In New York City, Co-Op apartments comprise a significant portion of the housing stock. Approximately 4,800 buildings in New York are Co-Ops, more than half of which are located in Manhattan. Co-Ops are corporations in which each apartment owner is both a shareholder and tenant of that corporation. The shareholder tenants elect a board of directors to operate the building, and in most cases, a Co-Op’s governing documents provide Co-Op boards with broad discretion to approve sales on each apartment in the Co-Op.
Co-Op boards are notorious for their lengthy application processes, extensive information requirements from potential buyers, and their ability to reject potential sales of Co-Op apartments. Some Co-Op boards may not even provide reasoning for their rejection of an applicant, and they are generally not required to do so. Legally, the business judgment rule favors the Co-Op board in this way, providing them the flexibility to make business decisions for the corporation so long as they are found to be in good faith and not discriminatory. If a shareholder believes the board is not operating in good faith, they may seek legal remedies to resolve the situation.
With regards to the sales process, previous case law has indicated that, despite the business judgment rule, Co-Op boards may not unreasonably restrain an owner’s ability to sell their property. This has come into focus in a case, Stromberg v. East River Housing Corporation.
Stromberg v. East River Housing Corporation
In this case, the plaintiff shareholders at 577 Grand Street, Eleanor Stromberg and Douglas Price, sued their Co-Op, East River Housing Corporation, claiming that the Co-Op improperly and arbitrarily refused consent to a proposed sale of plaintiffs’ apartment. In January 2022, the plaintiffs entered into contract with a buyer to sell their apartment for $520,000 based on an appraisal conducted by a third party, which valued the property at $525,000. They submitted the purchaser’s application for the sale of the unit to the Co-Op board for review, which application was rejected. The plaintiffs appealed the decision to the Co-Op, which appeal was also rejected. The plaintiffs and their buyer then amended the contract to increase the purchase price from $520,000 to $540,000 and the application was again rejected on the grounds that the purchase price was still too low, and the board indicated that it would not approve a sale for less than $600,000. Ultimately, the purchaser cancelled the contract after the board failed to consent to the sale within a reasonable period of time, and the plaintiffs then sued for breach of contract and breach of fiduciary duty.
Each party sought summary judgment on various claims and counterclaims. Importantly, the Court found there was a material dispute of fact as to whether the Co-Op denied the sales application for being below an arbitrary price floor, a ground for denial that the court indicated would not be shielded by the business judgment rule.
The Takeaway
While the business judgment rule often protects and upholds a Co-Op board’s decisions, boards should be wary of making a decision based on an arbitrary price floor. Stromberg v. East River Housing Corporation is a case that has the ability to provide clarity on issues related to board rejections based on price.
The foregoing is not intended to be comprehensive nor constitute legal advice. If you would like to discuss your specific circumstances or would like more information, feel free to contact us at (212) 625-8505.