On June 11, 2002, in one of the most significant court decisions affecting co-op and condo owners in recent years, the New York State Court of Appeals issued a ruling in the well-publicized case of 511 West 232 Street Owners Corp. v. Jennifer Realty Corp.. The court held that offering plans are in fact a kind of contract - and legally oblige buildng sponsors to act in good faith and timely sell "at the very least" enough shares to create a "fully viable cooperative." The Court ruled that by keeping a majority of shares in a cooperative, a sponsor defeats the purpose of the contract.
In order to understand the Jennifer dispute - whether a sponsor of a non-eviction conversion to co-op or condo ownership of an existing residential building has an obligation to complete the offering plan by selling all of the unsold apartments within a reasonable time after they are available for sale - a little history is necessary. Although the concept of a cooperative apartment building goes back over a hundred years, the creation of a co-op by converting an existing rental building to owner-occupancy seems to have caught on after World War II and gradually picked up steam during the 1960s and the latter part of the 1970s.
By the early 1980s, the only statutorily authorized method of converting a building into a co-op was through an eviction plan, by which the sponsor - upon selling 35 percent of the apartments to tenants-in-occupancy - could evict the remaining tenants if they did not buy their apartments. This threat of eviction generated opposition to the co-oping process. While conversion of a building to cooperative ownership was generally viewed as a good thing, bringing the benefits of home ownership into an urban setting, and helping to stabilize and improve neighborhoods, the opposition to the co-oping process from those tenants threatened with eviction created a political problem.
Accordingly, the New York State Legislature enacted a political compromise between the benefit of rapidly converting buildings to cooperative ownership, and tenant opposition to possible eviction and dislocation. The result was the creation - in 1982 - of the "non-eviction cooperative conversion," legislatively embodied in Section 352-eeee of the General Business Law, which allowed a sponsor to declare a co-op conversion plan effective upon sale of only 15 percent of total units. In return, however, the sponsor was prohibited from evicting any of the non-purchasing tenants. The compromise was expressly intended to facilitate conversions to cooperative ownership by reducing the opposition from existing tenants. The non-eviction conversion soon became the standard form of conversion. For most of the 1980s, sponsors sold apartments as soon as the rent regulated tenants moved out and the apartments became available to be sold on a free market basis.
During the economic downturn of the early 1990s, however, many sponsors were unable to sell apartments for several years, and were forced by economic conditions to rent out apartments when they could not be sold. After the economy picked up in the early-to-mid-90s, some sponsors continued to rent apartments rather than resume selling them. By 1995, a controversy began to erupt as to whether sponsors had a right to continue renting free market apartments indefinitely, or whether they had an obligation to sell the apartments as they became available, in order to complete the offering plan.