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Co-ops Excluded From Rental Regulations, Finally Fees, Escrow, & Other Tools Back in Boards' Toolbox

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Back in the fall of 2019, the New York State Legislature passed a new and stringent law meant to protect and defend the rights of rental tenants. Because co-op boards technically fall under the legal umbrella of ‘landlord’, they were subject to many of the new law’s restrictions and requirements. Co-op corporations immediately raised objections to being included, and launched efforts to remove their communities from the bill’s language. On December 22, 2021, their efforts met success when Governor Kathy Hochul amended the law to make exceptions for co-ops.

Landlord, Really?

The issue with the tenant law was rooted in the unique ownership structure of a residential co-op. Unlike single-family home and condominium unit owners, co-op owners are shareholders in a corporation that owns their building - not outright owners of real property. As such, they receive a proprietary lease to their unit as part of their shareholder package. Rather than a deed, it is that lease that passes from one co-operator to another when a unit (and its corresponding shares in the corporation) is sold - and what makes co-op boards resemble something akin to a property owner, hence a ‘landlord.’ Critics of the 2019 tenant protection measures argued that the statute failed to take this shade of difference into account. For the past two years co-ops have been struggling to continue to conduct their business without breaking the law.

What Was Affected?

The 2019 law prevented co-ops from charging and collecting certain fees. While these prohibitions were fair in a rental context, co-op administrators and advocates argued that they were cumbersome and intrusive. Co-op boards were prohibited from collecting deposits in excess of one month’s ‘rent’ - or more accurately in the case of a cooperative, one month’s maintenance fees. They were also prohibited from charging an application fee of more than $20.00, and late fees for arrears were limited to $50.00 or 5% of the outstanding amount. Boards were prohibited from seeking late fees, charges, or penalties in non-payment actions, and were required to send notices by certified mail seeking legal fees in connection with default judgments. Though co-op shareholders are clearly very different from renters, both legally and procedurally, the 2019 law lumped them all together - and in so doing took the teeth out of many of the legal remedies co-op boards rely on when vetting prospective buyers and navigating disputes with current shareholders. 

What Was Changed?

Perhaps most importantly, co-op boards can once again condition their approval of a purchase on the posting of a maintenance escrow. Maintenance escrows have been a common tool for ensuring the financial health of co-ops for decades. In cases where a new shareholder is fundamentally qualified but has some irregularities or other potentially problematic factors in their financial profile, putting a certain amount in escrow up front provides the board - and by extension the community - with a guarantee that the shareholder’s monthly fees will be covered. 

In addition to peace of mind and financial stability, maintenance escrows also make the sale of units easier by opening the field to a broader array of potential buyers, says Philip Simpson, a partner with Robinson Brog, a New York based law firm. By allowing a maintenance escrow, the changes should make co-op apartments more available to people whose documentable income might not otherwise meet a board’s requirements.”

The other changes eliminate requirements and restrictions on late fees and other charges, re-establish long standing co-op community management methods, such as board discretion in setting application fees, reasonable late fees beyond $50.00, the ability to collect fees and charges in non-payment default cases, and notifications of delinquency consistent with the terms of their proprietary lease.

“These changes recognize the fundamental differences between a co-op and a rental,” says Simpson. “Co-op shareholders directly bear the costs of operating their building, and have the ability to choose the people who will manage their building. The changes will bring a greatly needed level of certainty to purchase of a co-op apartment and approval of a purchaser.”

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2 Comments

  • Will this change be carried over to NJ co ops
  • Does the State Residential Tenants’ Rights law prevent the association from revoking a lease (and stock ownership) if a an owner stops paying monthly maintenance fee? The new co-op law seems to only affect the "front end" of the co-op transaction.