If You're Buying a Co-op...
What is a Co-op Anyway?
A co-op looks like real estate, acts like real estate, but for the owner of a cooperative unit, it really isn’t real estate. When purchasing a cooperative apartment one does not buy real estate, but rather, purchases shares of stock in a cooperative corporation. This ownership of shares gives the buyer the right to occupy a specific apartment in the building owned by the cooperative corporation in accordance with the terms of a document called a "proprietary lease." Unlike condos, real estate taxes are not assessed against each co-op apartment in a cooperative building. Instead, each tenant-shareholder pays his or her pro rata share of real estate taxes assessed against the entire co-op, as well as his or her pro rata share of all of the operating expenses of the cooperative.
Management of a Cooperative
Like a business corporation, a cooperative corporation is ruled by a Board of Directors (comprised only of the building's residents in most cases, unless the co-op is still controlled by a sponsor or investor), which makes all of the major decisions relative to the operation of the building and the rules governing occupancy by the tenant-shareholders. The Board has significant powers, including the authority to turn down a potential purchaser or sublessee of a unit (without giving a reason). Since an ornery Board can make life pretty oppressive, it's a good idea to get a sense of who's on the Board. If your real estate broker tells you it's a "tough Board," do yourself a favor and investigate exactly what your broker is talking about. Unlike condos, virtually all co-ops require a Board interview before you can purchase or sublease an apartment. As a part of the application process, you will be required to reveal just about every personal financial fact that exists about you, including disclosure of your tax returns for the last two years, with all schedules attached. In addition, you may also be required to provide verification of the assets listed on your financial statement. Although most coops require Board approval for a proposed sale or sublease of an apartment, it should be noted that some co-ops, called “condops”, have instituted "condo-like" sales and subleasing policies in order to make purchasing in the cooperative a more attractive investment.
A Significant Advantage of Cooperative Ownership
Although there are advantages to condominium ownership (like the ability to sell or lease an apartment without significant interference from the Board of Managers), there is one significant advantage to cooperative ownership: the relationship between the apartment corporation and the tenant-shareholder is that of landlord and tenant. As a result, the tenant-shareholder (that is, the owner of shares allocated to a particular co-op apartment) has all of the rights and protections afforded to a tenant under New York law. When a dispute arises either with the apartment corporation or with another co-op owner, the tenant-shareholder may be able to benefit from applicable landlord-tenant protections to help bring the problem to a solution. An owner of a condominium does not have this protection. Simply stated, the condo owner is not considered a tenant for purposes of landlord-tenant law in New York and can't rely on statutory protections granted to tenants. For more on the landlord tenant relationship between the co-op and the shareholder, see "The Great Co-op Secret".
Warranty of Habitability
One important statutory protection is known as the "Warranty of Habitability". Under this law, a covenant is implied into every lease for residential premises in New York to insure that a tenant's apartment and the building in which the tenant is living is "fit for human habitation" and is free from any conditions which would be dangerous, hazardous or detrimental to one's life, health or safety. When a landlord fails to provide these minimum standards, a tenant may be entitled to a rent abatement as compensation. In the case of a co-op, a tenant-shareholder might be entitled to a maintenance adjustment if the apartment corporation failed to provide essential services such as heat, hot water or elevator service or allowed a dangerous condition to exist. When these types of conditions are present in a condo, the condo owner cannot take advantage of the warranty of habitability because the condo owner is not considered a tenant. The condo owner must rely on those remedies applicable to property owners in general, which do not necessarily favor the special nature of the landlord-tenant relationship. The Court of Appeals, New York's highest court, has emphasized that the purpose of the warranty of habitability is to insure that tenants are provided with a living space that is suitable for residential habitation. The warranty of habitability is not to be used to enforce lease provisions that create higher standards and amenities in particular buildings.
Even though courts may apply the benefits of the warranty of habitability sparingly, when an issue does arise with the Board of Directors of your co-op, raising the possibility of invoking the protection of the warranty of habitability, may create an atmosphere for settlement of a dispute. This negotiation tool does not exist with a condo.
Residential Reality: Do Your Homework
Make sure you are comfortable with the financial and physical condition of the co-op before you sign the contract. Make sure the co-op is comfortable with your financial condition as well. In the vast majority of cases, co-op buyers do live happily ever after.
What Every Buyer Should Know
Here are the basics that every buyer should know on the way to buying an apartment in New York City: