Answer:
In a typical condo sale, once a unit goes into contract, the seller sends a letter to the board with the details of the deal, requesting that the board waive its "right of first refusal" -- i.e., the building's right, stated in bylaws, to buy the apartment for the same price agreed in the contract. Bylaws typically require the waiver to be issued within 20 to 30 days, or the right of refusal is automatically deemed to be waived.
"Normally boards feel compelled to issue the waiver, even in a situation where they might not want to," says Ian Brandt, a co-op and condo attorney with Wagner Berkow LLP. "Still, in these cases, my advice is not to issue the waiver, even though it goes against conventional wisdom."
Brandt explains that there is a way for boards not to issue the waiver without automatically giving up their rights when the prescribed 20 or 30 day time period elapses.
"When a board receives that request for the waiver, the question becomes, what can they do if they think the transaction is a sham," says Brandt. "The answer is that in every bylaw provision I've ever seen, there's a sentence that says something to the effect of that the board can make a 'reasonable request' for information to determine whether the transaction is bona fide. You can interpret that to mean that the board can look to make sure it's a legitimate transaction."
If your board suspects something fishy, it can ask for a full financial disclosure.
"For instance, if a prospective buyer is a Chinese civil servant who makes the equivalent of $50,000/year, and has $3 million that just landed in their bank in the last couple of months, we'd say we want the purchaser to provide all of their bank statements for the past 12 months," says Brandt.
Specifically, Brandt recommends writing a letter explaining the board's concerns, and citing the bylaw provision (Article 7) that gives the board authority to request this information from the buyer. A key detail here: according to most Article 7 bylaw provisions, the board only has to issue the waiver within that 20 or 30 day period after all "reasonably requested" information has been provided.
"So the 20-day clock only starts after the board has been provided all the information," says Brandt. This way, you don't run the risk of your right to first refusal automatically being waived because a certain amount of time has passed.
Note that some degree of conflict with the seller is pretty much guaranteed.
"You get a lot of blowback," says Brandt. "The unit owner goes, 'How dare you, this isn't a co-op, you're going to kill my deal.' To that I say, 'According to the information provided, this person makes $50,000/year, but just got $3 million—we need to know the source of the income, that's reasonable,'" says Brandt.
And while many boards are nervous about being sued in this situation, this shouldn't be an especially big cause for concern.
"If it's a sham, they're never going to sue you—criminals don't start lawsuits," says Brandt. And as for the unit owner, they're likely more interested in selling their apartment (and if necessary, finding a new buyer) than getting entangled in a legal dispute.
"In every case we've done with this, you get a lot of grumbling, but the purchaser walks away," says Brandt. "What I tell clients if that if they're pretty confident the purchase is a sham, or someone trying to funnel money through your building, you don't have to do it."
Ian Brandt is a partner at the New York City real estate firm Wagner, Berkow & Brandt. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Ian an email or call 646-780-7272.
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