Co-op Board Conditional Approval

January 26, 2018 | By Charles Botensten

Q: I am a real estate agent and I am representing a purchaser in a co-op transaction. The co-op board recently approved the purchaser but conditioned the approval by requiring the purchaser to put the equivalent of one year’s maintenance in escrow.  Can the co-op board require this?  What happens if the purchaser is unable or does not want to meet the co-op board’s requirement?

A: Yes, the co-op board most likely can require the maintenance escrow as part of its approval.  Under the business judgment rule, New York courts afford co-op boards with broad discretion in deciding whether to approve or reject a prospective purchaser’s application.  The business judgment rule holds that a court will not review the business decisions of any co-op board that performs its duties in good faith, with reasonable care, and in a manner believed to be in the best interests of the co-op corporation.  The business judgment rule is generally very difficult to overcome unless it is clear that the co-op board is guilty of breaching its fiduciary duty to the co-op corporation, or otherwise acting outside the powers granted in the corporate by-laws or in the proprietary lease. In the case of your purchaser, if the co-op board believes that the financial interests of the co-op corporation will be protected by requiring the maintenance escrow, the co-op board can require this condition.

Whether the purchaser must comply with the co-op board’s request is dependent on what is agreed upon in the contract of sale between the purchaser and seller.  The standard form of New York co-op contract includes a provision that the transaction is subject to the unconditional consent of the co-op corporation. The co-op corporation’s requirement that the purchaser place the maintenance in escrow as part of their approval can be considered a conditional consent (as opposed to an unconditional consent). Therefore, unless the parties state otherwise in the contract of sale, the purchaser may have the right to reject the requirement of the maintenance escrow, cancel the contract of sale and be refunded the purchaser’s contract deposit.

Important Tip:  Both the purchaser and seller should speak to their own attorneys regarding the manner in which they will address the co-op board’s conditional approval and their respective rights under the contract of sale

The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel

Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP