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Council of New York Cooperatives & Condominiums
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Conference Highlights

Publication Date: Summer 2000


Every autumn, the Council of New York Cooperatives & Condominiums holds its information-packed day-long Housing Conference at Hunter College, where scores of workshops and seminars present unparalleled opportunities for board members in cooperatives and condominiums to learn and to share information on every aspect of operating their buildings. This year's Conference will be held on Sunday, November 12th. The conference brochure is inserted opposite page 10 of this Newsletter. The following article, providing an overview of the why's and wherefore's of subletting, is based on information presented at a workshop at the 19th Annual Housing Conference by Morton H Rosen, a partner in the law firm of Rosen & Livingston. Mr. Rosen will recreate this session at the 20th Annual Conference.


SUBLET ISSUES
Few issues raise more questions and contention than subletting. What is a sublet? Who can sublet and for how long? What fees can the co-op assess? And should a cooperative -- which some might argue is a place where shareholders should live together to make a better home for all -- allow subletting at all?

Attorney Morton Rosen took on these and other questions in his workshop entitled Sublet Issues. While sublet policies come in many forms, he asserted, the best policies are those that are mindful of case law, shareholder needs, and "the complicated and creative nature of your fellow human beings."

TO ALLOW OR NOT ALLOW SUBLETS
There are any number of arguments against allowing sublets to run rampant in your cooperative. Among them, said Mr. Rosen, are:

  1. Security/familiarity of neighbors. While rentals and some condominiums (where owners are free to sublet their units) can feel more like a hotel than a home when neighbors change often, people tend to gravitate to cooperatives for their homey stability.
  2. Quality of Life. Shareholders have an equity stake in their building and, presumably, take better care of it than subtenants who don't have the same proprietary interest in the building.
  3. Difficulty with financing. Cooperatives with too high a percentage of sublets may not be able to borrow money or refinance their underlying mortgages except at rates substantially higher than market. Purchasers may not be able to secure share loans, or, if they are able to, it can be at premium rates. Fannie Mae, Freddie Mac and the FHA require high tenant owner occupancy, said Mr. Rosen.

This does not mean buildings should ban sublets in exchange for borrowing power. In the past, if owner-occupancy was under 30%, there was little chance of securing a loan. Today, however, lenders take a broader look at a number of specifics: who the owners are, if they are pledged to other lenders, and if the first mortgage is sufficient to cover the maintenance and operating costs of the building. Of course, he added, a building with 50% owner occupancy or better can generally get pre-approved for share loans.

On the flip side of the subletting issue is the human factor. People, from time to time, simply find themselves with little other choice than to sublet their apartments. In other than the current real estate markets, explained Mr. Rosen, sublets were "a necessary safety valve for shareholders." In the late 1980s and early 1990s, most apartments were difficult to sell at their conversion prices. This turned into a nightmare for many shareholders who had to leave their apartments because of a job transfer, problems with their health, or simply because their families had outgrown the apartment. As a result, many cooperatives loosened their policies to assist these shareholders and spare them having to default on their share loans. And while the current market is strong, a downturn will happen again, warned Mr. Rosen.

To keep subletting from overtaking the building, most cooperatives that allow subletting limit the term of the sublet. For example, they may only allow shareholders to sublet a unit for two years in any five year period. This is often enough to bail out a shareholders who may have been uprooted suddenly, but not long enough to make sense for a shareholder who wants to turn his apartment into an income-producing rental. Some other examples of sublet policies are:

Set an absolute prohibition of subletting (if the governing documents so permit).

Adopt numerical ceiling on the number of sublets permitted in the building at any one time. When the number of sublets reaches the ceiling, all sublet applications are rejected until such time as the number of subtenancies falls below the ceiling. This will ultimately occur because sublets which expire will not be renewed. Once the ceiling requirement is met, adopt a first in/first out policy with the granting of further sublet applications (e.g., if a renewal is requested by a person who has been subletting for many years at the same time as a request from a person who has not yet sublet, the veteran subletter will not be permitted to renew while the new subletter will be granted the right).

  1. Require that tenant shareholders reside in the building for a prescribed number of years before being permitted to sublet.
  2. Impose a limit on how long any one tenant shareholder can sublet a unit within a specific time period (e.g., no more than one year in any consecutive three year period).
  3. Hardship criteria. This is adopted to prevent non-essential subletting (investment subletting). What constitutes a hardship is up to the board to decide.

SETTING A SUBLET FEE
If your building allows subletting, it can help defray costs and deter wholesale renting by levying a sublet fee, if the board is granted authority to impose such a fee by the proprietary lease and bylaws of the cooperative. However, Mr. Rosen cautioned that the following typical bylaw provision does not permit the cooperative to impose a sublet fee beyond the cooperative's actual expenses of approving the sublet:

  • Section 5. Fees on Assignment. The Board of Directors shall have the Authority before an assignment or sublet of a proprietary lease or reallocation of shares takes effect to fix a reasonable fee to cover actual expenses and attorneys' fees of the corporation and other relevant costs.

The amount of the sublet fees a building may charge, however, has been the subject of much legal wrangling. Consider the following examples:

  • The Bailey Case. Mr. Bailey wasn't able to afford his apartment on the Grand Concourse in the Bronx. He asked the board for permission to sublet. The board said he had to pay a third of his maintenance up front for the period of the sublease, which was two years. Since Mr. Bailey couldn't make this payment, he was turned down. Unable to pay his maintenance or bank loan, he went into foreclosure. Bronx Legal Aid sued on his behalf, and the court found that the board had charged far more than the governing documents allowed. Ultimately, the cooperative paid a considerable amount of money.
  • The Hotel des Artistes Case. The cooperative, whose board believed that it had too high a percentage of subtenants, decided to charge a sublet fee even though there was no wording in the proprietary lease or bylaws to authorize such a fee. The cooperative began a 33% maintenance surcharge on sublets. Subletting shareholders took issue and hired an attorney. The court found that the board had no right to charge the fee, asserting that it had acted beyond its corporate authority, and the cooperative was compelled to refund all sublet fees.

A cooperative can change its bylaws to permit sublet fees by a majority vote of the board (unless your particular documents specify differently). Courts have upheld fees as high as 60% of the maintenance, though many experts think this figure is too burdensome on subletting shareholders, said Mr. Rosen, noting that there's more to the issue than the amount of the fee. "What's most important is the need to be clear and consistent in the lease and bylaws when charging a fee. When there are anomalies which give extreme powers to the cooperative and which are exercised unreasonably, problems do arise."

CONSIDERING SUBLET REQUESTS
As with prospective purchasers, the board has the right to deny sublet applicants without having to give a reason. The only time a board will have to defend its decision is if it is challenged in court or by the Human Rights Commission. This usually occurs when there is a claim of discrimination.

Most boards will look at the applicant's financials, judging whether he has the ability to pay the sublet rent to the shareholder who will continue to be responsible for maintenance payments to the cooperative. As part of the due diligence process, the board should have the managing agent contact the applicant's present landlord or the landlord's building manger to see what kind of tenant he is. Boards may also opt for a Renters Reference report, which includes speaking to past neighbors, as well as the standard credit check. Written authority from the sublet applicant is required for these background checks.

Overall, the secret to creating and administering a sound and fair sublet policy is to remember that it "does not need to be written in stone," said Mr. Rosen. "The Board should be flexible enough to meet the tenants' needs. Human beings are complicated and creative. There are only so many rules to control people's conduct. Use common sense and compassion; recognize that this is your neighbor and not your enemy."

 

 
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