June 16 2010
Can a co-op reject a creditworthy buyer solely because the board thinks the price is too low? That’s the exact email I got last week. “No,” I said, it being pretty much accepted wisdom that the market, not the board, sets prices so it can’t reject a buyer just because the apartment is too cheap.
Only it can, at least if it has a right of first refusal. That’s the takeaway from the decision handed down yesterday by the Appellate Division in a case involving Turtle Bay Towers, a building in Midtown East that calls the U.N. neighbor.
After a shareholder had defaulted on his maintenance charges and had been evicted, a foreclosure auction was held. The terms of sale specified that the board had a right of first refusal. The successful bidder agreed to pay $202,000 for the 124 shares representing Apartment 11D.
After the application had been submitted, the board exercised its right of first refusal, The winning bidder said it was to knock him out and transfer the apartment to the next highest bidder, who was a member of the board. The building said, no, it was to maintain the values of the 337 apartments in the building.
Even though not required, in order to avoid any claim of bias, the building held a special meeting of shareholders at which the board recommended they authorize exercise of its right of first refusal because the $202,000 sales price was well below the prices of comparable apartments then in contract for $695,000 and $469,000, respectively.
- We can earn a profit of more than $200,0000 when we resell after the economy turns
- We can rent out and generate revenue in the interim
- We have the money — $1.4 million in cash reserves – to buy it.
The owners bought the logic and 63% voted to authorize the board to exercise Turtle Bay’s right of first refusal, and deny the below market purchase application of the bidder.
Just yesterday, the Appellate Division handed down a decision agreeing with the lower court that the board was within its rights because, “the decision to deny the purchase application was based upon the determination that the purchase price of the subject unit was significantly below market value.”
According to management for the building, the apartment has been rented out for six months, and when the lease expires in the fall will be put on the market.
So why can’t your co-op do the same thing and turn down buyers if the price is too cheap? Because odds are it has the more conventional right to just say no, which doesn’t allow if to say no if the price is too low. That would leave the seller hanging out to dry in a lousy market with potentially no recourse for a long time to come. Ironically, the narrower right of first refusal provides greater protection in this situation The seller doesn’t get hurt because he gets the price agreed to, and the building gets the benefit of acquiring an under priced asset.
The only unhappy camper is the jilted buyer, but being left at the altar is one of the risks of buying into a building with a right of first refusal. So buyer beware.
See, Singh v. Turtle Bay Towers Corp., 2010 N.Y. Slip Op. 05279, June 15, 2010, App. Div. 1st Dept.
To access, click here, then enter the case date and number.