As the resale value and demand for cooperative apartments increase and the supply of available
units decreases, purchasers are facing denials for admission to co-op buildings in record number. There was a time when many co-op boards concluded that if a bank had given a prospective buyer a loan, the board would consent to the sale of an apartment. Co-op boards have since become much more selective about their future neighbors.
The first concept that all sellers and prospective owners of a co-op apartment must grasp is that cooperative ownership is inherently different from that of fee ownership in which the owner has an interest in real property. Co-ops were created to promote stability in a building and accordingly, a co-op board can determine who may or may not become a shareholder. Co-ops can use the scrutiny of reviewing prospective purchasers' applications as a way of protecting the shareholders from those who do not fit the financial and social profile of a building. Unless specifically excepted with exact language in the proprietary lease, a transfer of shares to an apartment cannot take place without board consent.
The Business Judgment Rule
It has long been the recognized rule in New York State that generally a court will not question the decisions made by the board of a private corporation. This concept of non-judicial review has been referred to as the business judgment rule. New York courts have applied the business judgment rule to co-op boards, thereby granting them great discretion in deciding whether to approve or deny the sale of an apartment. Co-op board discretion has been clarified in a landmark case decided in 1990 entitled Levandusky v. One Fifth Avenue Apartment Corp. The Levandusky case set forth the following guidelines that a co-op must follow in order to withstand the judicial review of the courts: The board's actions must be (i) in furtherance of the purpose of the co-op; (ii) within the scope of its authority; and (iii) in good faith.