery, these developments raise the question: Are condos undergoing an identity crisis? Will their current popularity continue unabated if they utilize the powers newly available to exercise greater control over owners?

Moreover, while independent-minded condo owners face the prospect of curbs on their freedoms, they lack many of the protections afforded their co-ops counterparts by virtue of the fact that they are both shareholders and tenants under a proprietary lease. For example, the Roommate Law (NY Real Prop Law Sec. 235-f), which originated in the rental context and has been held applicable to co-ops (Southridge Cooperative Section No. 3, Inc. v. Menendez, 141 Misc.2d 823) allows shareholders to have someone move in with them without board approval, regardless of any sublease or use and occupancy restrictions contained in the lease. Ironically, should subleasing restraints become commonplace in condos, unit owners may find themselves more limited than their co-op cousins in deciding who occupies their apartments.

Similarly, the Warranty of Habitability (NY Real Prop. Law Sec. 235-b), also developed in the rental context, allows tenant/shareholders (Suarez v. Rivercross Tenants Corp., 107 Misc.2d 135), but not condo fee owners (Frisch v. Bellmarc Management, Inc., 190 A.D.2d 383) to withhold monthly charges and recover damages if the board fails to maintain the premises according to the requisite standard. Even the Pet Law (NYC Admin Code Sec. 27-2009.1), extended from renters to co-op owners (see, e.g., Seward Park Housing Corp. v. Cohen, 287 A.D.2d 157), does not clearly protect dogs of condos owners from eviction because the First Department has ruled it doesn't apply (Bd. of Managers of Parkchester North Condominium v. Quiles, 234 A.D.2d 130) while the Second has said it does (Bd. of Managers v. Lamontero, 206 A.D.2d 340).

On the economic front, condo owners are less intertwined because each unit is separately taxed and mortgaged, but they are potentially at greater risk. Although at least until recently, boards rarely examined purchasers' finances, in the event those purchasers turned owners default, their fellow holders may be left to pick up the short fall because the bank takes priority over the condo (unlike co-ops which take first). Moreover, unit owners lack the benefit of limited liability that flows to shareholders by reason of the corporate form of organization of co-ops, a disadvantage that can put individual owners at substantial risk where insurance coverage is insufficient. (See Taratuta v. Allyn, Index No. 116732/01, Jan. 8, 2004, Sup. Ct. N.Y. Co.)

Conclusion

As the potential power gap between condo and co-op boards narrows and both seek to assume greater centralized control over matters fundamental to constituent owners, many of the key indicia of the two forms of ownership may become more alike than different (with the notable exception of the free transferability available to condo fee owners).

Whether or not this incipient trend toward concentration of power by condo boards, including assumption of control over leasing and imposition of flip taxes, becomes a full-fledged movement may depend more on what the market will bear than what the law will allow. And the increasing similarities underscore the need to rationalize the differences in legal rights presently afforded to owners of functionally identical residential organizations. Ultimately, with boards asserting greater overall power, the real issue may not be so much the form of ownership, but the system of management — a model that in many respects has outlived its usefulness and needs to be revisited.

Not long ago there was a movement afoot to turn co-ops into condominiums due to the supposed benefits they offered, including the lessened economic interdependence resulting from absence of any blanket mortgage or real estate tax lien. (See, e.g., Siegler R: The Feasibility of Co-op to Condo Conversion. NYLJ, Mar. 5, 1997, p. 3) Although such transformations never gained traction, in recent years condominiums have become market darlings (accounting for nearly all new construction and conversions), most notably because of their perceived let-freedom-reign philosophy, particularly the ability of owners to buy, sell, and lease without board intervention. Yet such relative independence may soon be more illusory than real as condo boards seek to assume powers traditionally reserved for their co-op brethren, and unit owners find themselves lacking legal protections available to shareholders.

Despite the fact that the Condo Act (NY Real Prop. Law Sec. 339-v(2)(a)) expressly allows bylaw provisions governing the sale, leasing, or transfer of units, until recently boards took a hands-off policy, due to the potentially overriding prohibition against unreasonable restraints on alienation applicable to real estate. Other jurisdictions with more developed bodies of condo law, however, have recognized that such communal living requires a greater degree of restriction upon individual unit owners. Florida courts, for example, have upheld both partial ( see, e.g.,Woodside Village Condominium Assn., Inc. v. Jahren , 806 So.2d 452) and total bans on leasing ( see, e.g., Flagler Federal Savings & Loan Assn. of Miami v. Crestview Towers Condominium Assn, Inc. , 595 So.2d 198) whether contained in the original declaration ( Hidden Harbor Estates, Inc. v. Basso , 393 So.2d 637) or subsequent amendments ( see Woodside Village, supra ). New York courts incrementally have inched their way toward this modern view, first upholding the right of condo boards to require owners to offer a right of first refusal before renting ( Bd. of Managers of Village House v. Frazier , 81 A.d.2d 760), and then expressly allowing them to impose a blanket leasing ban ( Four Bros. Homes at Heartland Condominium II v. Gerbino , 262 A.D.2d 279), even to charge fines for breaking the leasing rules ( Bd. of Managers of Plymouth Village Condominium v. Mahaney , 272 A.D.2d 283).

For much the same reason, flip taxes were the exclusive province of co-ops, which, as personal property, could impose restraints on transfers. Condo boards, sensing a good revenue-raising device and seizing upon changes in legal thinking, recently (with owner approval) have begun implementing transfer fees without waiting for judicial authority, instead relying on the Condo Act, which neither specifically prohibits nor allows such fees. This interpretation was bolstered by a California court in Grant v. American Golf Corp., 2003 Cal. App Unpub. LEXIS 8617, that held enforceable, as a reasonable means of revenue generation, a $5000 transfer fee imposed by a condominium board on any unit owner desiring to transfer his appurtenant club membership easement.

State of the Law

The current (and likely future) state of the law on restraints against alienation precludes condo boards from exercising absolute control over the admissions process wielded by co-op directors; nevertheless it is settled both here ( Anderson v. 50 East 72nd Street Condominium , 119 A.D.2d 73) and in other jurisdictions ( see, e.g., Oper v. Riverwood Condominium Assn. , 563 So.2d 110) that condos may exercise a right of first refusal on such transfers. And though courts have strictly construed the terms of such preemptive rights, condo boards, with judicial approval, increasingly are using the (admittedly limited) leverage of such provisions to demand greater financial information from would-be owners. (See David v. Trujillo, Index No. 120556/97, June 18, 1998, Sup. Ct. N.Y. Co.)

Condo Boards

Condo boards also are assuming more centralized control over building finances by amending bylaws to raise the threshold amounts they can spend on capital (and other) improvements without owner approval, a limitation that can halt projects midstream. Such authorization does not put money in the building's coffers, and borrowing has historically proved difficult for condos because, unlike co-ops, they have no assets to pledge. In an attempt to equalize the situation and afford similar access to loans, Section 339-jj of the Condo Act was added, but thus far the legislation has proved largely ineffective.

In addition, condos look to co-ops, with their more developed body of corporate law (under the applicable Business Corporation Law), to define unit owner rights and the procedures by which to implement them on matters from calling special meetings to mounting proxy contests. For example, while co-op owners have the statutory right (BCL Sec. 624) to the names and addresses of owners, necessary to make such a challenge, condo holders do not, and presently are subject to one opinion recognizing their right to such lists (A &A Properties NY Ltd v. Soundings Condominium Assn. , 177 Misc.2d 200) and another denying it ( Mishkin v. The 155 Condominium, 177 Misc.3d 1001A).

Given that imitation is the sincerest form of flattery, these developments raise the question: Are condos undergoing an identity crisis? Will their current popularity continue unabated if they utilize the powers newly available to exercise greater control over owners?

Moreover, while independent-minded condo owners face the prospect of curbs on their freedoms, they lack many of the protections afforded their co-ops counterparts by virtue of the fact that they are both shareholders and tenants under a proprietary lease. For example, the Roommate Law (NY Real Prop Law Sec. 235-f), which originated in the rental context and has been held applicable to co-ops ( Southridge Cooperative Section No. 3, Inc. v. Menendez , 141 Misc.2d 823) allows shareholders to have someone move in with them without board approval, regardless of any sublease or use and occupancy restrictions contained in the lease. Ironically, should subleasing restraints become commonplace in condos, unit owners may find themselves more limited than their co-op cousins in deciding who occupies their apartments.

Similarly, the Warranty of Habitability (NY Real Prop. Law Sec. 235-b), also developed in the rental context, allows tenant/shareholders ( Suarez v. Rivercross Tenants Corp. , 107 Misc.2d 135), but not condo fee owners ( Frisch v. Bellmarc Management, Inc. , 190 A.D.2d 383) to withhold monthly charges and recover damages if the board fails to maintain the premises according to the requisite standard. Even the Pet Law (NYC Admin Code Sec. 27-2009.1), extended from renters to co-op owners ( see, e.g., Seward Park Housing Corp. v. Cohen , 287 A.D.2d 157), does not clearly protect dogs of condos owners from eviction because the First Department has ruled it doesn't apply ( Bd. of Managers of Parkchester North Condominium v. Quiles , 234 A.D.2d 130) while the Second has said it does (Bd. of Managers v. Lamontero, 206 A.D.2d 340).

On the economic front, condo owners are less intertwined because each unit is separately taxed and mortgaged, but they are potentially at greater risk. Although at least until recently, boards rarely examined purchasers' finances, in the event those purchasers turned owners default, their fellow holders may be left to pick up the short fall because the bank takes priority over the condo (unlike co-ops which take first). Moreover, unit owners lack the benefit of limited liability that flows to shareholders by reason of the corporate form of organization of co-ops, a disadvantage that can put individual owners at substantial risk where insurance coverage is insufficient. (See Taratuta v. Allyn, Index No. 116732/01, Jan. 8, 2004, Sup. Ct. N.Y. Co.)

Conclusion

As the potential power gap between condo and co-op boards narrows and both seek to assume greater centralized control over matters fundamental to constituent owners, many of the key indicia of the two forms of ownership may become more alike than different (with the notable exception of the free transferability available to condo fee owners).

Whether or not this incipient trend toward concentration of power by condo boards, including assumption of control over leasing and imposition of flip taxes, becomes a full-fledged movement may depend more on what the market will bear than what the law will allow. And the increasing similarities underscore the need to rationalize the differences in legal rights presently afforded to owners of functionally identical residential organizations. Ultimately, with boards asserting greater overall power, the real issue may not be so much the form of ownership, but the system of management — a model that in many respects has outlived its usefulness and needs to be revisited.