Mi Casa Es Su Casa Proposing and Executing a Legal Sublet

Subletting your co-op or condo apartment in the city is a lot like subletting a rental - but with a few important differences. Many co-op apartment boards flatly refuse to allow subletting, and of those that do allow it, nearly all have strict guidelines about how long a shareholder can sublet, and to whom. Condos - over which the owner maintains more direct control - often prove easier to negotiate.

Assuming your board is willing to consider subletting, the question becomes a matter of finding a suitable subtenant, negotiating the sublease, and - if that becomes problematic - getting them out. As a co-op or condo owner, you may decide to sublet for several reasons; the most common of which is economical. An extended vacation or permanent relocation can actually be made profitable, particularly if your apartment proves difficult to sell outright and results in negative cash flow.

A Stranger in My House

Regardless of the reason you want to sublet, your first hurdles are facing your board and building management and maneuvering a complicated legal minefield. According to Steve Wagner, a partner at the Manhattan-based law firm of Wagner, Davis & Gold, P.C., "Some [sublets] are tolerated by the board whether they're legal or not, and some of them are not tolerated by any board at all."

Wagner cites potential security issues as most boards' primary reason for refusing to allow subletting. "Most times, boards [will take administrative or legal] action if they have a situation where people are using their apartment as a hotel room for strangers. It creates security issues. There's a lack of stability in the building because of it, and people like their homes to be stable, comfortable places where they know who their neighbors are. When you have someone who continually sublets, people surrounding the apartment tend to get upset, and push the managing agent to take some action."

Subletting also can be seen as "inimical to the definition of ownership," according to Richard Siegler of Stroock & Stroock & Lavan, another New York-based law firm. "[Subletters] can be less respectful to the building." Subletting, Siegler adds, establishes two classes of owners. "Secondary owners," he advises, "should be as carefully screened as primary tenants, to ensure that the subtenant will abide by the house rules and not be disruptive to the neighbors."

When seeking a potential tenant, Siegler recommends, "investigating and interviewing [a prospective subtenant] to almost the same degree that the building would interview a purchaser. A subtenant can do a fair amount of damage to the fabric of a co-op. There are plenty of reasons to scrutinize a prospective tenant with the same degree of care that you would a prospective purchaser." Any subtenant must be made aware of the rules of co-op and condo living, says Siegler. "There's a different standard of care and of living style" in non-rental buildings.

Winning the Board's Approval

The sublet approval process is different between co-ops and condos. The former requires that an application be submitted through a managing agent, along with financials and other pertinent information regarding the subtenant. Interview and background checks usually follow after delivery to the board, though the standards for approval and rejection vary. "Very few co-ops strictly prohibit subletting, although some do," Wagner points out. He says that when dealing with a co-op in which the primary governing document - the proprietary lease - expressly prohibits subletting, then that rule is law. Sometimes a building's lease will contain a clause permitting subletting upon approval, or "Upon approval not to be unreasonably denied or withheld."

From there, says Wagner, if subletting is open for discussion, the question then becomes, "Under what circumstances does the board say no?" A board cannot refuse a prospective subtenant on the basis of the protected classes under human rights law, and if the building's proprietary lease says one can sublet upon approval, then the board cannot establish a policy that prohibits subletting entirely. However, the board can in some cases limit subletting.

"They might put limits on how frequently people can do it," says Siegler, "like two out of every five years, so people can't make a business of it."

Proposing and executing a successful sublease depends largely on cooperation from the board. A wise board will expedite the process, depending on how complicated the application is. Most real estate attorneys recommend that co-op and condo boards act promptly on these things to limit the window of opportunity for things to go wrong.

Wagner also advises maintaining a distinct degree of control when prescribing the form of sublease agreement. "It should be subordinate and subject to the governing documents, and also should establish objective standards by which to reject early - and therefore avoid potential discrimination allegations - before even calling the references." Rejection at the outset says one is simply not qualified, Wagner says. After that point, it might be interpreted as looking good on paper, but not on sight. Timing is therefore essential to rejection. "If there's a good reason to deny somebody, don't waste everyone's time interviewing, because it only creates opportunity for issues," he recommends.

Condos, which typically do not require approval, are governed by bylaws. The board maintains a right of first refusal and can make some inquiries within reason, but not to as great an extent as that which is allowed co-op boards. Wagner points out that the limitations of exercising the right of first refusal versus just saying "˜no' is one of the major differences between co-ops and condos.

"You should check your documents," Siegler says. "Look at the bylaws, and the proprietary lease, and the offering plan, and see what the rules are concerning subleasing in order to see where they fall in." Another important difference between co-ops and condos is that one does not really "˜sublet' a condo - since you're the owner of the property, rather than a tenant shareholder, you lease it like an independent landlord within a larger building.

Taking Them to Court

Problem subtenants create unique difficulties within a co-op or condo. "There's more quality-of-life issues in subrentals than there are financial issues, because when you make a sublease, the shareholder still is primarily responsible for payment of the maintenance charges," says Siegler. "The co-op does not have as great an economic risk as they do when investigating a purchaser. The purchaser continues to be liable; they're not being relieved of financial responsibility. You should have an eye on the ability of the sublesee to pay the rent."

In the case of a difficult tenant or subtenant, the shareholder or owner is - as one might suspect - ruled by the governing documents that apply to each case. "With a condo, it's the...bylaws and the rules, regulations and policies, as well as the offering plan," Wagner says. "With a co-op, you have a proprietary lease, and there are shareholders who elect a board of directors. With a condo, they're unit owners who actually have a deed." That deed, he says, has covenants requiring subtenants' adherence to the condo board's governance.

Should an arrangement go sour, the available courses of legal action depend on the governing documents. When it comes to a co-op one can go to housing court for objectionable conduct. If the subtenant neither improves their behavior, nor vacates the apartment, the court will issue a Judgment of Possession and a Warrant of Eviction. Serious as that sounds, says Wagner, most cases are settled out of court. The owner will have received a notice from the bank expressing its concern that the co-op is poised to take away the security and cancel both the proprietary lease and the owner's shares of stock, and the bank does not want the loan made to the shareholder to be at stake. Otherwise the bank can foreclose on the apartment, get rid of the subtenant.

Condos have no proprietary lease, so if someone is renting out the apartment illegally or has a difficult tenant, the board - which cannot go to housing court - instead goes to the Supreme Court. There, Wagner says, they will get an Action for Declaratory Judgment and Injunction, which says the person has illegally leased the apartment and enjoins the person from continuing to do so.

The consequences for illegally subletting vary, depending upon the situation. In the case of a condo, you could lose the apartment to the bank, whereas a co-op would involve the termination of the proprietary lease or the cancellation of your shares of stock. The bank can foreclose, and under the proprietary lease you might be obligated to cover all the co-op's expenses for the litigation.

"The law doesn't really like to penalize people," says Wagner. "If the governing documents provide for fines, then you can fine. If not, then you cannot. Fines are assessed all the time in co-ops and condos, and usually it's not worth contesting them." The more significant consequence of illegally subletting is to a shareholder/owner's reputation and character. If you're caught illegally subletting, says Wagner, "the neighbors are not going to like that. If you have a subtenant who is not acting properly, you should speak to your board and try to resolve it to avoid having board take action against you."

Mutual Obligations

Beyond paying monthly maintenance charges, subtenants are responsible for complying with the same governing documents that apply to owners. "That's one of the things you would want added to whatever sublease there is," Wagner suggests. "At the very least, you want the subtenant's obligations to mirror the obligations of the tenant-shareholder or the unit owner. If you don't, then you're going to possibly have a situation where the subtenant is not obeying the rules and you have no remedy against them."

When it comes to the lease itself, it's vital that you have a lease with no room for misinterpretation or abuse. Attorneys negotiating subleases recommend that sublease forms have notice provisions, which let the prime tenant (as the "landlord") give notice to their tenant in adequate time to allow the tenant to cure - or even vacate - before a lawsuit is brought against the owner. Usually, the sublease contains indemnities, so that if the prime tenant or the owner is sued, they can go after the subtenant. "The sublease also should contain provisions regarding security deposits, repairs and insurance," says Wagner.

Wagner cautions potential subletters to be sure to use the proper form. "If you just pull out a [standard] lease form, you may not cover all of these things. The sublease has to consider the obligations of the owner and provide an opportunity for the owner to comply with those obligations, even if the subtenant isn't."

"It's arguably a task for a lawyer," Siegler adds. "You need a document which protects you, because you're giving up possession of your apartment."

Michael McDonough is a freelance writer living on Long Island.

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