New York co-op boards are notorious for scrutinizing prospective buyers with the intensity of federal investigators. The application and interview process can be lengthy and exhausting for someone looking to move into a cooperative. As such, many buyers look to condos as a way to avoid the whole daunting process. However, condos in New York City have their own way to screen buyers: the nearly universal—though rarely invoked—right of first refusal (ROFR), which is written into the bylaws of most New York condominiums.
ROFR in New York
“It is very rare that the right of first refusal is exercised,” says Alfred M. Taffae, Esq., with Racht & Taffae, LLP in Manhattan. “I cannot personally recall a single instance where a condominium I have represented has even considered exercising their right of first refusal. As a practical matter, it is difficult to do procedurally. It requires majorities of the board of managers and usually of the unit owners as well. And even more fundamentally, it requires the condominium to commit to making a large expenditure without having the funds at hand.”
Because condos are real property—as opposed to co-ops, in which units are shares—sales in condos are not subject to board approval.
“When you own a condominium unit you own real property,” explains Taffae, “whereas in a co-op, you own shares in the cooperative corporation, and the ownership of those shares entitle you to a [proprietary lease] for your apartment. One of the foundations underlying the common law governing real property is that it is in the interests of society as a whole that it be freely assignable, that there should not be restraints on alienation. Any restrictions on sales are viewed unfavorably and must not unreasonably restrict the ability to freely sell real property. That is why the sale of a condominium unit is not subject to the consent of the board of directors as it is in the case of a co-op.”
In New York, however, most condos have the right of first refusal included in their bylaws. This gives the board at least some say in who moves into the building—and who doesn’t.
“In my view, the purpose of having a right of first refusal is to afford the condominium and its unit owners some protection in the extreme situation where a proposed purchaser’s presence in the building could be seriously disruptive,” says Taffae. “Think of a Mick Jagger or Keith Richards in their younger days, or Richard Nixon after his resignation. The board of managers might wish to stop that particular sale from happening. I say an extreme situation, because generally the exercise of a first right of refusal requires the condominium to purchase the unit from the seller on the same terms offered by the proposed purchaser.”
“It is not a restraint on alienation, because it does not prevent a sale by the selling unit owner, nor does it require a change in the price at which the owner has agreed to sell or the material terms,” Taffae continues. “It merely substitutes the condominium for the individual the seller intended to sell to. It is also conceivable that a condominium could wish to exercise its right of first refusal if a sale was proposed at a price that was substantially below market, but the difficulties of exercising the right still make this unlikely,” he says.
No ROFR for NJ Boards
In New Jersey, however, condo boards do not have the right of first refusal. In fact, part of the New Jersey Condominium Act (NJSA 46:8B-36 and 38), adopted in 1980, prohibits a condo board or developer from reserving or retaining a right of first refusal to purchase a condo unit on resale.
The Act states, in part: “There is hereby established a rebuttable presumption of unconscionability with respect to provisions of master deeds or association bylaws recorded prior to the effective date of this act which shall arise whenever such a master deed or by laws shall contain any provision or clause affording the developer or the association a right of first refusal to buy a condominium unit upon resale, gift or devise by the condominium unit owner. Such presumption may be rebutted by the developer or the association by the presentation of evidence of the existence of facts and circumstances sufficient to justify and validate a provision of the master deed or the bylaws which would otherwise appear to be unconscionable under the provisions of this section.”
“You never see ROFRs, because nobody writes them into the documents anymore,” says Ron Perl, a partner with the Princeton-based law firm of Hill Wallack LLP. “You would be hard-pressed to find a set of New Jersey condo documents with the right of first refusal.”
Why strip New Jersey condo administrators of an option that their neighbors just across the Hudson still maintain? According to the legal professionals polled for this article, prior to the enactment of NJSA 46:8B-36 and 38, the right of first refusal was often abused, used to illegally discriminate against members of protected classes attempting to buy into a given building or HOA community.
“It was misused or used for discriminatory purposes,” says Perl, “so the legislature says we’re not going to outlaw the ROFR altogether, but you must show us a really good reason you need to use it. In almost 30 years, I haven’t seen it used.”
In instances where the right of first refusal does exist in New Jersey, it is extremely rare, as it would have to be in one of the state’s original condo associations.
“There’s been this presumption for a long time,” says Perl, “that your board would have to have a really good reason to go to court and make your case. You would, in essence, be keeping somebody out, which prevents [the seller] from selling it to a particular person. Associations can’t have a right of first refusal without having a really strong case or reason, because there is already the presumption of invalidity.”
In New Jersey, unlike New York, a board exercising its ROFR to keep a below-market sale from affecting the values of other units in the condominium isn’t an option.
“The association could try to buy the unit and bid against the person who wants to buy it to keep property values up,” says Perl. “If they’re willing to buy it and hold on to it for a while, they’ll pay a little more than the market is willing to bear.”
The condo association might have legitimate reasons for wanting to stop the sale of unit.
“If it’s a very small condo and you have a lot of shared facilities, let’s say you want to give people who are already there the right to buy it to expand, or put a family member in,” Perl continues. “You would allow someone in the community the opportunity to buy it.” He adds that the Condo Act only prohibits the association from invoking the ROFR—it doesn’t prohibit a unit from being offered to the community first.
However, a move like this could be incredibly difficult, if not impossible.
“If one could prove its being used for discriminatory purposes, you still have the fair housing laws that come into play,” says Perl. “To take a unit off the market even if it’s not the association that does it—if owners get together to deny someone the right to live there, and then turn around and flip [the unit], that would constitute discrimination.”
And New Jersey Co-ops?
New Jersey co-op boards fare somewhat better in terms of their ability to stop the transfer of shares. “Often the proprietary lease and/or bylaws of a cooperative will include provisions that provide for a right of first refusal at book value before a shareholder can convey the shares to another,” says attorney David J. Byrne, a shareholder attorney with the law firm of Stark and Stark in Lawrenceville. “I reviewed the proprietary lease and bylaws of just one of my cooperative clients however, and could not find such a provision in either document.”
“New Jersey’s Condominium Act prohibits a condominium from exercising any right of first refusal,” Byrne continues. “A 1988 New Jersey case addressed this issue in relation to cooperatives was Bluvias v. Winfield Mutual Housing Corp. [224 N.J. Super 515 (App. Div. 1988)]. The issue presented was whether, in a cooperative setting, the right of first refusal violated New Jersey law. The court found that it did not. This court compared N.J.S.A 46:8B-31, the relevant portion of the Condo Act, with N.J.S.A. 46:8D-1, the Cooperative Recording Act, and found that while the Condo Act prohibited rights of first refusal, the Cooperative Recording Act did not.”
Although co-op boards tend to have more leeway in New Jersey compared to condo boards, they still don’t come close to matching the kinds of restrictions New York co-op boards have put in place.
“In New Jersey, a co-op can reject a potential shareholder only for financial reasons,” says Byrne. “That of course limits the discretion of New Jersey cooperatives. New York cooperatives have more expansive discretion in that regard. That simplifies the issue regarding New Jersey co-ops.”
“When a New Jersey cooperative rejects an application of a potential shareholder, the potential share sale by the current shareholder is scuttled. The shareholder usually begins a search at that point for a more qualified buyer,” he says.
Stephanie Mannino is a freelance writer and author living in Erie, Pennsylvania.