Maintaining authority over sales by estates has become a difficult challenge for co-op boards of
directors. It is essential for co-ops to be reasonably assured that future maintenance payments will be made and that they will be able to control occupancy. Yet the case law has not been particularly helpful.
A recent court decision in Cavanagh v. 133-22nd Street Jackson Heights, Inc., held that an executor of an estate could sell a co-op apartment without board approval if there is no specific language in the proprietary lease requiring the executor to seek approval. In this case, the court decided in favor of permitting a sale without board approval for a variety of reasons. These included the principle that the law does not favor restrictions on the assignment of a lease, as well as the policy in favor of an executor's duty to settle an estate with due diligence. Therefore, the executor of an estate would not be bound by the general restrictions on assignment in a proprietary lease that does not make a specific reference to executors. Yet, this issue only represents the tip of the iceberg in dealing with a co-op's concerns.
Protecting the Co-op's Rights
One might think that all that needs to be done to protect the co-op in light of the Cavanaugh decision would be to add a reference to executors in the section of the proprietary lease dealing with board approval. It appears, however, that this kind of provision might not be upheld by the courts. The policy that discourages restrictions on the assignment of leases may frustrate the board's prerogative to approve new purchasers, even if the proprietary lease refers specifically to estates or other transfers in addition to the usual voluntary assignments.
A number of courts have held that even with specific language frequently found in proprietary leases, a transfer by will or even a gift or a sheriff's sale can effectively transfer ownership. As a compromise, the new owner is not allowed to occupy the apartment without the consensus of the board of directors.
Courts have adopted this compromise a number of times. It separates share ownership from possession, in an attempt at rough justice. Purists find this offensive as there is scant support for it in the law, and it contravenes the language of many stock certificates and proprietary leases. Boards face a practical quandary. Their first objective is to make sure that the maintenance will be paid promptly at all times, and the rough justice approach does not help meet this goal. Even if the heir needs board approval to occupy the apartment, he or she is still responsible for paying the maintenance, and the board has no control over whether or not the heir is financially responsible.
Inadequate Legal Language
Language frequently found in proprietary leases does not solve the problem. For example, two very common restrictions on transfers in many proprietary leases are inadequate. The first, which only concerns transfers on death, is: If the Lessee shall die, consent shall not be unreasonably withheld to an assignment of the lease and a transfer of the shares to a financially responsible member of Lessee's family (other than the Lessee's spouse as to whom no consent is required). This language may not work for transfers on death because the co-op's limited right to approve, or reasonably reject, a pu ffb rchasereven for financial reasonsmay be totally frustrated by a court.
The second typical provision is more encompassing: Regardless of any prior consent theretofore given, neither the Lessee nor his executor, nor administrator, nor any trustee receiver of the property of the Lessee, nor anyone else to whom the interests of the Lessee shall pass by operation of law, shall be entitled further to assign this lease, or to sublet the apartment, or any part thereof, except upon compliance with the requirements of this lease.
This provision is not completely clear. It apparently permits the initial transfer by law to an executor or an estate without approval, but requires consent for a transfer from the estate to an heir. Yet this provision has been held to permit a transfer to a purchaser at a sheriff's sale, but not to allow the purchaser possession. Logically, even this language will not prevent a transfer by an executor of legal ownership without the right to possession.
Other than requiring the new owner to obtain consent for a subsequent assignment after title has passed by operation of law, exactly what this clause prevents is not certain. It seems that no matter what a proprietary lease may provide, courts want to be able to award at least the value of the co-op to an heir or another party who is entitled to the ownership interest as a result of a will or gift.
Seeking a Solution
To best manage this problem, an entirely new concept may be necessary which fulfills a typical court's rough justice aims, without surrendering the board's prerogative to approve the new owner. Although there is no certain solution, perhaps a proprietary lease provision could try to protect the co-op and anticipate a court's use of rough justice at the same time. This might be done by making sure the heir gets the financial benefit of the apartment while giving the board the maximum authority to determine the next owner.
Typically, to amend the proprietary lease in order to change its provisions requires the affirmative vote of the owners of at least two-thirds of the shares. The appropriate paragraphs in a proprietary lease must be examined closely to make sure the correct procedure is followed.
If a new proprietary lease provision is to be adopted, it should affect all transfers except normal resales, including transfers following death, gifts, bankruptcies and judgments against shareholders. For purposes of this discussion, only estates are contemplated. Any separation of ownership of stock and the right of possession under a proprietary lease should be strictly prohibited to best serve the co-op's interests. This might not control a court's decision, but it would certainly give cause for thought.
An executor should be specifically barred from transferring ownership and possession to the intended heir unless co-op approval is given. If the heir is rejected, the executor could be given a short period of time, perhaps six months, to find an acceptable new shareholder. In the meanwhile, maintenance would have to be paid for the vacant apartment. If the executor desires to extend this period, he or she could be required to post a bond or letter of credit to secure the payment of maintenance for a longer time until an approved transfer is concluded.
In the event the executor does not find an acceptable new shareholder within the permitted period, the board can be given the authority to take steps to hold an auction (with the winning bidder subjected to board approval) or other commercially reasonable method, to find a purchaser.
Courts might have difficulty with this concept, but if they accept it, at least the co-op (if it so desires) will remain in control of the ownership as well as occupancy of the apartment. Of course, the co-op must be willing to handle a sale responsibly, if called upon to do so.
Mr. Heller is a partner in the Manhattan law firm Friedman, Krauss & Zlotolow.
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