Rejecting a co-operative sales contract

In a story published by the New York Times, the owner of a one bedroom co-op unit, a professional pianist, decided to put her unit on the market for $300,000. The market was not good. As time went on, she lowered the asking price several times and was finally relieved to get an all-cash offer of $225,000, from a fellow musician no less. The contract was signed, moving plans were put into motion and then the co-op board rejected the buyers application. Officially, the board gave no reason for the rejection, but several board members acknowledged privately that the low selling price was the deciding factor. The reasoning goes: selling units at low prices is simply not good business.

For many years, the conventional wisdom, supported by case law, was that a co-op's board's rejection of a unit transfer based upon what the board perceived as an inadequate selling price was an unreasonable, and illegal, restraint on the alienation of property. Several more recent court decisions, however, reveal that that view may be evolving, allowing that such decisions are within a board's business judgment.

In the case of Harris v. Seward Park Housing Corp., a buyer/applicant filed a breach-of-contract claim against the co-op board complaining of the board's rejection of his contract on the basis that the price was inadequate. The court first noted that the contract itself stated that: "This sale is subject to the unconditional consent of the corporation." The contract did not include any criteria by which the board was to assess the application of potential purchasers nor did it require the board to provide any reason for rejection. The court concluded that there could be no breach of contract under these circumstances. On appeal, the court similarly concluded that that there never was an enforceable agreement between the parties. The court went on, however, to conclude that the "cooperative had a legitimate business interest in procuring the highest possible price for the sale of its units."

In another case, Matter of Hershkowitz v. White House Owner's Corp., the administrator of an estate sought to force a co-op board to consent to a sales contract of the decedent's co-op to a third party. The board acknowledged that its refusal was based on the contract being substantially below market value and the court noted that the proprietary lease regarding the unit placed no restrictions on the board in determining whether to accept or refuse a contract of sale. Ultimately, the court did not decide on the facts of the case, but decided that the issue of the co-op board's refusal was a question to be determined under the business judgment rule. (The business judgment rule provides, essentially, that courts will exercise restraint in reviewing the decisions of businesses as long as they operate in good faith.)

Any co-op board contemplating acting to reject a sale on adequate selling price should consult with an attorney experienced in co-op law to evaluate this evolving area of the law.