Say you and your spouse own a single-family home. You’ve got two grown kids and a couple of grandchildren. When the time comes, assuming your will and other end-of-life documents are in order, seeing to it that your property and assets are passed along as you wish is a fairly straightforward process – a home is real property, after all, and laws of succession were practically invented to assure the transference of such property to one’s heirs without a lot of hassle.
But co-ops are different; co-ops are not owned outright the way single-family homes or condo units are. Living in a co-op means that you’re a shareholder, not a property owner, and that the monthly maintenance dues you pay to your cooperative corporation entitle you to occupy one of the units in your building. But that being said, can one leave a co-op apartment to one’s heirs? Can one inherit co-op apartment shares? The short answer is yes – shares in any corporation are inheritable. But overall, inheriting those shares may be a bit more complicated than it looks at first glance. The complications, if any, usually lie in the proprietary lease.
First, Look to the Lease
Phyllis Weisberg, a partner with Manhattan-based law firm Armstrong Teasdale explains; “In most cases, a review of the proprietary lease will provide answers to your questions. The lease is not relevant where the transfer is by operation of law – that is, where one of two joint tenants or tenants by the entirety dies and the survivor takes all. But the lease will typically have a provision dealing with transfers on death. The lease may provide that a transfer to a spouse does not require [board] consent, or it may provide that the board ‘will not unreasonably withhold consent to a financially responsible spouse.’ Some leases will not deal with the spouse separately, but provide that the board ‘will not unreasonably withhold consent to a transfer to a financially responsible member of the family,’ [though] sometimes it is limited to immediate family.”
Philip T. Simpson is an attorney with New York City-based law firm Robinson Leinwand Genovese and Gluck. “The issue usually turns first on the language of the proprietary lease. Does the proprietary lease make an exception to the usual requirement that the co-op board approve all transfers for cases involving inheritance from a deceased shareholder? Some proprietary leases make an exception; others do not.”
About Those Exceptions...
“If there is no exception,” continues Simpson, “then a person seeking to inherit has to go through the same process as anyone applying to purchase a co-op unit. If there is an exception, then questions arise concerning who falls within that exception. The proprietary lease could refer to ‘immediate family’—which is an unfortunate phrase, because there is no clear definition—or it could describe with particularity people who come within the exception. A better alternative to ‘immediate family’ is for the proprietary lease to describe with particularity the classes of people who fall within the exception. These can include spouses, adult children, parents, or other specifically delineated classes of people.”
Weisman advises that “any transfer on death should be reviewed by the co-op’s counsel to make sure that the transferor is in fact the duly appointed estate representative; in the case of a will, [that’s] an executor. In the case there is no will, that would be an administrator. In the case of a will, counsel will confirm that the transfer is in accordance with the provisions of the will, and that the taxing authorities have provided releases or discharges of liens. Assuming the board has the right to consent under the lease, the board should request an application from the proposed transferee and conduct an interview. While there is conflicting case law on whether the board has the right to turn down a named beneficiary in a will, as a practical matter, if the board does that, then the named beneficiary will receive the financial benefit when the executor sells the apartment.”
Simpson says he’s currently involved with a case involving questions of who may inherit. “In this case,” he says, “the proprietary lease has the broadest inclusion I have seen. Board consent is not required for transfer to ‘spouse, parents, adult siblings, adult children, adult stepchildren, guardians or trustees of a Trust for the benefit of Lessee’s children or stepchildren, or a trust created under the Lessee’s Will for the benefit of Lessee’s spouse’ and board consent ‘shall not be unreasonably withheld’ for transfer to Lessee’s ‘adult grandchildren, step-grandchildren, or grandparents.’” As Simpson points out above, this inclusion is really broad. Far more common is to see the exception limited just to spouses and adult children.
The Board’s Rights
If there is an exception, what is the limit on the board’s right to approve or reject a transfer? The very broad exception cited by Simpson effectively states that the board has no approval rights for assignment to some people, and that the board’s approval shall not be ‘unreasonably withheld’ from others. “This is one possible scenario,” explains Simpson. “Another scenario when there is an exception is that the board’s approval ‘shall not be unreasonably withheld’ as to all transferees or heirs who come within the exception. This imposes an obligation on the board to act reasonably – meaning that the board would have to articulate a common-sense reason for turning down an heir who comes within the exception.”
Sometimes the exception states that the board will approve the transfer if the heir’s financials are ‘satisfactory.’ That could mean that, say, a freelance writer, or actor or musician whose income is variable from year to year (or even month to month) could have a hard time inheriting a co-op unit in a pricey building.
Whether the ‘heir’ is designated by a will or not does not seem to matter one way or another. Simpson describes a situation with a co-op on Manhattan’s Upper East Side in which the unit was specifically designated for the heir in the deceased shareholder’s will – but the heir did not have the financial wherewithal to qualify. So, the heir chose to sell the unit on his own. Will or no will, there should be an estate opened for the deceased shareholder either way.
“The personal representative of the deceased – either the executor if there is a will, or the administrator if there isn’t one – would have to be appointed by the Surrogate’s Court,” Simpson explains further. “The personal representative would then sign the documents to transfer the shares and proprietary lease. If there is a contest in Surrogate’s Court over the will, or over who will be appointed administrator, that can take years, and may delay transfer of the unit. Or it may be that someone could get a temporary appointment for purpose of transferring the co-op unit while the will contest is decided.”
A Real-Life Example
In one well-known case outlined by the firm of Ganfer Shore Leeds and Zauderer on their website, a cooperative board was directed to recognize the two sons of a deceased shareholder as the successor owners of the shares corresponding to their mother’s apartment, and to allow an assignment of the shares to their names.
In the case of Estate of Del Terzo v. 33 Fifth Avenue Owners Corp., two brothers inherited from their mother the co-op apartment the family had occupied for 50 years. In the years immediately preceding their mother’s passing, one brother had been residing in the apartment with his mother, his wife, and his two college-age children. The other brother resided in Pennsylvania, where he had a thriving medical practice.
The brothers applied to the cooperative board for assignment of shares from their mother’s estate to the two of them jointly. However, only the non-occupant brother had sufficient income to pay the $3,500 monthly maintenance. Relying on a proprietary lease provision stating that there “shall be no limitation” on the board’s right to grant – or withhold – consent to an assignment, the board rejected the brothers’ application. It reasoned that the proprietary lease precluded more than one family from living in an apartment, and that if only the currently residing brother and his family lived there, the application should be rejected because he was not financially capable of becoming a shareholder.
The brothers sued the board, alleging that its denial of the assignment to them as heirs violated a separate provision in the proprietary lease governing consents to assignments to successor family members. That lease provision stated that “If the Lessee shall die, consent [of the board of directors] shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the Lessee’s family.” The court agreed with the brothers, and found the board had unreasonably withheld its consent.
While most people aren’t thinking about the end of their lives when they purchase a co-op apartment (on the contrary, they’re usually thinking about the new chapter a new home represents), the fact remains that depending on the language codified into a building’s proprietary lease, a board can have sweeping power over how that apartment can be handed down to subsequent generations. That language – and the power it confers – are certainly something to take into account when making the decision to purchase.
A J Sidransky is a staff writer/reporter for The Cooperator, and a published novelist.