Publication Date: Summer 1997
CNYC's annual Cooperative Housing
Conference, held each autumn on a Sunday, is New York's most
comprehensive source of cooperative and condominium information
and education. With product exhibits to visit from early in
the morning, a video theater showing Co-op
Roundtable throughout the day, and dozens of workshops
and seminars, the Conference brings together hundreds of CNYC
members for a day of learning and sharing.
Reviewed below are two presentations
from the 16th annual Cooperative Housing Conference: Repairs
in a Cooperative and Strategies
to Increase Owner Occupancy.
REPAIRS IN A COOPERATIVE
Although shareholders in cooperatives own shares in the buildings that
are their homes, complexities arise when the time comes to determine whether
the cooperative or the shareholder is responsible for a particular repair.
Provisions in the proprietary lease, as well as legal considerations and
government regulations, add layers to the process, so it pays to know
who is responsible for what.
Attorney Howard Schechter and managing agent Tony Angelico address this
difficult issue each year at the Cooperative Housing Conference. According
to Mr. Schechter, the most basic - and most confusing - question is, Where
does the building's responsibility end and the shareholder's begin? The
simple answer: Most proprietary leases state that shareholders are responsible
for everything in their apartments from the plaster on the walls inward,
while the co-op takes care of the building envelope and the pipes inside
Generally, this means owners are responsible for the maintenance and
repair of walls, floors and ceilings, and repair and replacement of any
appliances and equipment inside the apartment, such as air conditioners,
dishwashers and refrigerators. Many proprietary leases state the owner
is not responsible for maintaining and repairing entry doors, windows
and window frames, but Mr. Schechter advises reading your own proprietary
lease to make sure.
The cooperative is generally responsible for maintaining and repairing
all pipes and other conduits - gas, steam, water and electrical - located
inside of the walls themselves. Most co-ops also take responsibility for
the repair or replacement of any radiators or other devices inside apartments
that are considered to be standard building equipment. The roof, boiler
and other building elements and equipment are all the co-op's responsibility.
As an example, consider the kitchen sink. If the faucet is leaking or
the trap beneath the sink needs repair, these elements are inside the
apartment and are the shareholder's responsibility. If the pipe in the
wall bursts, it's the building's problem.
Sometimes it isn't always that simple, though. If a shareholder installs
a new radiator, either for its appearance or its efficiency, the cooperative
may no longer be responsible for its care, says Mr. Schechter. The alteration
agreement will stipulate if the shareholder is responsible for maintaining
the new equipment. Mr. Schechter adds that some buildings choose to repair
such units as part of regular building maintenance; but he cautions that
if this is done once, it can permanently become the co-op's responsibility.
Furthermore, many cooperatives request that a shareholder who installs
additional electrical lines or special plumbing inside the walls take
responsibility for maintaining these additional amenities. Mr. Schechter
advises boards to keep a detailed list of all such alterations, and make
sure subsequent owners purchasing units with such alterations are aware
of these maintenance responsibilities.
NEGLIGENT OWNERS MUST PAY
The dividing line blurs even more when it comes to matters of negligence.
Mr. Schechter notes that "if the co-op is negligent in how it takes
care of the building, the law imposes an obligation on the negligent party
to pay for any damage done as a result of its negligence." So, if
the co-op does not maintain the roof and a resulting leak damages the
interior of an apartment, the co-op is responsible not only for making
the repairs, but also for restoring damaged personal property in the apartment.
Similarly, if a shareholder allows his bath tub to overflow, that shareholder
must pay for any damage done to the apartment below.
To further complicate matters, the definition of negligence is vague,
says Mr. Schechter. Negligence is generally the result of inaction: If
a pipe bursts inside the wall, the co-op probably will not be considered
negligent; if the co-op doesn't repair the pipe within a reasonable period
of time, that could be considered negligence. However, if a toilet backs
up because of something a shareholder put into it, the interpretation
of negligence is not as clear-cut. "Unfortunately, it's often left
up to a court to decide," he says.
Repairing other apartments after a leak or other problem can certainly
be expensive. In cases of negligence, the offending party is generally
responsible for restoring the damaged apartment to its previous condition.
This can include replacing any expensive wallpaper, fixtures or decorative
objects. Co-ops may also find themselves paying for repairs when they
are not found negligent. For example, if a pipe bursts and the plumber
needs to break through an apartment wall to make the repair, the co-op
will generally pay for restoring the wall. However, in such cases, the
co-op only needs to restore the plaster or wallboard and perhaps a coat
of primer - not any custom wall coverings. "In cases where no one
is found to be solely responsible for the damage, the risk is spread over
all the parties," says Mr. Schechter.
INSURANCE REDUCES FINANCIAL RISK
According to Mr. Angelico, the
high cost of making such repairs is a good reason for shareholders
to carry homeowners insurance. "Whether or not it is
a case of negligence, having insurance takes you out of the
debate," he says. "You can go on with your life
while the insurance companies talk it out." He recommends
taking a policy that covers "improvements and betterments"
- to cover the cost of built-ins, your glorious new kitchen,
and, oh yes, that expensive wallpaper.
Mr. Schechter adds that co-ops have the right to require shareholders
to carry homeowners insurance, yet he does not recommend buildings exercise
that right. "If you do not follow through and check that every apartment
owner has insurance, and an incident occurs where an apartment is damaged
and the negligent owner did not carry any insurance, the co-op could be
found negligent for not enforcing its rule," he says.
If a co-op fails to make repairs in an apartment - for example, after
a pipe bursts - it also risks breaching a state code called the Warranty
of Habitability, says Mr. Schechter. The Warranty makes property owners
responsible for ensuring that the apartments meet minimum standards of
decent and safe housing. The courts have determined that this responsibility
extends to cooperative corporations. Therefore, if the cooperative allows
a leak to render an apartment uninhabitable, and it does not make the
repair to return the walls to a habitable condition, then it breaches
the Warranty of Habitability.
A state regulation called the Multiple Dwelling Law (MDL) and a city
law called the Housing Maintenance code, both of which are enforced by
the city, add a further layer of complexity. These laws apply to residential
buildings with three or more units, and say that the building owner is
responsible above all others for maintaining and repairing the building
and its units. In essence, if shareholders fail to maintain their units,
the city will hold co-op responsible. Even though the proprietary lease
makes a shareholder responsible for repairing, say, his leaky dishwasher,
the building must make sure that repair is made. If it is not, the building
must make the repair itself or face violations and fines. It will then
need to go after the apartment owner for the repair fees.
ALWAYS REQUIRE ALTERATION AGREEMENTS
While the proprietary lease and
government regulations cover a lot of ground, the best way
for a building to protect itself when a shareholder makes
improvements is with an alteration agreement. According to
Mr. Schechter, this document says that the shareholder accepts
responsibility for the repair and replacement of any additions
to the unit, and any damage caused to surrounding units or
common areas as a result of the work.
Before offering a shareholder an alteration agreement, the board should
satisfy itself that the proposed alteration plan meets all the co-op's
standards, and that the shareholder carries the proper insurance and is
using licensed and bonded architects/ engineers and contractors.
Alteration agreements often contain specific requirements intended to
protect the building and its residents. For example, some co-ops require
that the backs of all kitchen cabinets be open to the wall, allowing easy
access for plumbers or electricians.
"A lot of this is already contained in the proprietary lease,"
says Mr. Schechter. "But when you're talking about people making
changes within the building, it always pays to be as careful as possible."
TO INCREASE OWNER OCCUPANCY
Until at least 51% of the shares in a cooperative have been sold to owner-occupants,
the building will have difficulty in asserting itself as a cooperative.
Lenders may be leery of financing these buildings and vendors may question
their creditworthiness. This problem became particularly acute during
the long downturn in the real estate market, which had limited sales for
Yet even now, as the market improves and owners are finally able to find
buyers for their units, New York cooperatives are still facing the dilemma
of having too many non-owner-occupied units. Those in this situation still
find it difficult - or impossible - to refinance their underlying mortgages
or secure share loans for apartments. This delays much-needed capital
projects and reduces sales values.
If your building has this problem, its outlook is not hopeless. In a
workshop entitled Strategies to Increase Owner Occupancy, presented at
the 1996 Cooperative Housing Conference, property manager and sponsor
James P. Goldstick and attorneys Steven Goldman and James Samson outlined
steps you can take towards eliminating some or all of your building's
IDENTIFY THE PROBLEM
The first thing to do is identify
the problem. Boards should ask themselves, "Why does
a sponsor who converted a building in 1985 still own 65% of
the apartments there?" There could be a number of reasons.
One reason could be that the sponsor just hasn't had any vacancies. If
his rent-regulated tenants are happy with their leases, they may see no
compelling reason either to buy their units or leave the building. One
solution to this problem, say the workshop speakers, is to approach the
sponsor and recommend he that he encourage further "insider"
sales by making attractive financing available to his tenants. A broader-scale
solution involves an incentive-oriented sales program, where the sponsor
trims prices aggressively as the number of renter-purchased units increases.
The key to any plan, they note, is for the board to get involved - because
the the best sales agents are those who have already chosen to buy.
Such a strategy paid off at one Upper Manhattan building, where the sponsor
owned 26 of the 40 apartments, was carrying a $5,000-per-month negative
cash flow, and owed arrears to the building of more than $100,000. The
board opted to take an active role in working with the sponsor and his
rent-regulated tenants. First, board members met with the sponsor and
proposed a discount sales plan - the more apartments that were sold, the
lower the prices. The sponsor also agreed to give financing to purchasers.
Then the board went door-to-door telling tenants about the plan.
In the end, the sponsor sold 8 apartments. Owner-occupancy increased
to 55%; the sponsor's negative cash flow disappeared; and the arrears
were eliminated. This brought the cooperative onto solid footing, which
collectively made the 18 apartments the sponsor still owns more valuable
than the 26 he had before - and increased the value of all the apartments
owned by the other shareholders. The mortgage on the building was then
refinanced on a 10-year fixed-interest basis at an interest rate of 7.75%.
UNSOLD SHARES & FORECLOSED
The answer may not be quite as
apparent if the sponsor has already sold apartments to investors,
particularly those claiming rights as "holders of unsold
shares". Holders of unsold shares became a common phenomenon
when sponsors who could no longer carry the negative cash
flow on their units sold them in blocks to investors. Those
designated as holders of unsold shares have the same rights
as the sponsor to sell or sublet units without the board's
approval and are free from various other restrictions, such
as limits on sublet duration.
For boards, the trick here is to do some homework to see whether such
parties really have the designated rights they claim. For example, an
investor is only a holder of unsold shares if he has complied with the
provisions of section 18.3W of the Attorney General's regulations, which
set specific criteria for holders of unsold shares. To find out whether
a transfer in your building was in compliance, check the contracts of
sale, the offering plan and other documents relating to the units in question.
They should contain language that says, "the seller hereby designates
buyer as a holder of unsold shares." If not, the investor is not
a holder of unsold shares and is subject to the same regulations and restrictions
as other shareholders.
Furthermore, even if the contract contains such language, it may not
be be valid under the Attorney General's provisions. Simply stating that
the buyer is designated, without complying with section 18.3W, is not
legitimate. This practice has been the subject of litigation say the workshop
speakers, and courts have found in favor of co-ops.
Shareholders who have bought foreclosed apartments from lenders may make
similar claims, and it is up to the board to weed out those who do not
legally have special rights. Most cooperative proprietary leases contain
a standard paragraph 17, which defines two classes of lenders: one is
a private lender, such as an apartment owner who takes back a mortgage
when he sells an apartment, as defined in paragraph 17A; paragraph 17B
covers institutional lenders - in most cases, banks - that make most of
the share loans in a cooperative. If a private lender forecloses on an
apartment, he has the same rights and obligations as any other shareholder.
If an institutional lender forecloses, it is given greater rights - such
as free reign to sell or sublet. This was done to make it more attractive
for banks to make loans to cooperative apartments.
The first step boards should take is to look carefully at who owns foreclosed
apartments. If it is still an institutional lender, you have little recourse.
But if it is a private lender, you can step in and limit the owner's sublet
privileges as you would any other owners'. A common scenario is that the
units have been sold by a foreclosing institutional lender to an investor.
In this case, the new owner does not retain the rights of the foreclosing
bank, says Mr. Goldman. He notes than many buyers manage to convince the
boards that the rights are transferable from the foreclosing bank, but
"this is not the case, and you should contest it," he says.
PRESERVE YOUR CO-OP'S RIGHTS
In some troubled buildings, investors
sometimes demand the rights of a holder of unsold shares as
part of the deal. According to the workshop speakers, boards
should take the position that only the Attorney General can
recognize those rights. You can't recognize those rights and
you shouldn't, and you should actually oppose anyone who seeks
rights that can have a long-term adverse effect on the financial
soundness of the cooperative, they advise.
Also, never assume that banks fully understand the extent of their rights
under paragraph 17B, says Mr. Goldman. "Most don't. Not only for
designation of right of holder of unsold shares. Also, this speaks to
a foreclosing lender's obligation to pay a flip tax. Some proprietary
leases exempt them from paying a flip tax, but at 75% of the closings
I've done I've insisted that they pay a flip tax."
Astute use of these strategies will help increase owner-occupancy in
your cooperative, and thus improve its financial condition. At the same
time, relations between the board, the sponsor, the shareholders and the
remaining renters may also benefit from these collaborative efforts.