TOPA: Sale of Ownership Interest in a Cooperative and Tenant Right to Purchase

February 6, 2012 — Leave a comment

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In our practice, we are often asked when a tenant has a RIGHT to purchase the unit they are renting. In the District of Columbia, city law permits tenants the opportunity to purchase their units, under certain circumstances. Recently we were presented with a coop, which had subleased/rented out its coop unit to a nonmember tenant.

As a result, the following questions were triggered:

1–Does the sale of a cooperative member’s ownership interest in the cooperative and the consequent transfer to the purchaser of the residential unit that appertains to that ownership interest, trigger the tenant’s overriding right to purchase the ownership interest under DC Code Section 42-3404.02 (the Tenants Opportunity to Purchase Act or “TOPA”)?

2– Does the sale of an LLC, which is a member of the coop and owns several ownership interests related to 15 out of 18 residential units in the cooperative, trigger TOPA giving the tenants the opportunity to purchase the LLC?

Answer:

After review of the DC Code and relevant case law, we concluded that the scenario described in Question 1 the sale of the cooperative member’s ownership interest in the coop is not a “sale by the owner of the housing accommodation.” Therefore, under the scenario described in Question 1, the sale does not trigger TOPA. Ironically, the scenario described in Question 2, would arguably be considered a “sale” triggering TOPA, as amended in 2006, if the percentage of the shares of the coop that are owned by the LLC is as high as the percentage of its ownership interest in the coop’s 18 residential units, i.e., 15/18 or 83.3 percent. [I d

Whether or not the sale of the ownership interests in either of the two scenarios is a “sale” for purposes of TOPA,under the 2006 amendments to Section 42-3404.02, the coop owner is required to provide each tenant and the Mayor a “Notice of Transfer” when transferring an ownership interest in the coop. The “Notice of Transfer” gives a tenant or tenant association the opportunity to challenge the owner’s determination that the transfer was not a “sale” under the Section.

Background:

Ownership Interest in a Coop:

The following elements and attributes of cooperative form of housing ownership have long been established by statute and case law. Typically, the Corporate and Governing Documents and Plan of Corporate Organization for a district of columbia cooperative expressly incorporate these elements and attributes and apply to the proposed sale of the LLC or sale of individual ownership interests associated with a coop rental unit.

The cooperative corporation owns the title to the building and land and, therefore, owns all the residential units within the building.

The ownership interest of a cooperative member is ownership in the cooperative corporation, not ownership in the residential unit that he/she occupies or has subleased to a tenant. That ownership interest in the cooperative is evidenced by shares issued by the coop. The shareholder/coop member is entitled to lease and occupy a cooperative unit to which the shares have been allocated under a proprietary lease. The lessor is the coop and the lessee is the shareholder.

A shareholder is provided one vote for each share it owns that can be exercised in electing members of the Board of Directors and by participating in some of its decision making regarding operation of the coop. The share also imposes on the shareholder the obligation to pay a monthly assessment which is its proportionate share of the coop’s debt and cost of operation. However, the shareholder is not personally liable for the mortgage, real estate taxes and other financial obligations of the coop.

Tenant Right to Purchase and Become Member of a New Coop

Upon conversion of a housing accommodation to a coop, the owner is to give each existing tenant an opportunity to purchase an ownership interest in the cooperative. If the tenant does not so purchase within the statutory period, the owner may force the tenant to vacate the unit upon 90 days notice (DC Code Section 42-4302.06). In the alternative, the owner may allow the tenant to remain a renter of the unit, in which case a landlord-tenant relationship arises providing the tenant the rights and protections provided by DC’s landlord-tenant laws. If the owner forces the existing tenant to vacate, the vacant unit may be rented out by the cooperative to another person, creating a landlord-tenant relationship, or the unit may be occupied by a person who purchases an ownership interest in the coop at the price set by the Board.

New Tenant Right to Purchase in an Established Coop

In an established cooperative, by virtue of the coop’s control of any transfer or lease of a coop unit, when a shareholder subleases his cooperative unit with approval of the Board of Directors, the sublessee arguably becomes a tenant of the cooperative. If the shareholder wants to sell his ownership interest in the coop, the question presented is whether the coop as owner of the coop unit is required to offer the tenant an opportunity to purchase that ownership interest. (The same question arises if the coop rented a coop unit directly to a nonmember and the coop decides to sell the ownership interest associated with the unit to a third party.)

Applicable Statutory Language:

Definitions

Section 42-3401.03 defines “cooperative”, “owner”, “housing accommodation” or “accommodation”, “rental unit” and “tenant” as follows:

“ ‘Cooperative’ means a cooperative legally incorporated pursuant to the District of Columbia Cooperative Association Act (§ 29-901 et seq.) or a cooperative corporation incorporated in another jurisdiction for the primary purpose of owning and operating real property in which its members reside.”

“ ‘Owner’ means an individual, corporation, association, joint venture, business entity and its respective agents, who hold title to the housing accommodation unit or cooperative share.”

“ ‘Housing accommodation’ or ‘accommodation’ means a structure in the District of Columbia containing 1 or more rental units and the appurtenant land…”

“ ‘Rental unit’ or ‘unit’ means only that part of a housing accommodation which is rented or offered for rent for residential occupancy and includes an apartment, efficiency apartment, room, suite of rooms, and single-family home or duplex, and the appurtenant land to such rental unit.”

“ ‘Tenant’ means a tenant, subtenant, lessee, sublessee, or other person entitled to the possession, occupancy or benefits of a rental unit within a housing accommodation. If the names of 2 or more persons appear on a rental agreement, those persons shall determine which person may exercise a vote under this chapter. The singular term ‘tenant’ includes the plural.”

Tenant Opportunity to Purchase

Section 42-3404.02(a) states that:

“Before an owner of a housing accommodation may sell the accommodation…the owner shall give the tenant an opportunity to purchase the accommodation…

The relevant provisions in Section 42-3404.02(b) and (c) that define “sell” or “sale” were amended in 2006 and are as follows:

“(b) … the terms “sell” or “sale” include, but are not limited to, the execution of any agreement pursuant to which the owner of the housing accommodation agrees to some, but not all, of the following:

(1) Relinquishes possession of the property;

(2) Extends an option to purchase the property for a sum certain at the end of the assignment, lease, or encumbrance and provides that a portion of the payments received pursuant to the agreement is to be applied to the purchase price;

(3) Assigns all rights and interests in all contracts that relate to the property;

(4) Requires that the costs of all taxes and other government charges assessed and levied against the property during the term of the agreement are to be paid by the lessee either directly or through a surcharge paid to the owner;

(5) Extends an option to purchase an ownership interest in the property, which may be exercised at any time after execution of the agreement but shall be exercised before the expiration of the agreement; and

(6) Requires the assignee or lessee to maintain personal injury and property damage liability insurance on the property that names the owner as the additional insured.

(c)(1) … the term “sell” or “sale” shall include:

(A) A master lease which meets some, but not all, of the factors described in subsection (b) of this section or which is similar in effect; and

(B) (i) The transfer of an ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns an accommodation as its sole or principal asset, which, in effect, results in the transfer of the accommodation pursuant to subsection (a) of this section.

(ii) For the purposes of sub-subparagraph (i) of this subparagraph, the term “principal asset” means the value of the accommodation relative to the entity’s other holdings.

(2) For the purposes of subchapters IV and V, and notwithstanding anything to the contrary herein, the term “sell” or “sale” shall not include:

(H) The transfer of interests in a partnership or limited liability company that owns an accommodation as its sole or principal asset; provided, that the sole purpose of the transfer is to admit one or more limited partners or investor members who will make capital contributions and receive tax benefits pursuant to 26 U.S.C.S. § 42 [Low-income housing credit] or a comparable District program;

(I) A transfer of title to the housing accommodation to a limited liability company pursuant to § 29-1013 [under this Section, “a general partnership organized in the District or any state and a domestic or foreign limited partnership may be converted to a limited liability company”];”

Analysis:

Application of Subsection 42-3404.02 (a)

Under Subsection 42-3404.02 (a), the sale of an ownership interest in the coop would not be a sale of the “housing accommodation” as the term “housing accommodation” is currently defined. The statutory definitions make a clear distinction between a “housing accommodation” and “rental unit”. Arguably, only a rental unit (along with the coop share) would be the object of a sale of an “ownership interest” in the coop.

Application of Subsection 42-3404.02 (b)

For purely argument sake, even if it assumed that the sale of an ownership interest in the coop is a sale by the “owner of a housing accommodation”, it would not be a “sale” triggering TOPA as defined under Subsection 42-3404.02 (b). Clearly, paragraphs (b)(1) and (b)(3) do not apply to the sale of an ownership interest in the coop since the coop does not relinquish possession of the housing accommodation and the appurtenant land (collectively, the “property”), nor assigns all contract rights and interest in the property. Paragraph (b)(2) and (b)(5) do not apply since the transactions described in the scenarios of Questions 1 and 2, above, do not provide an “option” to purchase the property or an ownership interest”. The transaction is a purchase of the ownership interest.

Application of Subsection 42-3404.02(c)

Subsection 42-3404.02(c) makes clear that transfer of merely an ownership interest in a corporation may be considered a “sale” that would trigger TOPA and give the tenants the right to purchase the ownership interest.

Sale “In Effect” Analysis

Under Paragraph (1)(B) of Subsection 42-3404.02(c), sale of the ownership interest in the cooperative is considered a “sale” for purposes of TOPA if the sale of the ownership interest has “in effect result[ed] in the transfer of the accommodation” pursuant to Subsection 42-3404.02 (a). As previously discussed, by definition, sale of a single ownership interest in the coop is not in fact or “in effect” a sale by the coop owner of the housing accommodation. Again, even if it is considered a sale of the housing accommodation by the coop for sake of argument, the sale of an ownership interest does not fall into any of the six paragraphs of Subsection 42-3404.02 (b) defining a “sale”. This is true for the sale of the single ownership interest scenario described in Question 1.

The scenario in Question 2 is the sale of the LLC which holds a collective number of coop shares. If those shares represent a majority or more of the total shares of the coop, the coop by permitting the sale of the LLC arguably would “in effect” be allowing a transfer of the ownership in the housing accommodation to the purchaser. In that case, the sale of the LLC would be a “sale of the housing accommodation” under Paragraph (1)(B) of Subsection 42-3404.02(c) and trigger TOPA.

The “Master Lease” Analysis

The sale of the LLC could also arguably be a “sale” triggering TOPA under Paragraph (1)(A) of Subsection 42-3404.02(c). Specifically, by permitting the LLC to sell its collective ownership interest, and therefore transfer its collective proprietary leases, to a third party, it may be argued that the coop has agreed to transfer a “Master Lease” to the third party. Under Paragraph (1)(A), a “Master Lease” which meets some, but not all, of the factors described in the six paragraphs of Subsection 42-3404.02 (b), “or which is similar in effect”, is considered to be a sufficient transfer of ownership interest in the housing accommodation to constitute a “sale” for purposes of TOPA

A “Master Lease” is not defined in the DC Code. However, Paragraph (1)(A) was adopted in response to the District Court of Appeals decision in West End Tenant Association v. George Washington University, 640 A2d. 718 (D.C. 1994) in which the tenant association argued that a lease agreement between the owner of the building and GWU gave GWU so much control over the housing accommodation that it constituted a “sale” under the factors set forth in the six paragraphs of Subsection 42-3404.02 (b). The lease at issue granted GWU the right to use any voluntarily vacated units for student tenancy for period of 10 years, an “exclusive right to purchase” the apartment building at the end of the ten-year period at its option but subject and subordinate to the tenants’ rights to purchase, and gave a large measure of control over the premises. The lease contained typical “triple-net” terms and obligated GWU to pay all real property taxes and utilities, to perform all maintenance and repairs, and to purchase liability insurance. Because the lease predated the adoption of Subsection 42-3404.02(b), the Court refused to apply the factors in the six paragraphs and ruled the lease was not a “sale.”

By the time the Court made its ruling in West End, it was clear to the tenant association that even if the Court had applied the factors in the six paragraphs of the Subsection 42-3404.02(b), it would likely have found the lease not to be a “sale” because it did not include all of factors. Consequently, they convinced the DC City Counsel to adopt the language in Paragraph (1)(A) of Subsection 42-3404.02(c) so that a lease need merely meet some, but not all, of the factors described in the six paragraphs, or be “similar in effect,” to be considered a Master Lease.

The consequence of the language in Paragraph (1)(A), is that the sale of the LLC conveys to the purchaser a collective proprietary lease over 15 of the 18 coop’s residential units in the building and, depending on the number of shares of the coop that appertain to those 15 proprietary leases, the purchaser may acquire control of the housing accommodation. Such control would arguably make the sale of collective proprietary lease a transfer of a Master Lease triggering TOPA.

Limitation on Tenant’s Purchase of the Ownership Interest

If by the above analysis the sale of the LLC is a “sale” triggering TOPA, a factor which might prevent the exercise of TOPA rights by the tenants in the coop is the size of the housing accommodation. In a housing accommodation which contains 5 or more units, under Section 42- 3404.11 the opportunity to purchase is only available to a tenant association properly formed within the housing accommodation. (See Stanton v. Gerstenfeld, 582 A.2d 242, 245 (D.C. 1990). Accordingly, the tenants in the example above., would arguably have to first create a qualified tenant association before they could purchase the LLC.

The Notice of Transfer Requirement:

Under Subsection 42-3404.02(d), a transfer of an interest in a housing accommodation or of any ownership interest in a corporation, partnership, limited liability company, association, trust, or other entity which owns a housing accommodation, whether or not it is considered a “sale” for purposes of TOPA, requires the owner to provide each tenant in the housing accommodation and the Mayor a written Notice of Transfer. No Notice of Transfer is required for a transfer of title to the housing accommodation to a limited liability company pursuant to § 29-1013 [under this Section, “a general partnership organized in the District or any state and a domestic or foreign limited partnership may be converted to a limited liability company”];”

The Notice of Transfer is to be substantially in the form prescribed by the Mayor and is to provide, at a minimum, a statement of the tenant or tenant association’s rights, an accurate description of the transfer containing all material facts, the date of the proposed transfer, and the reason, if any, why the owner asserts the transfer may not constitute a sale. The owner’s failure to provide the Notice of Transfer, or the provision of a notice that is fraudulent or contains material misrepresentations or material omissions, creates a rebuttable presumption that the transfer constitutes a “sale” for purposes of TOPA.

An aggrieved tenant or tenant association duly organized and meeting pursuant to its bylaws, may, within 45 days of the Mayor’s receipt of the Notice of Transfer, file a Notice of Intent to File a Petition for relief pursuant to Section 42-3505.03 or Section 42-3505.03a, and within 30 days of the receipt by the Mayor of the Notice of Intent to File, a tenant or tenant association is given 30 days to file a petition for relief. Section 42-3505.03 provides that an aggrieved tenant or tenant association may seek enforcement of any right or provision under the Rental Housing Conversion and Sale Act (which includes TOPA) through the filing of a civil action. Section 42-3505.03a provides that a tenant or tenant association may petition the Mayor for declaratory relief, and upon a showing of reasonable grounds, the Mayor is required to grant a hearing and may issue findings of fact, conclusions of law, and declaratory orders and take other enforcement actions.

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