The Board Approval Process Staying On the Right Side of the Law

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Board approval has been part and parcel of buying into a co-op since the housing model was introduced in the late 1800s. Boards can demand a great deal of personal information from buyers, and can approve or deny a purchase, as long as the decision is legally sound and not discriminatory. Because the stakes are so high for both parties involved, it’s crucial for boards to understand what information they’re entitled to from buyers, what’s none of their business, and what’s off limits entirely—both to protect themselves from liability and to govern fairly and ethically. Let’s take a look. 

Getting Approved

For co-op buyers, the first step in getting approval is completing and submitting the ‘board package’ for review. The package typically contains financial documents, personal information, and reference letters from friends and business associates—though some boards ask for a lot more than that. Anecdotes abound about ultra-exclusive co-ops wanting to know applicants’ club and board memberships, their educational background, their lifestyle preferences—even what credit cards they have. (One story that circulated years ago claimed a New York buyer was rejected by a swanky Park Avenue co-op because he had a Sears card. The board apparently felt that patronizing such a downmarket establishment made the buyer a poor fit for their community.) 

While Garden State boards don’t tend to get quite that nosy—or exclusionary—they can still require a hefty dossier from buyers. A buyer’s broker typically helps compile the board package and submits it for review. And those packages can be exhaustive; one tri-state area broker describes one he put together that had 11 different requirements, including the formal application form, a financial information form, credit and background checks, two years of state, federal, and local tax returns, an employer letter confirming the applicant’s salary and terms of employment, pay stubs, and the applicant’s three most recent bank statements—as well as personal references, business references, and references from the applicant’s current landlord. “Exact requirements may differ slightly from building to building,” he says, “but that list is typical of most co-op applications.”

While demanding all of this information may seem invasive, it’s within a board’s purview to do so, according to attorney Matthew Z. Earle, partner in the Hackensack law firm Kates, Nussman, Ellis, Farhi & Earle, LLP. While the extent and specifics of a particular board package “depend on the provisions of [the] cooperative’s governing documents,” Earle says, “as a general proposition, nearly all cooperative proprietary leases require the consent of the board of directors for the transfer of shares and assignment of lease, usually after a recommendation by the admissions committee.”

Financial Considerations

According to brokers and legal pros, when assessing a purchaser’s application, most boards are primarily concerned with the person’s financial profile. Can the buyer afford to buy the apartment and cover the monthly carrying costs? Do they have the resources to pay a special assessment, should one be necessary? 

“Every building has a finance requirement,” says Jennilee De Leon, a broker and account executive with Sacks Real Estate Management Corp./Allied Partners in New York City. “Some buildings are all cash, while others permit financing, which can range anywhere from 50 percent to 80 percent of the purchase price. In terms of liquidity, annual income is a deciding factor. Some high-end buildings may have more stringent requirements,” she adds. “In luxury buildings, net worth is a bigger factor.”

In New Jersey, says Earle, “virtually all proprietary leases state that ‘the board may not withhold consent except for the failure of the proposed assignee to meet the financial requirements established by the board of directors.’ This language is in most proprietary leases because it was required by the Department of Community Affairs (DCA) as a condition to approve the developer’s offering plan. What this means is that a board should establish, by written resolution adopted at a meeting open to attendance by shareholders, financial standards for admission.” That way, the requirements are clear, accessible, and in writing, which reduces the risk of discrimination—in both perception and practice. 

A Word on Condominiums

Unlike co-ops, which are corporations, condominiums are real property. Thus, condo boards have less control over who can buy in. While condo boards typically require little or nothing from the buyer or seller to approve a sale of a unit, some do require buyers to complete board approval packages. According to De Leon, that may be due to the influence of the co-op market. 

But unlike a co-op, which can simply say ‘no thanks’ to a buyer and move on to the next one, condo boards in some markets do have one—and only one—option: the right of first refusal (ROFR). In simple terms, if the board is unhappy with a prospective buyer and chooses not to approve the sale, the board can elect to purchase the unit itself—at the same price the prospective buyer is offering. Given the six- and seven-figure price tags of most units, this is exceedingly rare. Few associations have the available cash on hand to make such a move—and leveling a huge assessment on unit owners to prevent a purchase would be a very tough sell indeed. 

In New Jersey, the ROFR is a moot point, because condo boards here have no such right. In fact, part of the New Jersey Condominium Act (NJSA 46:8B-36 and 38), adopted in 1980, prohibits a condo board or developer from reserving or retaining a right of first refusal to purchase a condo unit on resale.  

“You never see ROFRs, because nobody writes them into the documents anymore,” says Ron Perl, a partner with Princeton-based law firm Hill Wallack LLP. “You would be hard-pressed to find a set of New Jersey condo documents with the right of first refusal.”

And why is that? Well, according to legal pros, prior to the enactment of NJSA 46:8B-36 and 38, the right of first refusal was often abused, and used to illegally block prospective buyers from moving into a given building or HOA community. “It was misused or used for discriminatory purposes,” says Perl, “so the legislature says we’re not going to outlaw the ROFR altogether, but you must show us a really good reason you need to use it. In over 30 years, I haven’t seen it used.”

Although New Jersey’s co-op boards tend to have more leeway compared to condo boards, they still don’t come close to matching the kinds of restrictions New York co-op boards have put in place. “In New Jersey, a co-op can only reject a potential shareholder for financial reasons,” says David J. Byrne, a partner in the Community Association Department of Princeton-based law firm Ansell Grimm & Aaron PC. “That, of course, limits the discretion of New Jersey boards. New York cooperatives have more expansive discretion in that regard. But it does simplify the issue for New Jersey co-ops. When a New Jersey cooperative rejects an application of a potential shareholder, the potential sale by the current shareholder is scuttled. At that point, the current shareholder usually begins a search for a more qualified buyer.”

Playing Fair 

Even in states that allow boards to consider non-financial criteria and potentially deny a purchase application based on those grounds, the discretion granted them does not equal a license to discriminate. Boards must stay on the right side of ethics and the law.

Key among those laws is the federal Fair Housing Act. According to Deborah Koplovitz, a partner with the Manhattan-based law firm Herrick Feinstein LLP, “The Act was passed in 1968 [and] was the most important piece of legislation from the civil rights era.” While the Act’s initial purpose was to promote integration and discourage racial discrimination, Koplovitz continues, its scope has expanded since then. “In 1988, it was extended to include people with disabilities, for instance.”

Different states and municipalities have different laws recognizing protected classes when it comes to housing—which is why it’s so important for boards to understand those laws, abide by them, and consult their legal counsel throughout the process.

In New York, for example, a co-op board could reject a buyer “if [the] applicant is a felon…or is a celebrity,” says De Leon, based on the Business Judgment Rule— a common-law doctrine by which courts typically defer to board decisions—as long as those decisions are within the law, made in good faith, and in the best interest of the shareholders as a whole. That said, rejecting a buyer for non-financial reasons can have serious repercussions. Koplovitz notes that even asking an applicant’s age—common on many applications—is ill advised, since that question could be grounds for a discrimination claim. 

By contrast, in the Garden State, “applicants can only be rejected for failing to meet the financial standards,” says Earle. “As per the express terms of most proprietary leases, an applicant cannot be rejected due to a criminal record, or because he or she is a registered sex offender. In the event that your cooperative’s proprietary lease does not limit rejections to financial criteria, you should seek the advice of counsel, and make sure that any rejection for non-financial reasons does not run afoul of the New Jersey Law Against Discrimination or other statutory protections.

“However,” Earle continues, “many cooperatives do run a landlord-style ‘consumer report’ check that may reveal criminal records. Note that if you reject an application due in whole or in part to information contained in a ‘consumer report,’ such as a background check or credit check, you must comply with the Fair Credit Reporting Act, including provisions relative to adverse action notices.”

What About Interviews? 

Even before the pandemic forced a pause on face-to-face interactions, many New Jersey boards opted to scrap interviewing prospective buyers face-to-face out of concerns about liability and claims of discrimination. According to Earle, “The interview process may theoretically increase the cooperative’s exposure to a discrimination claim because it could make the committee aware of the applicant’s status as a member of a protected class (e.g., race, national origin, religion, etc.). “It’s not illegal to interview applicants, and many cooperatives still conduct interviews to ask for clarifications regarding financial issues, or to introduce the potential new shareholder to the various facets of cooperative living. [But] again, the only criteria for admissions are the financial records submitted by the applicant.”

In the end, say the legal pros, the best policy for protecting your board and its members from claims of illegal discrimination is to play fair, and not illegally discriminate in the first place. Knowing the law, plus taking the advice of your co-op’s legal counsel and using a healthy measure of common sense, will go a long way toward keeping your board on the straight and narrow when it comes to deciding whether a prospective buyer will become a neighbor.

Cooper Smith is a staff writer/reporter for CooperatorNews.  

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