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What can a seller do about a co-op board that keeps rejecting potential buyers?

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Question:

I’m trying to sell my co-op, but my board turned down 3 buyers without giving a good reason. I think one of board members wants to buy my apartment and is hoping I’ll have to drop the price. What can I do?

Answer:

While a board is within its rights to reject prospective buyers without giving any stated reason, if it's starting to seem suspicious, you do have some potential recourse to move along your sale, says Steven Wagner, a co-op and condo attorney with Wagner Berkow LLP and a longtime board member of his own 420-unit Manhattan co-op. 

"The board has the right to turn down a buyer without giving a reason, provided the board members have acted properly," Wagner explains. "But if there's a violation of the board member’s fiduciary obligations like an allegation of discrimination, for example, the courts are very clear that the board does have to give reasons for its denial of the applicant." 

So if one of the buyers your board rejected was from a protected class, and there's few people or no one in the building of that protected class, you could conceivably make a claim—either in tandem with the buyer, or on your own based on association discrimination—that the board is behaving in a discriminatory manner, in which case they'd have to give reasons for the rejection. (More details on that process here.)

But even if there's no discrimination afoot and a board member is simply trying to soften you up to score a deal on your apartment, says Wagner, "That in and of itself could be a breach of the board members’ fiduciary duty."

"As a board member, part of your fiduciary duty is to act in good faith for the best interest of the co-operative," Wagner continues. "And turning down a prospective buyer so that a shareholder will sell to you at a discounted price is self-dealing.  It's not in the best interest of the building to get a board member a better price on an apartment.  Board members can’t pursue personal agendas or vendettas."

"If a board member came to me as attorney for a co-op and said, 'the board has turned down applications three times because they’re trying to help a board member who wants to buy the apartment,' I'd tell them that they had a big problem and may have put themselves in line for a successful lawsuit for breach of fiduciary responsibility," says Wagner.

"And if the apartment subsequently sold for less than the price in one of those rejected contracts, it could be a way of establishing damages to say, 'I could have sold it for this, but I had to sell it for that because of the improper rejection,'" Wagner adds. "It really is not OK for a board member to be disapproving prospective purchasers and at the same time trying to negotiate to purchase the same apartment on their own."

However, diving into a lawsuit against your board (or just as likely, your board's insurance company, who may well cover these kinds of expenses for them) is an expensive and time-consuming prospect, and should generally be seen as your last resort.

First, says Wagner, "I would send a letter to the board—either directly or via an attorney—advising them of your concern, and saying that you believe this has occurred, that if true it would be a violation of their fiduciary responsibility, and if it continues you'll have a claim."

Whether or not that gets you any traction will depend on the individual board, but still, your better bet is to try to sell as expediently as possible, rather than get bogged down in litigation with your building. "The practical route is to sell as soon as possible and not get bogged down in litigation," says Wagner.

"And I say the same things to boards in this situation: the longer it takes a tenant-shareholder to sell, the more likely it is they’ll seek counsel and/or bring a lawsuit.” Additionally, if a seller suspects that denials have been made based on improper purposes (including the self-dealings of a board member), they’re legally allowed to bring a lawsuit against the board even after they’ve sold a unit. Meaning that an expedient sale is very much in the board’s best interest, as well, not just the seller’s.

To prevent the board stymying any future sales, says Wagner, you should inquire into the building's financial standards and other requirements for buyers, the better to ensure that any future candidates are bulletproof against their approvals process. "A good broker helps here," says Wagner. "If you have a broker who does business in the building, typically she would know what these standards are and would be able not only to vet a good candidate but also help put together a good board package."

And the sooner you find a viable candidate, the sooner you can get out of the building—and away from your bad board.


New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders.  To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.

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