United States: Statutory Changes Affecting Cooperatives And Condominium Unit Owners

The sweeping changes in New York's rent laws that were passed by the Legislature and signed into law on June 14, 2019, have been widely reported. While these changes will have a substantial, if not drastic, effect on conventional rental housing, they are largely irrelevant as far as the operations of cooperatives and condominiums are concerned.

However, the same legislation that made changes to the rent laws also made a number of changes to other laws that do affect cooperatives and condominium unit owners. Among these changes are the following:

  • Under a change in the NY General Obligations Law, security deposits and rent advances required of tenants cannot exceed one month's rent. If a landlord knowingly violates this limitation it may be subject to punitive damages equal to twice the amount of the deposit or the advance.
  • It is a common practice for cooperative boards concerned about the finances of prospective tenant shareholders to require the deposit of security as a condition of permitting the transfer to proceed. The amount required is often substantial, such as one or two years' maintenance charges. This change in the law appears to prohibit the practice. As a consequence, boards are left with three choices: (i) to reject purchasers they might otherwise accept if they provided security deposits, (ii) to accept purchasers notwithstanding financial concerns, or (iii) to accept purchasers on the basis of guaranties provided by financially responsible third parties.
  • The limitation on security deposits also applies to cooperative and condominium owners renting out their units.
  • Under a change in the NY Real Property Law, late payment penalties under residential leases may not exceed the lesser of 5% of the overdue amount or $50.
  • Virtually all current late charges levied by cooperatives exceed this limitation. The limitation is so low that, if late charges are compliant, they will provide no incentive to pay maintenance on time. In light of this change, cooperatives might consider earlier and more aggressive collection action to deter late payment instead of relying on late charges to do so.
  • The late charge limitation also applies to leases issued by cooperative and condominium unit owners.
  • Under a change in the NY Real Property Law, application charges to new tenants, including charges for background and credit checks, may not exceed $20. (If a fee is charged, the applicant must be given copies of the reports.) This provision applies to both cooperatives and individual condominium unit owners.
  • The permitted amount is a very small fraction of fees that cooperatives and their managing agents customarily charge, and it is well below most cooperatives' and managing agents' actual out of pocket costs. In light of this limitation, cooperatives might consider charging the costs of processing purchase applications to selling shareholders, rather than to purchasing applicants.
  • Cooperative and condominium unit owners charging application fees to their tenants may have to abandon them.
  • Under a change in the NY Real Property Law, both cooperatives and owners of condominium units are prohibited from refusing to rent to a potential tenant because that tenant was or is involved in a landlord-tenant proceeding. There is a rebuttable presumption that the law has been violated if the cooperative or the unit owner has obtained information about such proceedings from a tenant screening bureau or by examining court records.
  • Changes to the NY Real Property Actions and Proceedings Law, affecting both cooperatives and owners of condominium units, add notice requirements and lengthen time periods for the commencement of proceedings against defaulting tenants. Historically, many cooperatives have utilized the statutory time periods instead of the longer time periods given in proprietary leases as a basis for proceeding against shareholders who are in default of their maintenance obligations. Managing agents and attorneys for cooperatives will have to be aware of this change and abide by it.
  • Changes to the NY Real Property Actions and Proceedings Law also provide that no "fees, charges or penalties other than rent may be sought in a summary [landlord-tenant] proceeding ..." It is unclear how this provision will be applied, but it could have a detrimental effect on the ability of cooperatives to collect in a single proceeding all amounts that may be due from a defaulting tenant-shareholder.

From all appearances, the various organizations representing cooperatives made little, if any, effort to affect the terms of the recent legislation, and there is no indication that the Legislature gave any consideration as to how the legislation would affect cooperatives and condominium unit owners. While we believe that applying the legislation to cooperatives and condominiums is poor public policy, we do not know if the result would have been different if the Legislature had considered their interests. In any case, there is now an after-the-fact effort underway to exempt cooperatives and condominium unit owners from the changes described above, but at this point in time, we cannot predict the likelihood of its success.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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