Co-ops have to be vigilant and address defaults due to nonpayment, objectionable conduct, illegal sublets, bank foreclosures and below market resales, and shareholders declaring bankruptcy. Some proprietary leases and bylaws appear to give co-op boards incredible authority. By a mere majority vote, boards can declare a shareholder, investor or even a sponsor in default due to their own actions, or the actions of the subtenants and renters. Boards may mistakenly believe that by a mere vote and then notification, they can terminate the shareholders’ stock and lease. Boards who read their proprietary lease and bylaws in a narrow and literal way may begin to think they can solve their resident problem cases by eliminating the shareholders’ or investors’ rights and interest in the stock and lease, without a judicial procedure. The court cases cited above show that even with a court action, the co-op may not be able to terminate the stock and lease! Boards often believe that after stock is terminated, the apartment and stock automatically revert back to the co-op, as the co-op’s property without a private, public or foreclosure sale.
I am not an attorney. As director of Diversified Property Management in Brooklyn, I work under the "law of agency" representing cooperatives. Like many of our colleagues, Diversified has established an active closing department in which transferring stock to a shareholder purchasing a co-op is fairly routine. Stock transfers are based on long-established presumptions that the co-op corporation (the Lessor ) has absolute control over the stock it issues and has a primary, built-in lien on the shares. That lien allows the co-op to collect maintenance and other charges ahead of any other lien, including bank loans or other encumbrances. But is this presumption actually clearly established in the laws of New York State? Surprisingly, the answer is no. There have been a number of court rulings, unknown to boards and managing agents (and even to some real estate attorneys) that shake the foundation of this core belief that co-ops have automatic liens on their own stock.
Inaccurate Interpretations of Co-op Rights
I recently encountered a situation where, despite advice from their attorney and myself, a co-op board was moving forward to terminate the lease and cancel the stock of an investor. Their goal was to expedite evicting the investors’ subtenant, John Doe, due to his objectionable conduct. In order to genuinely rid themselves of this subtenant, the board also sent notice to the sponsor that they were terminating one of his leases and canceling the stock appurtenant to one of his free market apartments, where John’s girlfriend (Jane Doe) rented. The board wanted to make sure that John didn’t simply move in with Jane and continue to live in the co-op.
The actions of this board became increasingly radical. Their inaccurate interpretation of the proprietary leases’ "use of premises" clause was that residents had the right to use inside apartment space, but not the common areas outside the apartment, such as the private parking lot and swimming pool, without the explicit consent of the board. They ignored my advice that this distinction was not stated in the lease or anywhere else in the offering plan. This board decided that they could restrict anyone who they declared to be in default of the proprietary lease (including subtenants) from using the co-op amenities, as if they were trespassers. They hired a security guard service to stand guard at the pool gate entrance to physically restrain John and Jane from access to the pool. They even sought the involvement of the police and chairman of the neighborhood community board.