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CONDO BOARDS AND THE RIGHT OF FIRST REFUSAL

Real Property

A condominium unit owner has significantly more freedom to transfer and sell her unit than a cooperative shareholder, who is restricted by his board’s broad power to veto a proposed sale by rejecting the proposed buyer’s application.  At the same time, a condo board’s hands are not tied.  In lieu of a cooperative’s broad veto power, a condo board has a right of first refusal, through which a condo board can buy the unit being offered for sale.

So, why would a condo board want to block a sale to a third party?  First, if the buyer is known to be particularly litigious or has had financial difficulty in the past.  Another reason to block a sale is if the board wants the unit for use by the condo association itself, or as a new or larger apartment for a superintendent.  Lastly, if the board believe that the sale price is too low and will adversely affect the value of the other units in the building, it may exercise its right of first refusal to buy the property, flip the apartment to a third party purchaser and add the profit to the condo’s reserve fund.

As useful as this right may be, it is not always easy to execute.  The level of difficulty in exercising the right of first refusal depends on the governing documents, which usually define this right to allow a condo board to buy a unit with the same terms and conditions offered by a prospective buyer within a certain number of days after being notified of a pending sale.  A 30 day time period is also not uncommon, but some condos have as little as 5 days.  Additionally, the bylaws govern what type of vote is required before the board can exercise its right, and it is more common than not that the bylaws require a majority vote of the owners.  In and of itself, this requirement is not terribly daunting if the bylaws allow consent to be provided in writing.  However, if the bylaws require the board to first call a meeting before obtaining the majority’s consent, it may be difficult to meet the deadline.  Assembling non-resident unit owners on short notice takes time.  Ultimately, there is no black and white rule regarding when a board should exercise its right and buy an apartment, but if the issue is something that affects the building as a whole, such as a sale price below market value, it merits extra consideration.

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