Navigate Co-op Ownership Transfers Without Legal Drama

It’s too easy for the complex world of co-op ownership transfers to become a costly headache. Attorney Aaron Shmulewitz, partner at the law firm, Belkin Burden and Goldman, breaks down the three main types of co-op ownership and explains why shareholders increasingly want to transfer apartments into trusts and LLCs for estate planning benefits. In this interview, you'll discover how to handle messy divorce situations where spouses try to lock each other out, when building staff must enforce court orders, and how some transfer requests can lead to discrimination lawsuits.

Most importantly, learn about conditional consent agreements that can protect your co-op financially while still accommodating shareholders' estate-planning needs. Shmulewitz explains how boards can avoid legal pitfalls, which can help boards make informed decisions that protect both individual owners and the cooperative as a whole. Habitat's Carol Ott conducts the interview.

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges. For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Welcome to Legal Talk, a conversation about governance issues that New York's co-op and condo boards are tackling today. I'm Carol Ott with Habitat, the New York City magazine for co-op and condo board directors. And my guest today is Aaron Shmulewitz, partner at the law firm, Belkin Burden and Goldman. 

An owner, is an owner. Until a transfer is requested, and then depending on each co-op and its governing documents, the board will consider the request. Aaron, can you explain the most common types of co-op ownership and their implications for ownership rights and responsibilities? 

Aaron Shmulewitz: Sure. Thank you Carol. There are effectively three major types of ownership of co-op apartments.

The most basic is called tenancy in common. That's where two people own an apartment without any special designations. Each of those people has its own separate distinct interest in the apartment. Theoretically, person A can leave his interest under his will to whoever he wants, not necessarily to person B, and same goes for person B.

The second type of ownership is called joint tenancy with right of survivorship. That's where two people, often a husband and wife, but not always own an apartment together. And the right of survivorship means that when person A dies, his interest goes automatically to person B. So person B, which could be his wife or could not be his wife, winds up owning a hundred percent of the apartment.

The third type of ownership is called tenancy by the entirety, which is reserved exclusively for husbands and wives. It's the same type of automatic transfer upon death, as we just discussed a moment ago, but it's only between husbands and wives. 

Carol Ott: So for estate reasons, many of these owners, which you've just gone over, wanna transfer their ownership into something else.

And I'm curious what the something else's are and how should a board approach those different requests? 

Aaron Shmulewitz: Trust ownership has become very popular since the IRS allowed it back in 1986. Many co-op shareholders want to transfer their apartments into trusts that they set up for the benefit of themselves or for the benefit of other people.

The primary advantages of ownership in a trust is that it avoids probate. It's out of the shareholders' estate, so that when the shareholder dies, there's no need to probate the apartment. It's owned by the trust. And the second reason is that since it's out of the shareholders' estate any estate taxes that might otherwise be payable on the value of the apartment are not payable.

The apartment is not subject to estate taxes, which are approximately 50% of the value of the apartment at certain value levels. Many shareholders for the last 40 or so years have been transferring their apartments into trusts the last few years. Another type of transfer has become popular transfers into LLCs, limited liability companies, formed by the shareholder again, to create a separate entity that can own the apartment, so that the apartment is no longer in the among the assets of the shareholder so that the apartment is not part of the estate of the shareholder when he or she dies. 

Carol Ott: So not all transfer requests are peaceful or maybe appropriate.

What kinds of transfers can cause problems and what are those problems and how should boards deal with them? 

Aaron Shmulewitz: Let's start at the end. Transfers are generally subject to provisions in the proprietary lease. Some proprietary leases allow for transfers, let's say, between spouses without any board consent.

Some proprietary leases allow for transfers to financially responsible members of the dead shareholders' family with only limited board consent and some proprietary leases provide for full board consent for such transfers. Examples of messy transfer situations are generally they generally involve matrimonial situations where a husband and wife own an apartment.

They're getting divorced. One of them wants to transfer his or her interest to somebody else, and the spouse objects to that, or the outgoing spouse objects to that. There's also the flip side of that where the husband and wife are getting divorced. They agree amicably on which one of them is gonna get the apartment, but the board may have other ideas.

The board may have the right to reject the spouse, as I mentioned a moment ago. The board almost always has the right to examine the finances of the spouse and other attributes of the spouse to make sure that the transfer is not going to hurt the co-op or the other shareholders of the co-op.

So even if a husband and wife are going through hell of a divorce and they ultimately agree several years and several hundred thousand dollars in legal fees later on how to transfer ownership of the apartment, the board may have other ideas. There's one other interim step that you and your listeners should be aware of. Prior to divorce, un- amicable situation, one spouse may seek to lock out the other spouse from the apartment. Spouse B may not want spouse A to come to the apartment, to enter the apartment. Often spouse B asks building staff to keep spouse A out. Do not let my husband up to the apartment. Once again, you look at the proprietary lease.

If the husband, if spouse A, is a co-owner of record of the apartment and spouse B cannot block him from entering the apartment, absent a court order. So if a couple is going through a bad situation and spouse B wants to keep spouse A out of the apartment, the only enforceable way to do that is to go to court to get a court order to block spouse A from entering the apartment.

Carol Ott: And if there is a court order, if there's building staff, is it up to the building staff to implement it? 

Aaron Shmulewitz: Yeah. But you're making it sound like they have a choice. They don't have a choice. If there's a court order and it's given to building staff, building staff must implement it. They must seek to enforce it.

So if the court order blocks the husband from entering the apartment building, staff must try to stop him from entering the apartment. Unfortunately, these efforts sometimes turn nasty and screaming matches ensue in the lobby, and the police are often called and the police will enforce the court order.

Carol Ott: Sounds like a nightmare. I wanna ask about cost and also the governing documents. Does it make sense for a board to review its proprietary lease to address what people seem to need when they wanna transfer so it's very clear what has to happen? Or is it usually pretty clear as it as they were already, devised 40 years ago?

Aaron Shmulewitz: The provisions in the proprietary lease merely say what level of board consent is necessary for a transfer to occur. Even if full board consent is necessary for any sort of transfer, the board is free to set the list of things that it will need in order to approve a request to transfer.

And that list has grown over the decades and it's changed over the decades, so it's best to leave the board with maximum, year to year, or decade to decade, what it wants to look at now in order to make a decision. 

Carol Ott: And I'm just curious about now the building's operating and let's say the building needs to impose an assessment. And some of the apartments are now owned by a trust or an LLC, the assessment, they're obligated to pay just like an occupying shareholder.

Is that correct? 

Aaron Shmulewitz: Yes, absolutely. They are the shareholder. If the transfer has been made to a trust, let's say, the trust is the shareholder and the trust has all the obligations of a shareholder. I would point out that virtually every co-op requires, if they're going to approve a transfer to a trust, they require the shareholders and the trustees, if they're different people, to sign a document, I call it a conditional consent agreement, other attorneys call it something else, where various things happen. The individual shareholders personally guarantee all obligations of the trust , among other things. If a board is concerned about a trust being a shareholder and thus not fulfilling its payment obligations to the co-op the board need not be concerned about that because with such a document in place, the individual shareholders are just as personally liable as they were before the transfer.

They remain 100% fully personally responsible for the obligations of the trust. 

Carol Ott: In your experience, in your practice, where has the process of board involvement or board approval gone amiss? 

Aaron Shmulewitz: There have been occasional situations where occasional boards object to a proposed transferee of a shareholder.

 If there's a shareholder who wants to transfer his interest, let's say, to a woman who he has just met. And of course, the genders could be completely reversed as well, I'm just using this for simplicity. And the board somehow objects for some reason to the young transferee. Some boards get overly involved on that issue and they get overly hung up on that issue.

And of course, we all know that turning down a person because of their gender or age or sex is against the law, both federal, state, and city. Boards should be reminded of that periodically because sometimes boards forget that. 

Carol Ott: The bottom line, which of course is the bottom line.

I just wanna confirm that if a shareholder asks the board for a transfer into a trust or an LLC, all the expenses that the board will engender, going to their attorney to review, all of that is taken care of by the people who are requesting the trust. 

Aaron Shmulewitz: Right. That's also part of the agreement, the conditional consent agreement, that the shareholder pays all expenses of the co-op's attorney and the co-op's transfer agent, and the lien search, any other expenses that arise are the obligation of the shareholder, and they must be paid at or before the closing in order for the transfer to close.

Absolutely. So the whole thinking behind this conditional consent agreement is that the shareholders can get what they want, they can do the estate planning that they want, A; B, it doesn't hurt the co-op in any way. And C, it doesn't cost the co-op anything in order to accommodate the shareholders.

So it's a win-win-win for everybody. 

Carol Ott: And that is exactly what I was gonna say. It sounds like a win-win. 

Aaron Shmulewitz: Yeah. 

Carol Ott: Thank you very much. This has been really informative. 

Aaron Shmulewitz: Thank you Carol.