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BLOG / 06.11.21 /Kenneth R. Jacobs

Legislature Exempts Co-ops From Key Restrictions In “Housing Stability Act”

On June 10th, the State Senate and Assembly removed most cooperative corporations (with one significant exception noted later in this Alert) from the application of key sections of the so-called “Tenant Protection and Housing Stability Act” that had lumped private Co-ops in with for-profit rentals. The changes included the following:

1. (a) Co-ops Can Recover Legal Fees and Late Charges from Defaulting Shareholders in Summary Proceedings. If authorized under the Proprietary Lease or Occupancy Agreement, Co-ops can now seek “fees, charges, penalties and assessments other than rent” in a summary proceeding to evict a defaulting shareholder. Previously the TP Act required Co-ops to start a separate action to collect their legal fees, which was completely uneconomic and impractical for most buildings.

In addition, Cooperatives are now permitted to collect their legal fees if they obtain a default judgment against a shareholder. (The TP Act had barred that as well.)

(b) Co-ops Can Charge up to 8% Late Fee, If Authorized in Lease. Co-ops are permitted to impose a “late charge” of up to 8% of unpaid monthly maintenance charges, provided that the Proprietary Lease or Occupancy Agreement authorizes collection of late fees.

Co-ops whose Proprietary Leases don’t contain provisions authorizing collection of late charges, fines and other charges should amend their Proprietary Leases now to expressly allow collection of those fees in order to comply with the requirements of the new law. If you haven’t done so already, these changes provide the perfect excuse for a Board to propose it.

2. Escrow Deposits Permitted for “Owner-Occupied” Co-ops. The TP Act had barred landlords from collecting more than one month’s rent as a security deposit. Escrows of maintenance, frequently demanded by cooperative corporations as a condition of consenting to a purchase or refinancing, were deemed to be “security deposits,” requiring Co-ops to develop cumbersome workarounds. Co-ops will now be permitted to collect escrow deposits, provided that apartment will be occupied by the prospective tenant-shareholder.

Note that Co-op apartments to be subleased are not exempt from the one-month security deposit limitation. So ironically, a Co-op cannot collect a maintenance escrow from someone purchasing a rent-regulated or subleased apartment, where the escrow might be even more important to maintain. Co-ops may also need to take a position whether they can demand an escrow if a current tenant-shareholder occupant subsequently seeks to sublease their apartment.

3. Transfer Agents and Managing Agents May Charge Processing Fees to Applicants. Some managing agents had expressed concern whether the limitations in the TP Act on charging “fees” to applicants for a tenancy applied to co-op applications. The amendment now clarifies that transfer agents and managing agents can charge fees for “processing, review or acceptance” of a prospective tenant-shareholder’s application. (As far as we could tell, agents never stopped charging these fees regardless, but now they can breathe again.)

4. Co-ops Can Charge Actual Costs of Background and Credit Checks to Applicants. The TP Act had prohibited landlords from charging applicants more than $20.00 for background and credit checks. That is substantially below actual costs. Co-ops are now allowed to charge the actual cost of these checks.

5. Notice of “Rent Increases” Over 5% Need not be Sent to Shareholders. The TP Act required landlords to send written notices to tenants if they intended to increase rents by more than 5%. Technically, this meant that Co-ops could not increase maintenance unless they sent certified mail notices to all shareholders at least two weeks ahead of time. Private cooperative corporations are now exempted.

6. Notices to Shareholders Can Be Sent in Co-op’s Customary Manner. Cooperatives can now send notices to shareholders in any manner authorized under your Proprietary Lease. (The TP Act had required only certified mail.)

Exceptions to Exemptions: Co-ops Organized under the Private Housing Finance Law. The foregoing exemptions from the TP Act do not apply to cooperative corporations organized under Articles 2, 4, 5 and 11 of the PHFL. These include “limited-profit housing companies,” “limited dividend housing companies,” “redevelopment companies,” and “housing development fund companies” [HDFC’s.]

In our opinion, by excluding PHFL cooperatives from the exemptions, the legislature is hurting cooperatives comprised of those persons who can least afford to absorb the effects of a defaulting shareholder, particularly smaller HDFC’s. We think that this is the wrong choice if the legislature wishes to support affordable home ownership; to treat a 99-year lease as a “rental” as opposed to a “sale” ignores the clear substance of the transaction.

Notwithstanding, we congratulate the Legislature for passing these amendments. We have followed the bill through its numerous iterations in the Senate and Assembly, and appreciate how difficult it was for its sponsors to persuade a majority to agree. We look forward to cooperatives recovering the benefits of these restored rights.