When you buy a co-op apartment, you are not buying the apartment itself, but rather shares in the corporation that owns the building. In exchange, the corporation will grant you a proprietary lease to occupy the apartment. Given that buying a co-op is not a traditional real estate purchase, the contract of sale must address different issues than if you were buying a condo unit or house. This article addresses contract clauses unique to co-ops and what you as a purchaser should watch out for.
Before you can buy a co-op apartment, you will most likely have to receive the owner-corporation's approval, by way of its board of directors. As such, the co-op contract will set forth the steps you must take to obtain the co-op board's consent and any deadlines for completing those steps, as a contingency before the deal can close.
For instance, the standard form contract for New York co-ops requires purchasers to submit an application on a form provided by the board and to pay any application fees imposed by the board. The application typically requires the buyer to submit detailed financial information including pay stubs, bank statements, and income tax returns, as well as personal and business references. If you are getting a mortgage, the board will also want to see the loan commitment letter provided by your bank.
Co-op contracts usually specify the number of days that you have in which to submit your application and the event that will trigger the running of those days. In New York, if you are getting a mortgage, you typically have three business days from receipt of a loan commitment letter, and for all-cash deals, ten business days from delivery of the fully executed contract.
As part of the application process, your co-op contract likely will require you to attend an interview with members of the board. The board is unlikely to decide upon your application until its next monthly board meeting. Accordingly, your co-op contract should allow the closing to be postponed if the board has not made a decision by the scheduled closing date.
The standard New York co-op contract allows the closing to be postponed by 30 days. This right to postpone the closing is explicitly stated because, in New York, time is considered of the essence in co-op sales. That means that, after one 30-day postponement in New York, if the board has not made a decision, either party may cancel the contract. Moreover, if the board rejects your application, your contract should provide that you will receive any deposit or downpayment that you made.
Most co-op contracts include a clause stating that you examined, or waived your right to examine, the corporation's documents before signing the contract. Those documents might include the offering plan, certificate of incorporation, bylaws, proprietary lease, house rules, minutes of shareholders' and directors' meetings, most recent audited financial statements, and most recent statement of tax deductions available to the corporation's shareholders.
Do not waive this right! Your attorney should review these documents thoroughly before you sign the contract, in order to assess the corporation's financial health and the building's physical condition.
These documents might, for example, reveal that the corporation is anticipating making major capital improvements, such as replacing an elevator or doing painting work on a brick façade, which could result in an assessment on shareholders if the corporation has insufficient reserve funds.
These documents will also reveal whether the co-op imposes a "flip tax." Many co-ops impose a "flip tax," which the seller pays to the corporation at closing. The corporation's bylaws will state how that flip tax is calculated. The method is likely to be either:
If the corporation for the co-op apartment you are purchasing charges a flip tax, your contract should specify that paying it is the seller's responsibility.
Lastly, the seller should make various representations in the contract as to the condition of the specific co-op apartment that you are purchasing. These representations should include that the unit is free of leaks and bedbugs and that appliances will be delivered at closing in working order.
If the seller refuses to make one or more of these representations, consider this a red flag that a problem might exist. Investigate further. Your lawyer or broker should probe the seller's lawyer or broker to find out whether there might be a defect in the apartment. If you haven't already, hire a professional to inspect the apartment before you sign the contract. Based on what you learn, you might decide to walk away from the purchase, negotiate a price reduction, or go ahead with the transaction as planned.
The co-op seller should also represent that any significant alterations to the apartment were done in compliance with applicable law and with the co-op board's approval. If they were not, the board may require the seller to bring the apartment into compliance as a condition to closing, which could significantly delay your closing date. You might want to walk away from the deal if you need to close quickly.
This article highlights a few key contract clauses to watch out for if you are purchasing a co-op, but it should not take the place of the advice and review of an attorney knowledgeable about co-ops.