Co-op shareholders who are clients of mine wanted to sublease their apartment to some folks who I know quite well. All was going swimmingly until the cooperative Board decided to reject the sublease application without providing any reason whatsoever.
As you might expect, both the shareholders and the prospective subtenants were extremely frustrated and disappointed by this turn of events. The shareholders, who were traveling for work and wanted to put someone into the apartment in order to generate revenue, were worried that they might suffer the same fate with their next prospective subtenants, without knowing why the first applicants were rejected. The prospective subtenants were bewildered and wondered whether they would be turned down if they apply to another coop Board for approval. And they don’t even know why they were rejected!
Unfortunately for both of these parties, ever since the 1990 Court of Appeals decision in Matter of Levandusky v. One Fifth Ave. Apt. Corp., New York state law allows coop Boards to utilize the “business judgment rule” to reject an applicant for purchase or sublease for any reason or for no reason, as long as there is no discriminatory purpose. Given that the Board did not provide a reason (and it was not obligated to do so), how can someone determine if there was discrimination? The answer lies in litigation, where the discovery process can reveal the motives behind the rejection. A lower cost alternative is a complaint filed with the New York State Division of Human Rights or New York City Commission on Human Rights, through which the reasons for the rejection must be revealed. But who has the time to litigate, or to wade through the red tape of the administrative process, especially when the actions of the Board would probably withstand judicial scrutiny? It takes a lot to prove discrimination, and most Boards are sensitive enough to this subject to avoid even the appearance of improper action. And most shareholders and prospective shareholders (or tenants, subtenants, etc.) who are affected by a Board rejection know that the Board’s actions weren’t discriminatory. They just want to know why the rejection happened, so that they can be guided in their future actions and not make the same mistakes that will end up costing them time and money, both of which are typically in short supply.
This issue has been discussed at great length recently in the Committee on Condominiums and Cooperatives of the NY State Bar Association’s Real Property Section. Realtor groups are trying to convince legislators to enact laws that would compel cooperative Boards to reveal their reasons for rejecting applicants for purchase or sublease. Such legislation has been introduced in Suffolk County and is being considered in Nassau County, and the State Bar Committee has been strongly opposed. In addition, it is of great concern to practitioners in New York City, where a majority of coop apartments are located, that a local law has been proposed that would amend the New York City Administrative Code in relation to the Human Rights Law by requiring coop boards to reveal the rationale for their actions and decisions.
The City Bar’s Committee on Cooperative and Condominium Law has been active in its opposition to this proposed legislation. The reasons for the City Bar Committee’s objections are: 1) there are other remedies available to those who believe they have been aggrieved (namely, those set forth above – litigation and a claim with the Human Rights Commission); 2) this legislation would discourage qualified and knowledgeable people from serving as Board members, for fear that it would generate a firestorm of litigation directed against Board members individually. People can twist the reasons provided by a coop in several ways, some of which could provide a basis for further action; 3) what if the reason was something personal, such as the applicant’s behavior during the interview, or the way someone smells? These are legitimate, non-discriminatory reasons for a rejection, but coop Boards may be uncomfortable providing them as a reason; 4) it could have an adverse impact on market value of cooperative apartments by tying up sales of affected units while the process runs its course; and 5) the legislation does not promote timely decision-making by Boards.
I serve as a member of both the NY State Bar and City Bar committees and fully understand the logic and basis of their positions in opposition to the proposed legislation, which calls for burdensome levels of action and oversight by Boards that go far beyond the summary set forth above (such as requiring that Boards provide a statement detailing the number of applications and rejections over a three year period preceding the rejection). After all, what other type of corporation is required to provide detailed reasons for its decisions? However, as a practitioner representing purchasers, sellers and renters of cooperative apartments, I am faced on a regular basis with people like the clients and their prospective subtenants that I described at the start of this article, who don’t want to sue or file claims against anyone; they simply want fast answers that will give them some guidance for their present situation and for their future dealings, as well. Perhaps we need legislation that allows Boards to provide simple, straightforward explanations for why an application was rejected, leaving the question of discrimination for the agencies and courts presently set up to deal with them, and providing coop Boards who, like most, act within the scope of their authority, with some measure of protection that will allow them to function without fear incurring personal liability. I certainly believe that people deserve answers without being forced to get them through agencies and courts.