Introduction
This topic contains information on legal requirements for co-op projects, including:
- Amendments to Documents
- Co-op Membership
- Lien Position for Co-op Share Loans
- Prior Co-op Financing
- Assignment of Co-op’s Lease/Occupancy Rights
- Co-op Corporation’s Recognition Agreement, Responsibilities, and Lender’s Rights
- Lender’s Rights
Amendments to Documents
The co-op project’s documents must provide for the tenant-stockholders to have the right to amend them. In addition, the co-op corporation must be legally bound to notify the holder of a co-op share loan about any proposed material changes to the co-op project with respect to allocation of membership interests, voting rights, insurance coverages, and any other provisions that are for the express benefit of the lender.
Co-op Membership
The project documents must require that the sale or transfer of stock, shares, or membership certificates in the co-op corporation be in compliance with federal and state security disclosure laws. The documents also must require tenant-stockholders to own stock, shares, or a membership certificate, and permit the stock, shares, or membership certificates in the co-op corporation to be pledged and registered.
The project documents must give the tenant-stockholder a right to occupy the unit for a period that extends at least to the maturity date of the share loan, although this right should be subject to the terms and conditions of a proprietary lease or occupancy agreement between the tenant-stockholder and the co-op corporation. The documents also must prohibit the co-op corporation from imposing unreasonable limitations on the tenant-stockholder’s ability to sell, transfer, or convey his or her membership, or to sublease his or her unit. If the purchaser’s right to membership or occupancy is subject to any right of the co-op corporation to give approval, the lender must furnish evidence to clearly show that such approval has been given before Fannie Mae will purchase or securitize the co-op share loan.
Prior Co-op Financing
The co-op project must be in compliance with the requirements imposed by the holder of any prior financing for the project. If the blanket mortgage on a project includes a due-on-encumbrance clause and the project is located in a state in which share loans are considered to be an encumbrance on the project, the blanket lender must consent to the share loan financing. In the case of a conversion of an existing building, the blanket lender must agree to the use of the building as a co-op and, if it is feasible, agree—in the event of a default on the blanket mortgage—not to wipe out the shares of those tenant-stockholders who are current in the payment of their assessments or carrying charges.
Assignment of Co-op’s Lease/Occupancy Rights
Generally, the project documents should not permit the co-op corporation to restrict the sale, conveyance, or transfer of a unit owned by a lender, its successors, or assigns, nor to place any limits on the assignment of the proprietary lease or occupancy agreement to the lender, its successors, or assigns. This lease or agreement must be assumable by the lender if the tenant-stockholder defaults on the share loan. If the co-op’s organizational documents require that a tenant-stockholder be a natural person, they must permit the lender to select a non-corporate designee for any assignment of a proprietary lease or occupancy agreement that it acquires through foreclosure or acceptance of a deed in lieu of foreclosure. If the lender assumes the lease or agreement as the result of the tenant-stockholder’s default, the co-op corporation must allow the lender to attempt to sell its interest in the lease or agreement. However, if the lender is unable to effect a satisfactory sale within 60 days—either through its own efforts or with assistance from the co-op corporation—the co-op corporation may not prohibit the lender from subletting the unit.
The project documents may grant the co-op corporation the right to approve a lender’s sublessee or to offer an alternate sublessee that is satisfactory to the lender. However, the co-op corporation’s approval standards and procedures may not be unreasonably restrictive or in violation of applicable law, and the action must be completed within a reasonable time after the lender requests approval of a proposed sublessee.
Co-op Corporation’s Recognition Agreement, Responsibilities, and Lender’s Rights
The project documents must either require the co-op corporation to execute a separate agreement—such as a recognition agreement—or include provisions to recognize specific rights of the lender that finances the share loan (or those of its successors or assigns) and the co-op corporation’s responsibilities to that lender.
Co-op Corporation’s Responsibilities
The recognition agreement (or the project’s legal documents) must include, among other things, the following responsibilities for the co-op corporation:
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The co-op corporation must evict a tenant-stockholder who has defaulted on his or her share loan and must terminate that tenant-stockholder’s lease, if the share loan holder requests it to do so.
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The co-op corporation must be legally bound to notify the lender of any of the following changes or occurrences:
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any threatened or actual condemnation, eminent domain proceeding or acquisition, or any actual loss, whether or not covered by insurance, that affects any portion of the co-op project or unit;
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failure to maintain compliance with co-operative corporation eligibility under IRS Code Section 216;
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any 30-day delinquency by the co-op corporation in payments due under any blanket mortgage for real estate taxes, assessments, and charges imposed by a government entity or public utility, or under any ground lease;
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any lapse or cancellation of any insurance coverages maintained by the co-op project;
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any proposed action that requires the consent of a specified percentage of eligible share loan holders; and
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any 90-day delinquency by the tenant-stockholder that is related to the payment of his or her monthly assessments or carrying charges.
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Lender’s Rights
The project documents must grant the lender financing a share loan the right to cure the tenant-stockholder’s defaults in his or her assessment payments or carrying charges and the right to review and approve the following actions before the co-op corporation can consent to them:
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any surrender, cancellation, modification, or assignment of any documents evidencing ownership, possession, and use of a unit;
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any sublease of a unit;
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any further or additional pledge or mortgage of any documents evidencing ownership, possession, and use of a unit;
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any action to change the form of ownership of the project; or
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the contraction, expansion, or termination of the co-op project.