Thinking of developing or redeveloping that rental property? The DC Code sets forth the requirements for tenants who wish to exercise their rights to purchase pursuant to the Tenant Opportunity to Purchase Act (TOPA). DC ST § 42-3404.11 with respect to rentals with five or more unit. Recently, a client posed the following issue related to the TOPA rights on their building.
What effect does the loss of members have on a tenant association that is statutorily required to represent at least a majority of the tenants?
In an accommodation with five or more units, only the tenant organization has the right to purchase when the Owner of that accommodation intends to sell. Additionally, if the Owner violates the rights of the tenant organization, the DC Code permits only the tenant organization to bring a civil action against the Owner. A tenant organization which wishes to purchase the accommodations must represent at least a majority of the occupied rental units as of the time of registering its interest to purchase. Accordingly, if the tenant organization looses members and ceases to conform to the statutory requirements, it will lack the capacity to exercise its rights to purchase and to assert any legal claims against the Owner.
The DC Code sets forth the requirements for tenants who wish to exercise their rights to purchase pursuant to the Tenant Opportunity to Purchase Act (TOPA). DC ST § 42-3404.11 states that the following applies to accommodations with five or more units:
In order to make a contract of sale with an owner, the tenants shall: (A) form a tenant organization with the legal capacity to hold real property, elect officers, and adopt bylaws, unless such a tenant organization exists in a form desired by the tenants; (B) file articles of incorporation; and (C) deliver an application for registration to the Mayor and the owner by hand or by first class mail within 45 days of receipt of a valid offer.
At the time of registering, the tenant organization must represent at least a majority of the occupied rental units. Once registered, the tenant organization becomes the sole representative of the tenants and the Owner is required to negotiate only with the organization in good faith. Importantly, it is the tenant organization, as opposed to the individual tenant, that has the right to make a contract for purchase pursuant to TOPA, and only the tenant organization “may seek enforcement of any right or provision under this chapter through a civil action in law or equity…” that has been violated. DC ST § 42-3405.03.
While the question presented has not been directly addressed to date, in Stanton v. Gerstenfeld, 582 A. 2d 242 (D.C. 1990), the D.C. Court of Appeals recognized the tension between the tenant organization and individual tenants regarding the right to negotiate with the Owner in accommodations with five or more units. The court recognized that so long as the tenant organization existed, individual tenants, who were either a part of the organization or independent of it, had no rights to exercise with respect to the contemplated sale by the Owner. In this particular case, Stanton was a tenant who was a member of his tenant organization and who was opposed to the conversion that the organization had approved. Stanton brought a civil action on his own behalf on the grounds that the Owner had not been bargaining with the tenant organization in good faith. The Court refused to permit Stanton to proceed with his claims on the grounds that the statute was clear that it was only the tenant organization that held the right and could bring suit if the rights were violated. Arguably, the Court’s premise was that the tenant association continued to meet the required qualifications during the negotiations.
The court explained that the reason why the organization must be the sole negotiator is to prevent confusion throughout the process.
The statutory scheme would become unworkable if dissenting tenants, who disagreed with positions taken by their tenant organization, could attempt collaterally to undo an agreement, or disrupt negotiations between the tenant organization and the owner, by bargaining separately with the owner. Stanton v. Gerstenfeld, 582 A. 2d 242, 245 (D.C. 1990).
Recently, DC Superior Court Judge Melvin Wright, guided by the precedent established by Stanton v. Gerstenfeld and a later case which relied in part upon its reasoning, West End Tenants Assc v. George Washington University, 640 A. 2d 718 (D.C. 1994), granted an order to dismiss a tenants’ association’s claims against an Owner who allegedly violated its TOPA rights because the organization was improperly formed and lacked standing to bring suit. (See Twin Towers Plaza Tenants Assc. v. Capital Park Assc., Order Granting Defendant’s Motion to Dismiss, July 19, 2004, Case No. 03CA3376). In the Twin Towers case, the tenant organization was determined to be in violation of the D.C. Code because it had not established and could not establish that it “represented a majority of the tenants in the two buildings at issue.” Judge Wright determined by reviewing the discovery evidence produced that the organization as it existed was in no position to allege any violation of the statute or exercise any of the rights afforded to tenant associations by the law. Moreover, Judge Wright pointed out that the tenant organization had admitted that it had not complied with the D.C. Code because it had not registered with the Mayor and filed its Articles of Incorporation. While the issue was the validity of the organization’s contention that it represented at least a majority of occupied rental units, it is clear that Judge Wright recognized that an organization that does not represent such majority has no right to act on behalf of the tenants.
The rationale behind the rulings of both Judge Wright in the Twin Towers case and the D.C. Court of Appeals in Stanton echoes the concerns expressed by the City Council nearly twenty six years ago when a bill providing a the tenants’ right to purchase was debated. A review of the legislative history of The Rental Housing Conversion and Sales Act of 1980, of which Tenant Opportunity to Purchase Act (TOPA) is part, reveals that the Council was primarily interested in preventing the displacement of low and moderate income tenants who are most affected by the conversion of their accommodations by developers. The legislation was designed to give the tenants a voice in whether their apartment homes would be converted into condominiums or cooperatives. In accommodations with five or more units, the legislation was designed to give the majority of the tenants, by virtue of the tenant organization, in a given accommodation that voice and that right to determine the fate of their homes. No owner could make a decision absent tenant majority support and no single tenant had the authority in accommodations with five units or more could thwart the will of the majority of tenants who had formed an organization and expressed their views. While there is nothing in the legislative history that directly discusses why the Council insisted upon the tenant organization representing a majority as opposed to simply some of the tenants in an accommodation, it is clear that the organization was made the sole negotiator in certain cases because it represented the majority and was determined to be best situated to advance the views of its members.
Because there is also no applicable case law on point regarding the narrow question, it may be instructive to look at how the courts have treated other organizations statutorily designated as the sole negotiator on behalf of its members. For example, the relationships between an employer and a labor union and an owner and a tenant association are similar. In both cases, the organization is deemed to be the sole representative of its individual members. Additionally, the employer and owner are required to recognize and bargain with the respective organizations in good faith.
There are several reasons why the standards regarding labor unions that lose their majority status can be applied to tenant associations that lose their majority status. The statutes that establish and regulate the relationships between the employer and the labor union and the owner and the tenant association are similar in design and intent. Section 8(a)(5) of the National Labor Relations Act, 29 U.S.C.S. § 158(a)(5), imposes upon an employer, the duty to bargain collectively with the representative of his employees. This is analogous to the effect of DC ST § 42-3404.11. The rationale behind these concepts is simple: the organization is better situated to advance the interests that bring its membership together.
Accordingly, it could be argued that when an owner who is in negotiations with a tenant association that seeks to purchase a building questions the association’s majority status, the burden is on the owner to rebut the presumption of continued majority status by showing that (1) either the association has in fact lost majority status or (2) that there are objective considerations sufficient to support a reasonable good faith doubt that the association still enjoys majority support. This was the rule applicable to employers negotiating with labor unions that was articulated by the Third Circuit in NLRB v. Wallkill Valley General Hospital, 866 F.2d 632 (3d. Cir. 1989), a case in which the National Labor Relations Board (NLRB) had found that the Wallkill Valley hospital failed to bargain collectively with the union and ordered the hospital to cease and desist from unfair labor practices it had been engaging in. The hospital contended that it no longer was required to negotiate with the Union because it had a good faith doubt that the union still represented a majority of its members. The Court held that the NLRB was correct in determining that hospital failed to establish it had a good faith reasonable doubt as to the union’s majority status. The Court determined that the hospital failed to rebut the union’s presumption of continued majority support and had negotiated in bad faith with the union members directly.
Central to the Court’s holding was the fact that the hospital’s good faith doubt about the union’s majority status was based upon speculative reasoning. The hospital never found out the actual number of the employees who supported the decertification of the union, and relied upon the representation of a single union member who had filed a petition for decertification and stated she felt there were a majority who did not want the union. Additionally, the hospital took note of the fact that only a very small number of employees had authorized that union dues be deducted from their salaries, and decided that this indicated that only a small number actually supported the union. But, as the Court stated, the issue was “not how many employees belonged to the union or paid dues, but rather whether the majority desired union representation,” Wallkill Valley 866 F.2d. at 637 quoting Retired Persons Pharmacy v. NLRB, 519 F.2d. 486,491 (2d. Cir. 1975).
Applying the union analogy to the tenant association issue presented, it becomes clear that if the owner wishes to cease negotiating with the tenants, he must do so only when he knows in fact that the association no longer represents the majority or when he has a good faith belief that such is the case. That good faith belief must be based upon more than speculation or it will simply not justify the act. The burden is a difficult, but not impossible, one to surmount when it is the owner who wishes to prove the association no longer represents the majority. Far easier is it to prove that the association has lost majority status when the tenants manifest this by vote than when they are silent and it is left up to the owner to discern their true intentions.
This brings up the question of how one tenant can force an accounting. Ideally, a member of a tenant association who believes that his association no longer represents the interests of a majority of the occupied rental units should call for an accounting of the numbers that are still members of the tenant association. Both the Whittier Gardens and the Butternut Project tenant associations’ bylaws give each tenant one vote and a simple majority could halt the negotiations with the owner if that is what the tenants wanted. If, in fact, a majority of the tenants did not wish to proceed with the purchase of the accommodations, having them force the issue to a vote would be effective in relieving the Owner of his obligation to continue to negotiate with the organization and restore the legitimacy of the third party contract.
 In the West End case, the issue was whether an apartment building lease agreement between the university and the owners deprived the tenant association’s members of their rights of first refusal to buy their units when that lease agreement gave the university an exclusive right to purchase at the end of the lease period. The Court held that: (1) neither the master lease struck between the university and the owners nor an option clause included in it constituted a “sale” within the meaning of the Sale Act; (2) the Clarification Act did not operate to compel a different result because the Clarification Act, as a retroactive and variant interpretation of the Sale Act, was entitled to less judicial deference in its explication of the meaning of the Sale Act; and (3) the use of a three-part constitutional Contracts Clause analysis showed that retroactive application of the Clarification Act to make the master lease subject to its statutory terms would result in an unconstitutional contractual impairment. The Court also reiterated the fact that based upon Stanton, only the tenant organization, and not the individual tenant, had the right to negotiate with the owner to purchase and the right to bring a civil action against the owner if it is “aggrieved” by actions of the owner that violate the statute.
Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.