PRICE AS A BASIS FOR DISAPPROVAL
OF APARTMENT SALES

ISSUE

Coop Boards have a legitimate interest in maintaining the value of Co-op apartments. Does this interest give the Board the right to set a floor price below which the Board will disapprove a prospective transfer? A floor price causes conflicts between the goals of the Board and the goals of the selling shareholders. A Board may want to impose a floor price for several reasons such as to try to keep the value of the apartments high and/or to collect higher flip taxes. However, these goals of the Board may be adverse to the goals of the selling shareholder who needs to sell his/her apartment, even at the lower price.

ANALYSIS OF CASE LAW

In Oakley v. Longview Owners, Inc. 165 Misc2d 192 (1995), a case of first impression, a shareholder sued the board for refusing to allow her to sell her shares for less than the floor price adopted by the Board. The Court ruled that the floor price created a restraint which constituted a prohibition on transferability. The court reasoned that the floor price created a restraint that was dependant upon market forces beyond the control of the shareholder or the coop. The restriction thus created an open-ended and potentially long lasting prohibition on transfer and was thus an unreasonable restraint on alienation.

In Marine Midland bank v. White Oak Coop Housing Corp. , NYLJ, March 19, 1997 at p. 31, col.5., the Court again held that forcing a shareholder to sell shares at a price set by a board is an unreasonable restraint on alienation. As in the Oakley case, the court in Marine Midland noted that the price set by the board may have no reasonable relationship to the market price. The court also explained that the restriction was unfair because it forced the shareholder to pay maintenance charges until the shares were sold. Finally, the court held that although a board may lawfully reject purchasers for non-discriminatory reasons, the share price has no bearing on the purchaser. Thus, board disapproval of a transfer because of price would not be a rejection of the purchaser, but an impermissible rejection of the terms of the sale.

In Levine v. Yokell, , 245 AD2d 138 (1st Dept 1997), a rejected purchaser, as opposed to the shareholder, brought an action against the coop board claiming wrongful disapproval based upon the board’s finding the purchase price too  low. The Court dismissed the claim, but only because the Court found that the board owed no duty to the prospective purchaser and the Appellate Division upheld the dismissal. 

CONCLUSION

Thus, based upon the above case law, coop boards should not use a floor price to disallow transfer of shares. If the Coop’s governing documents gives the board a right of first refusal to purchase the shares that are being offered, if the shares are being offered for a price less than what a board deems to be appropriate, the board may, so long as it is not acting on a discriminatory purpose, exercise its right of first refusal and then seek to resell the shares to a buyer who may be willing to pay more.

A Board may also disallow the transfer on non-discriminatory grounds including the buyer’s finances, credit rating and litigation history, personal impressions from an interview or the purchase application, adverse business or social references or other indicators that the purchaser would negatively affect the coop.

If a Board is adamant about imposing a floor price, it should seek shareholder approval and incorporate the floor price in to the coop’s foundation documents and notify the shareholders of its adoption. While doing so may not insulate a floor price from judicial challenge, courts tend to look more favorably on sale restrictions that are imposed by shareholder action.

Since the Board’s concern for a below market sale is that such a sale becomes a signal to subsequent purchasers to decline the value of the coop shares, the Board should seek to make sure that the brokerage community notes the reasons for a below market sale – such as an apartment which needs significant repairs and upgrading. If the real estate community and a subsequent purchaser know the circumstances surrounding a below market sale, the sale should not affect a subsequent sale.