Fordham Urban Law Journal Volume 11 | Number 4 Article 11 1983 Examining Cooperative Conversion: An Analysis of Recent New York Legislation Robert M. Nelson Follow this and additional works at: https://ir.lawnet.fordham.edu/ulj Part of the Housing Law Commons Recommended Citation Robert M. Nelson, Examining Cooperative Conversion: An Analysis of Recent New York Legislation, 11 Fordham Urb. L.J. 1089 (1983). Available at: https://ir.lawnet.fordham.edu/ulj/vol11/iss4/11 This Article is brought to you for free and open access by FLASH: The orF dham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Urban Law Journal by an authorized editor of FLASH: The orF dham Law Archive of Scholarship and History. For more information, please contact [email protected]. EXAMINING COOPERATIVE CONVERSION: AN ANALYSIS OF RECENT NEW YORK LEGISLATION I. Introduction New York City contains ninety-five percent of the cooperative hous- ing units in the United States.' The fundamental reasons for the proliferation of cooperative housing in New York City are historical, economic and social.2 A more specific factor is the New York State Legislature's support of conversion of residential real estate from rental to cooperative ownership. 3 This support has taken form in the most comprehensive set of laws and regulations in the nation dealing 4 with rental apartment conversion to cooperative housing. The most recent legislation in this area (the "Goodman-Grannis" bill)- provides a method whereby developers may convert residential 1. OFFICE OF POLICY AND DEVELOPMENT RESEARCH, U.S. DEP'T OF HOUSING AND URBAN DEVELOPMENT, THE CONVERSION OF RENTAL HOUSING TO CONDOMINIUMS AND COOPERATIVES, PUB. No. PB 81-118234, A NATIONAL STUDY OF SCOPE, CAUSES AND IMPACTS: XI-1 (1980) [hereinafter cited as HUD STUDY]. 2. Id.at 2. See notes 35-53 & 59 infra and accompanying text. 3. The legislative finding in three recent bills dealing with conversion of rental housing to cooperative or condominium housing supports apartment conversion as sound public policy and a means of "preserving, stabilizing and improving neighbor- hoods and the supply of sound housing accommodations .. " 1982 N.Y. Laws ch. 555, § 1; 1979 N.Y. Laws ch. 432, § 1; 1978 N.Y. Laws ch. 544, § 1. 4. See N.Y. GEN. Bus. LAW § 352-e (McKinney 1968 & Supp. 1982-1983), id. § 352-ee to -eeee (McKinney Supp. 1982-1983); N.Y. ADMIN. CODE tit. 13, § 18 (1982); see notes 102-35 & 152-65 infra and accompanying text for a discussion of legislation in this area. The only federal legislation directly affecting cooperative and condomin- ium conversion is the Condominium and Cooperative Protection and Abuse Relief Act of 1980 (Title VI, Housing and Community Development Act of 1980), Pub. L. No. 96-399, 94 Stat. 1672 (codified at 15 U.S.C. §§ 3601-3616 (Supp. V 1981)). This Act encouraged the use of the condominium and cooperative forms of ownership as a way of meeting the shortage of adequate and affordable multi-family housing throughout the United States. At the same time, the Act aims at correcting and preventing abuse of long-term recreational and similar leases. HUD STUDY, supra note 1, at X-17 n.26. The Condominium and Cooperative Protection and Abuse Relief Act of 1980 provides very basic protection. This statute requires that tenants receive adequate notice of conversion and the first opportunity to purchase the units. All other attempts at federal legislation, including a bill requiring a conversion moratorium, have failed to pass Congress. See, e.g., Condominium Act of 1979, S. 612, 96th Cong., 1st Sess., 125 CONG. REC. 4637-45 (1979), and its companion bill H.R. 2792, 96th Cong., 1st Sess., 125 CONG. REC. 4702 (1979); H.R. 5175, 96th Cong., 1st Sess., 125 CONG. REC. 23,134 (1979). 5. N.Y. GEN. Bus. LAW § 352-eeee (McKinney Supp. 1982-1983). New York State Senator Goodman and Assemblyman Grannis are two major sponsors of this legislation. 1089 1090 FORDHAM URBAN LAW JOURNAL [Vol. XI rental housing in New York City to cooperative housing without obtaining an agreement to purchase a cooperative apartment from any of the existing tenants." Under this method, tenants who do not desire to purchase their apartments as cooperatives may remain in the targeted building indefinitely.7 In order to initiate this "noneviction" plan, a developer must be able to show that potential purchasers- tenant or non-tenant-will purchase at least fifteen percent of the apartment units in a targeted building." The only legal obligation of these potential purchasers is to indicate a desire to move into the purchased apartment when and if it becomes vacant." As a result of this procedure, landlord-developers may convert rental units to coop- erative units without having to confront either individual tenants or tenant organizations. 10 By contrast, the "noneviction" procedure for cooperative conver- sion in Nassau, Rockland and Westchester Counties requires that a developer be able to show that existing tenants will purchase at least fifteen percent of the apartment units in a targeted building.' In these counties, non-tenant purchasers cannot be included in the fifteen percent requirement. 12 In New York City, the eviction approach to cooperative conversion allows a landlord-developer to evict non-purchasing tenants when at least fifty-one percent of the tenants agree to purchase their apart- ments. 3 The non-purchasing tenants have the longer of three years or the expiration of their lease to vacate their apartments once an evic- tion type of cooperative conversion has been approved by the New York State Attorney General's office.14 Despite the fact that the noneviction approach of Goodman-Gran- nis is less harsh on New York City tenants than an eviction scheme, the ability of a landlord-developer to convert rental units without tenant support has been criticized. Specifically, the Goodman-Grannis legis- lation may result in increased tenant harassment, 5 an increase in the 6. Id. § 352-eeee(1)(b), (d), (2)(c)(i). 7. Id. § 352-eeee(2)(c)(ii), (vi). 8. Id. § 352-eeee(1)(b), (d), (2)(c)(i). .9. Id. § 352-eeee(1)(b), (2)(c)(i). 10. "[W]ithout such an insider percentage sponsors can ignore the tenants' de- mands as long as there is a market for outside purchasers, many of whom buy not because they want a place to live but for speculative reasons." McKee, How the City Got A New Co-op Law, CITY LIMITS, Aug.-Sept. 1982, at 26. 11. N.Y. GEN. Bus. LAW § 352-eee(1)(b), (8) (McKinney Supp. 1982-1983). 12. Id. 13. Id. § 352-eeee(1)(c). 14. Id. § 352-eeee(2)(d)(ii). 15. See notes 159 & 161-62 inJra and accompanying text. 1983] COOPERATIVE CONVERSION 1091 number of buildings left unattended through apartment speculation,' 7 and the undermining of rent regulations.1 This Note will discuss the impact of the Goodman-Grannis legisla- tion on tenant and landlord interests in the cooperative conversion process in New York City. Initially, cooperative housing will be de- fined in terms of its relationship to condominium ownership. In addi- tion, the development of cooperative housing will be explored. Fi- nally, relevant New York case law and the framework of cooperative conversion in New York State will be examined. This Note concludes that the ability of landlord-developers to meet the fifteen percent requirement of the Goodman-Grannis noneviction approach by the use of non-tenant purchasers leaves existing tenants without any lever- age in the conversion process. Accordingly, adequate protection of New York City residents requires landlord-developers to meet the fifteen percent requirement solely from existing tenants. II. Cooperative Housing and Cooperative Conversion The most common form of cooperative housing in the United States and the type most frequently used in New York State is the corporate form.' 8 Title to the entire premises is vested in a corporation leasing specific apartments to the tenant.' 9 Three essential documents are necessary to create a cooperative corporate organization: (1) a corpo- rate charter or certificate of incorporation, (2) a set of by-laws and (3) a proprietary lease or occupancy agreement (certificate of member- 2 ship) .0 These documents constitute the contract between the tenants and the corporation. 21 A proprietary lease sets forth the number of shares of the lessor corporation owned by the tenant-shareholder. 22 16. See notes 159 & 163-64 infra and accompanying text. 17. See note 165 infra and accompanying text. 18. 2 P. ROHAN & M. RESNICK, COOPERATIVE HOUSING, LAW AND PRACTICE § 2.01[i], at 2-2.1 (1982) [hereinafter cited as ROHAN & RESNICK]; C. SMITH & R. BOYER, SURVEY OF THE LAW OF PROPERTY 445, 446 (1971) [hereinafter cited as SMITH & BOYER]. Prior to the advent of condominium living the term cooperative was used to mean several types of organizations where occupants of individual units of a multi- family structure sought to acquire advantages of joint ownership. Id.; note that § 352 of the New York General Business Law does not contain a general statutory defini- tion of a cooperative corporation. See ROHAN & RESNICK, supra, § 5A.03, at 5A-12 n.18. However, the New York Cooperative Corporation Law does give a general definition of a non-profit cooperative corporation. N.Y. Coop. CORP. LAW § 3(c)-(d) (McKinney 1951 & SuPp. 1982-1983). See I.R.C. § 216(b) (1976 & Supp. V 1981) for the Internal Revenue Service definition. 19. ROHAN & RESNICK, supra note 18, § 2.01[4], at 2-8. 20. Id.; see N.Y. Coop. CORP. LAW §§ 11, 16, 40 (McKinney 1951 & Supp. 1982- 1983). 21. ROHAN & RESNICK, supra note 18, § 2.01[4], at 2-8.