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A co-op buyer wants to use a trust. Should our board approve this?

Our co-op board was asked to approve a buyer using a trust. Should we allow this? What sort of protections do we need?

“When a co-op purchaser wants to buy using a trust or limited liability company—known as a LLC—boards are typically concerned about long-term ownership of the apartment, who will live there, and whether monthly fees will be paid,” says Steven Wagner, a real estate attorney at the Manhattan law firm Wagner, Berkow & Brandt who represents co-op and condo boards and owners.

Trusts and LLCs are often used for estate planning and tax purposes, and there are steps that can be taken to protect a co-op against some of the common issues that arise, namely the transfer of the apartment without board approval or the liability of the shareholder if maintenance or other fees are not paid.

With the help of an attorney, a board can draw up an occupancy agreement, also known as an inducement agreement.

“This agreement includes restrictions on occupancy and transfers, requires guarantees and indemnities, and states that if there are violations of the proprietary lease or house rules, the trust does not protect the occupant from eviction,” Wagner says.

Prohibitions against purchases by a trust can be waived

In older co-ops, the governing documents may prohibit a purchase by an entity. This was for tax purposes but Wagner says the law has changed.

“Even if this is the case, the prohibitions can be waived in writing by entering into an inducement agreement with the tenant shareholder,” he says.

Depending on the complexity of the trust, there may also be a need for further reassurances for the board. This may include having a guarantee that payments and other obligations under the governing documents, like assessments, will be made.

There may also be a need for an opinion of counsel from the legal team that set up the trust or is assisting with the transfer of the apartment. This would typically be required if the trust was established in a different jurisdiction.

“There may be a question of which law applies—New York law or the laws of another state where the trust was set up,” Wagner says. An opinion of counsel can be submitted by the trust’s attorneys, making it more difficult for the arrangements for the trust to be contested at a later date.

“The legal fees for these documents can range between $3,500 to $5,000 or more and the co-op board can stipulate that these costs will be met by the purchaser,” Wagner says.

Provisions of an inducement agreement

The inducement agreement makes clear the trust is the lessee and not the individuals residing in the apartment or the beneficiaries of the trust. It also states the occupancy is limited to those approved by the board.

Wagner says he will typically add language to the agreement stating that the trust is not an individual but an entity and as such has no immediate family members.

“In the proprietary lease there’s typically a provision not to unreasonably refuse the transfer of co-op shares to a spouse or family member. In an inducement agreement, we make it clear that a trust or LLC has no family members,” he says.

Another aspect of the agreement is to indemnify the co-op in the event there is any challenge or litigation regarding the trust or the LLC.

“The agreement also makes clear that each party—the grantor, the trustee, beneficiary, and successor beneficiary—will abide by the various governing documents including the house rules, the proprietary lease, the certificate of occupancy, and the offering plan, to the extent consistent with the inducement agreements,” Wagner says.

Those seeking to put the apartment into a trust must also agree to appoint someone to receive lawsuits.

“This gives the board additional reassurances,” Wagner says. In addition, there’s often a non-waiver provision, so that if the board fails to enforce or carry out any provisions of the agreement, they will be able to enforce the provisions at a later date.

Some trusts are irrevocable and cannot be changed but, where possible, Wagner negotiates an amendment to the trust to provide that the sale and occupancy of the apartment is subject to the occupancy agreement and that any violation of the occupancy agreement will be deemed a violation of the proprietary lease.

“What the agreement seeks to do is prevent someone putting an apartment into a trust or LLC and then changing who can occupy the apartment or who owns the apartment by amending the trust agreement or operating agreement of the LLC or selling the interests in the LLC,” Wagner says.

“Very often these LLC’s or trusts are single purpose entities that have no other assets, so we make sure we have guarantees from people who have assets,” he says.

In this way, the buyer is able to take advantage of the trust or LLC for tax or estate planning purposes and the co-op gets the protections it needs with regard to who lives there and who is liable for unpaid maintenance or other liabilities.

New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272. 

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