Groucho Marx once famously said, “I wouldn’t belong to any club that would have me as a member.” Not so for many in the world of co-ops, condos, and HOAs.  Shared communities often (if not usually) have an application process required for prospective new residents, be they owners or shareholders. That process can range from cursory to complicated, depending on the type of property and where it’s located. Sometimes state laws apply—and federal antidiscrimination statutes always hold sway.

Co-ops vs. Condos

In general, cooperative corporations have much more discretion than condominium associations in just about every regard, including the process of approving (or rejecting) prospective buyers. Co-ops tend to have lengthy application processes, while condominiums will ask for a very limited amount of information, if they have an application at all. Co-op boards can base their decision to approve or deny share transfers on many considerations, but the most common are primarily financial ones. Condominiums in most jurisdictions face a trigger clause, or the right of first refusal—meaning they have the ability to reject a prospective buyer, but if they invoke the right of first refusal and reject a buyer, the association is then obligated to buy the unit from the seller at the price the rejected buyer would have paid. Few associations have the funds—or the desire—to buy out an existing owner, and the vast majority simply approve the third-party transaction.

“Unlike a condo board,” says Christopher Tarnok, a partner at the DL Partners law firm based in New York, “a co-op board has more leverage in what can be requested from a purchaser in connection with a purchase application. A board can request an in-person interview, bank account statements, and tax returns among other things.”

Alternatively, explains Ellen Shapiro, an attorney with the firm of Allcock &  Marcus, located in Braintree, Massachusetts, “In Massachusetts there is almost no ability to screen or prohibit persons from buying into a condominium. Arguments have been made that unit owners can put an amendment in the master deed prohibiting sex offenders [from buying into the association]. Some master deeds that have been amended as such have not yet been challenged in court. Whether they will be upheld remains to be seen. Having said that, the concern most association attorneys have is: how do you screen, and then enforce that screening? The boards often don’t even know the identity of the buyer moving in or renting a unit. Boards may not even be able to get this information.”

In New Jersey, like Massachusetts, there is no real application process for a condominium purchase, explains Scott Piekarsky, a partner with Offit Kurman, a national law firm with offices in Hackensack, “whereas in a co-op, there is. In a New Jersey condominium, as long as you can afford to buy the unit and pay the entry fees, you’re in. There is also no right of first refusal, so the association has no right to turn down a prospective buyer. In co-ops, however, there is an application process that typically includes an interview, and it comes down to finances—dollars and cents. The board makes sure the buyer can afford to live there and afford the monthly carrying charges. That’s it.”  

What Can a Co-op Board Ask For?

Dan Wollman, the CEO of Gumley Haft, a management firm located in Manhattan, brings a manager’s perspective to the question of applications and what information they should be seeking: “If I’m on a board, I want to understand the purchaser’s finances—and most boards are very diligent in asking for financial information. They don’t consult with the building’s accountant to develop criteria for questions. They may rely on board members or other shareholders with backgrounds in finance or real estate. They might bring in trusted counsel if a purchaser is a ‘trust fund baby.’ Their manager will have a closing or transfer department, but their role is to collect data. Today, most of this is done electronically. The management office will get the data and make sure it’s complete, but won’t opine—ever—on its quality. They just make sure that the requirements are met and sent to board members via a secure link.”

In most cases, the information boards can demand from prospective buyers is tightly controlled by a myriad of federal, state, and local anti-discrimination laws. Boards cannot make decisions based on race, religion, ethnicity, marital status, gender, etc. Recently, New York City added previous incarceration to its list of protected classes. [See “New Law Bars Boards from Rejecting Felons” in “From the Web” on page 6. -Ed.]

“Whether a cooperative can or cannot ask for any specific information will depend on applicable federal, state, and local laws and ordinances,” says Kris Kasten, a partner with Bartzen Rosenlund Kasten located in Chicago. Even if the law permits a cooperative to ask for certain information, the board may choose to avoid such requests to avoid the appearance of impropriety or unlawful discrimination. “For example,” Kasten continues, “asking about someone’s race on a paper application may be for appropriate reasons, such as a desire to foster diversity. However, such requests can very easily be the basis of a discrimination claim. Another example is asking about children. A cooperative has a legitimate basis to ask about and know who will be occupying an apartment with the applicant, including minor children. However, an appearance of rejecting the applicant based on familial status could also result in a discrimination claim. Cooperatives may also want to know about an applicant’s criminal background, and request a criminal background check. While historically this is an acceptable practice, there is a growing trend in some states and municipalities to pass laws limiting the type of criminal background information employers and housing providers can request, and how that information can be used.” 

Alternatively, explains Piekasrky, “In a condominium, the case is completely the opposite from co-ops. Condo boards don’t ask for anything. Most of the property management companies in New Jersey have a portal where the buyer’s attorney puts in personal information, but not for application purposes. It’s minimal. In Florida, by contrast, in condos there is an application and an interview, etc., but that’s totally not the case in New Jersey.”

In the past few years there has been a trend among high-end, newer condominium properties in NYC to request an application to purchase with additional requests for financial information. The simple legal truth is that there’s no basis in law for condominium boards to request such information, or even for them to have an approval process of any kind. If the board does not want to authorize the transfer of a unit, they have a right to first refusal, as mentioned earlier. They may buy the unit from the seller at a like price. It should be noted that this policy has not been tested in court yet. Clearly, it will be.

When the Board Says No…Repeatedly

Co-op boards do need to be judicious and meticulous in their review of prospective buyers. They must keep in mind that the seller is their neighbor, and that they don’t want to earn a reputation as a bunch of ‘deal-killers.’ That said, board members do have a fiduciary responsibility to the community, and must put its best interest before all else. With that in mind, transparency is always a good idea. Boards should consider making public the reasons why a buyer was rejected to establish that no discriminatory practices were embedded in their decision.

“The idea for a board is to try to make the seller and buyer understand why they might be blocking the sale,” says Wollman. “It’s hard to imagine why a board would continually reject any particular shareholder’s sale. If I don’t like you, I don’t personally reject your buyer just to keep you in the building. The brokerage community in general has a decent idea of what a building’s criteria are, and what a bona fide purchaser’s profile looks like. If you’re working with the right broker, they will be helpful. For instance, if your building doesn’t want pieds-à-terres, those buyers will be directed elsewhere by brokers. I have one client who interviews the new buyer in their current apartment to see how they live. That’s an interesting approach.”

“In my experience,” says Kasten, “prospective buyers are primarily rejected for financial reasons. For example, the buyer may be receiving funds from a family member to make the purchase. In such a case, the buyer may be rejected because he or she does not have sufficient income and savings to pay assessments or carrying charges and other charges, such as special assessments, as obligated under the proprietary lease or occupancy agreement. However, financial status is not the only basis for rejecting an applicant. Sometimes the buyer does not show a full understanding and appreciation for what is required to be a member of the cooperative community. Sometimes, a seemingly well-qualified buyer may in fact not be a well-qualified buyer under the cooperative’s applicant criteria. A lack of understanding or misunderstanding of that criteria may result in repeated rejections of buyers that the seller believes to be well-qualified, but who really are not.” That may reflect badly on a board, but a closer inspection by those affected would be in order.

While a co-op board does not need to provide any specific reason for a rejection, explains Jonharold Cicero, also a partner with DL Partners in New York City, “the board needs to be wary of the questions they asked the rejected applicant during their interview. Any questions that could lead up to the information on which a form of discrimination could be based could result in a discrimination claim being brought against the board, especially if there is a pattern of repeated rejections that may be interpreted to be based on such repeated lines of questioning.”

In the end, boards are bound by their governing documents and federal, state, and local laws. If, as in a co-op, there is an application process, boards should follow a well-conceived, transparent process to approve share transfers. If, as is the case with condominiums, there is no legal basis in documents of law for condo boards to vet sales, board members should not try to reinvent or reinterpret their responsibilities with respect to unit transfers. Stay within the law, and follow your documents. 

AJ Sidransky is a staff writer/reporter with CooperatorNews, and a published novelist. He may be reached at alan@yrinc.com.