Q&A: Can a board assign a lower per-share transfer fee to different units?

Q. We’ve come across a situation at our cooperative, where some members of the board want to change the transfer fee or flip tax allocation. They want to assign a lower per share fee for those shareholders who purchase property in the near future. Some members of the board argue this is unfair because all the continual fluctuations of real estate through past years and future years can’t possibly be addressed. Also, those who’ve been here the longest to pay off the mortgage, and have invested and waited the longest for our new capital improvements, can’t be told our shares have lesser value than those of newer shareholders do. Is what they are proposing legal? How can we dissuade them from changing the transfer fees? What course of action can opposing shareholders take if those members of the board decide to implement these ideas?

                —Questionable in Queens

A.  “Assigning a lower per share transfer fee or ‘flip tax’ for certain shareholders but not for others would be illegal,” says Peter G. Goodman, Esq., a partner with the law firm of Smith Gambrell & Russell, LLP in Manhattan. “New York’s Business Corporation Law Section 501(c) and related court decisions prohibit unequal treatment of shareholders who hold the same class of shares, including the assessment of different fees depending on whether a shareholder is an original or subsequent purchaser of shares. Lowering the per share fee for those shareholders who purchased after a certain date would run afoul of that statute and those decisions.

“Assuming that the proprietary lease already validly provides for the imposition of transfer fees, the existing lease language would need to be reviewed to determine whether the co-op board is given the authority to make the change or whether the proposed change to this provision would require a lease amendment. If a lease amendment is required, depending upon the language of the lease, such an amendment would require at least a majority, but more likely a two-thirds vote of the issued and outstanding shares. The vote would occur at an annual or special meeting of the shareholders. Under these circumstances, if the co-op board tried to change the transfer fees without amending the proprietary lease, any such board action likely would be invalidated by a court because of improper implementation and illegality of the transfer fee. Nevertheless, even if the proper procedure were followed to change the transfer fee, a court would likely invalidate the fee based upon illegality. In both scenarios, the opposing shareholders could bring an action requesting a declaration that the new transfer fee is invalid and an injunction against its enforcement.” 

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