HOUSING COUNSEL

CAN THE COOPERATIVE REJECT YOU FOR MEMBERSHIP?

By

Benny L. Kass

Q. I just signed a contract to purchase a cooperative apartment here in the District, and have been told that before I can go to closing and move in, I have to apply for membership. Exactly what does this mean and why do I have to make an application? Can I be rejected for membership?

A. Cooperatives are different than condominiums. When you buy a condominium unit, you generally do not have to be approved by the condominium Board of Directors. Although there are some condominium associations which give the Board a “veto” power over new owners – in the form of a right of first refusal to purchase the unit – the great majority of condominiums throughout this country do not have any such restrictions.

However, when you want to buy an apartment in a cooperative housing complex, in most cases you have to be interviewed – and approved – by a membership committee.

Why the difference? Perhaps it is just a matter of history: cooperative housing has been around for a very long time, whereas condominiums first started gaining popularity in the mid 1970's. Perhaps its origin is an attempt by the early cooperative developers to restrict the class of members who will be living together in one big complex? Or perhaps it was an effort on the part of these early developers to counter (or perhaps match) the ethnic discrimination faced by many immigrants to the United States in the early 1900's who were looking for work and for housing.

The fact remains that when you buy into a cooperative, you do not own title to any portion of land. Rather, you buy a share (or shares) of stock, and get a proprietary lease (or occupancy agreement) for the perpetual use and occupancy of your apartment. You become a member of the cooperative association.

The general public often confuses condominiums with cooperatives. In reality, as far as living standards go, there are few differences. However, from a legal – and financing – point of view, there are major differences.

There are many definitions of cooperatives, but the one I like best is that a cooperative is a multi-unit apartment building, in which each resident has an interest in the entire building, and a lease (or contract or share of stock) enabling the owner to occupy a particular apartment within the building.

If you own a condominium, you actually own in fee simple your entire apartment, as well as a percentage of the common areas (called the "common elements"). A cooperative owner, on the other hand, does not, in fact, own the unit.

What is the Board looking for when it is deciding whether to accept you for membership? Unfortunately, there are no standards – and few guidelines – and thus it becomes very difficult for a conscientious Board of Directors (or membership committee appointed by the Board) to know how to proceed.

Although there are a large number of cooperatives in the District of Columbia, historically the cooperative movement started in New York City, where there are many cooperatives. There is a joke circulating among New York real estate agents about the rules relating to membership in a local cooperative there. In order to be sure that an owner who has a pet understands the rules and regulations, the Board of Directors interviews both the owner and his/her pet. On one occasion, the owner was rejected, but the pet passed.

A cooperative must have standards by which to determine membership; the decision cannot be made on an ad hoc basis – we like him and thus he is eligible; we don’t like her and thus she is rejected.

There has been litigation when contract purchasers have been rejected for membership. These individuals claim that the Board is rejecting them on illegal grounds – such as based on race, sex, color or religion. The Board, on the other hand, claims it made the decision on other grounds which were legal and valid.

In one case, a potential owner who was rejected, filed a complaint with the Human Relations Commission based on racial discrimination. After a long hearing process, the Commission rejected the complaint, finding that the Board turned the complainant down because of financial – not racial – reasons. But the Board was faced with a lengthy legal process and a large legal bill. It should be noted that in most cases, the association’s insurance carrier will not cover claims which involve potential violations of civil or human rights.

In my opinion, there are (or should be) only two grounds on which rejection can legally be based: financial or unwillingness to abide by the terms of the association's rules and regulations. If the membership committee believes that the potential purchaser does not have the financial capacity to live in the complex -- or if the committee determines that the potential purchaser has demonstrated an unwillingness or an inability to comply with the operating rules -- that potential purchaser may be rejected for membership. However, under no circumstances can the applicant be rejected for other reasons, such as age, sex, race, sexual preference or religion.

Let’s look at these two criteria:

– financial: clearly, the Board wants to be sure that the potential owner has the financial wherewithal to make the monthly cooperative assessments. But how does the Board make this determination? In most cases, the Board members (or the members of the membership committee) are not financial analysts. To protect the privacy of the financial information given them by the potential member, they clearly do not have the right to circulate this material to others, without the express approval of that person. In many cases, the numbers speak for themselves; however, there are situations where it is a close call. What should the Board do?

First, if the potential owner has obtain a loan commitment from a financial institution, that should be proof enough that the person is qualified financially. Clearly, if a reputable lender is satisfied with the financials, the Board should similarly be comfortable.

Second, some associations are using outside sources to assist in the evaluation. Clearly, the potential owner must approve of this process first. Some local banks – for a nominal fee – are able to assist the cooperative in assessing this information. Additionally, organizations such as the First American Registry have been established to assist cooperatives in the screening process, which includes access to credit reports, and review of landlord-tenant court records.

While financial screening is important in the application process, the Board of Directors must have clear guidelines – and using outside consultants does appear to be the best approach so as to avoid litigation.

– abide by the rules and regulations: Once again, this is a highly subjective concept. Who is to be the judge of whether a prospective owner is willing and able to comply with the cooperative’s proceedures?

The two classic cases in history involve Richard Nixon and Barbra Streisand -- both of whom were rejected for membership in New York cooperatives. The membership committees of those cooperatives were concerned that the presence of these celebrities would create havoc within the cooperative, and would make their building a tourist attraction.

The Board should inquire if the applicant has read – and understood – all of the cooperative’s legal documents. The Board should ask if the applicant has any questions about these rules, and whether the applicant is prepared to honor and obey these procedures. If the applicant answers in the affirmative, the applicant has met this test.

Keep in mind that once a person becomes a member of a cooperative, there are steps which the cooperative association can take to curb any violations by a member. The Board can fine the owner, the Board can impose sanctions on the owner, or – in matters involving serious violations – the Board can take steps to terminate the membership in the Cooperative.

It must be noted, however, that before a Board can take any such actions, due process requires that the cooperative member be given an opportunity to appear before the Board of Directors and explain his/her actions. The shareholder has the right to be represented by legal counsel, should he or she believe that the charges are serious and may lead to expulsion.

Termination of memberships are, of course, rare occurrences. Most cooperative members recognize the need to honor the “cooperative spirit” of the Association, and most Boards of Directors similarly recognize the need for due process. Your membership approval process should be quick and painless. Enjoy life in your new cooperative.

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