We write to express our concerns about the seemingly unintended impact of Part M of the recently enacted Housing Stability and Tenant Protection Act (the “Act”) upon cooperative apartment corporations and, to a limited extent, upon condominiums. We believe that the Act will potentially harm many tenant shareholders, including those who are long term owners aging in place – precisely the people whom the legislature has tried to help with legislation concerning reverse mortgages, a step we applaud.
Underlying our concerns is that an inability to act properly in vetting new members of the coop community, an inability to pursue defaults among members of the coop community, an inability to collect fees for which the coop becomes responsible will harm the owners, who comprise the members of the coop community – all of whom will have to make up any shortfall in the coop’s budget out of their own pockets – without any offsetting benefits. As noted, coops typically operate on break-even budgets, of which on average only 15- 20% is discretionary, the bulk of the costs being outside the board’s control, such as real estate taxes, mortgage, labor and insurance. If boards cannot properly and fully vet prospective buyers and their ability to meet their share of the coop’s financial needs, the Act will cause the resulting delinquencies to create shortfalls and additional costs to be borne by the remaining members of the community who have not defaulted.
Moreover, the ability to purchase and own a cooperative apartment has been an important means of upward mobility, in the same way as the ability to purchase a home. In the 1980’s, when many rental buildings were being converted, people had an opportunity to purchase their homes; this, among other things, helped stabilize communities. Many owners remain in those homes today – although they may be retired and with substantially reduced incomes. The apartment remains their biggest asset. Increased costs because of some of the provisions of Part M may make the apartment unaffordable. Further, because it appears boards cannot ask for an escrow if a prospective purchaser’s finances are questionable, another unintended consequence of Part M will be to increase the number of rejections of such candidates, who are often young, thereby depriving them of this means of upward mobility.
Our specific concerns include the following:
1. GOL Sec. 7-108, as amended by the Act to add a new subdivision 1-a, now limits “deposits” to only one month’s rent. It would seem from the language of the law that the very common requirement in coops for financially questionable purchasers to post one (or more) year’s maintenance in escrow is now considered illegal. If this is the case, and coops are prevented from requiring a year or two’s maintenance in escrow from a prospective purchaser with questionable finances, boards may feel compelled to reject more prospective owners rather than take a chance of allowing a financially unstable individual to join the community and placing a burden on the other owners in the event of a default. Though this is undoubtedly not the intended effect of this law, this may well be one of the more important negative impacts of the Act. Further, the inspection requirements do not make sense in a coop context. In addition, in some condominiums, where a lease is between a unit owner and a tenant, the condominium association requires the unit owner to obtain several months’ rent as security to, among other things, protect against the tenant’s arrears and to protect against a transient tenant who may do damage to the condominium property. This limitation may also unintentionally prevent a coop from requiring an owner performing alterations to post a deposit to protect against damage to the building or failure of the owner to pay architectural and other professional fees of the coop to review and monitor performance of the work.
2. The Act adds Real Property Law 227-f, which prohibits a landlord from refusing to rent or offer a lease to a potential tenant on the basis that the potential tenant was involved in a past or pending Landlord-tenant action or summary proceeding. In addition, it creates a rebuttable presumption that a violation of this law exists if information is requested by a landlord (i.e., a coop board) from a tenant screening bureau or the landlord otherwise inspects court records. We understand that there have been concerns in rental situations about blacklisting and other abuses by absentee, profit- motivated landlords, but that concern should not apply in a coop. Indeed, this is precisely the sort of information that boards typically require as part of the background check in order to make an informed decision about potential new shareholders. A litigious shareholder can end up costing the coop, and, therefore, its individual shareholders, substantial sums of money, as well as making life unpleasant for neighbors. This ability should not be taken away from coops.
3. The Act amends RPAPL 702 to provide that if a tenant does not pay his/her maintenance within five (5) days of when it is due, the landlord must send a notice, by certified mail. If not sent, the tenant can use this fact as an affirmative defense in any eviction proceeding based on that non-payment of rent. Proprietary leases typically have their own deadlines and methods of sending a notice, so this may be duplicative or add yet another layer onto the process. In any event, it is an additional and cumbersome requirement, particularly if the shareholder/lessee is in arrears for several months.
4. Under RPL 238-a, a new section added by the Act, “no landlord, lessor or sub-lessor may demand any payment, fee or charge for the processing, review of acceptance of an application … before or at the beginning of a tenancy” (with a few exception); provided, however that the landlord may charge a fee to reimburse costs associated with conducting a background check and a credit check, provided the cumulative fee is no more than the actual cost or twenty ($20.00), whichever is less (and only if the landlord gives the prospective purchaser a copy of the reports as well as a receipt or invoice). It is unclear at this time whether this applies to a coop’s managing agent’s application fee for potential purchasers (or sub-tenants), which is typically required to compensate management for the additional work that is necessary to review and process the application. If that limit applies to the managing agent, then the members of the coop community will be required to make up any shortfall in the managing agent’s compensation. Requiring the seller to pay would not resolve this; aside from the printed form of contract of sale and years of custom and usage, as well as the management agreement that not only requires payment of these fees but also states they are to be paid by the purchaser, the seller will simply pass this obligation on to the purchaser in one fashion or another. And, in a condominium, to which Part M does not apply, what is the impact on processing fees for lease applications when the lease is between a unit owner and a tenant? Typically, the managing agent charges for processing such applications, since they are subject to the board’s right of first refusal. Nor can it be assumed that background or credit checks are not important if a bank is willing to lend. In the various housing crises, most recently in 2008, it has become clear that banks lend recklessly, assuming the bubble will never burst. The banks’ so-called due diligence cannot be considered a substitute for real due diligence. Coops should be permitted to pursue due diligence without placing a financial burden on the owners
5. RPL 238-a also provides that no landlord may demand a payment, fee or charge for late payments of rent if it exceeds fifty ($50.00) Dollars or five (5%) of the monthly rent, whichever is less. Many proprietary leases already include late fees and interest, and the new law may void those provisions – even if they have been amendments to the proprietary lease, enacted by a supermajority of the shareholders. Notably, many coop leases initially provided for an interest rate of 6 % per annum, but the leases have been amended to increase the rate of interest and impose late charges. This was due to the seeming realization by some less than honorable shareholders that the coop was a cheaper bank” than a credit card company, so, it was better to pay the credit card company and leave the coop singing for its money, while other owners would have to cover the deficit created thereby.
6. RPAPL 702, as amended by the Act provides that only rent may be sought in a summary proceeding, and not fees (administrative or otherwise) and other charges. What about electric and other user charges authorized under the proprietary lease? What about special assessments – often used to deal with budget shortfalls or for capital improvements? In addition, many management companies charge the coops that they manage for the additional bookkeeping and managerial services required when arrears exist, including sending notices to tenant shareholders in arrears. This provision would require coops to bring two separate actions – one a summary proceeding and one a plenary action – or alternatively forego a portion of the monies owing because the legal fees involved do not justify a second proceeding. And who will pay the shortfall created by that – again, it will be the other owners who abide by their obligations.
7. The Act amends RPL 234 to preclude a landlord from recovering attorneys’ fees upon obtaining a default judgment even if the tenant initially appeared – albeit there may have been substantial fees incurred. And, so, the other owners will be forced to bear that expense.
8. In the event a landlord commences a summary proceeding for non-payment of rent and obtains a judgment of possession, and the tenant can demonstrate ”extreme” hardship, the court can allow the tenant to remain in occupancy for up to a year. A child’s enrollment in school is listed as one of the circumstances a court may consider. (RPAPL 753) This will undoubtedly adversely affect the governance of coops and increase the amount of shortfall that the other cooperators will be forced to bear.
9. The Act, in amending RPAPL 711, creates confusion re occupancy after death; while succession rights are important under rent regulation, they are irrelevant in a coop