The 95-year-old luxury co-op at 68 Beacon St. in Boston shows the benefits and problems associated with a cooperative ownership structure.
What do Richard Nixon, Gloria Vanderbilt, Madonna, Billy Joel and Calvin Klein all have in common? They are among many noteworthy personages who were rejected when seeking to buy into cooperative housing projects in New York City.
Cooperative housing projects (known as “co-ops”) are less common in Massachusetts than New York. In Massachusetts, most residential buildings with multiple owners are condominiums, but co-ops can be found in Boston’s Back Bay and Beacon Hill neighborhoods. Condominiums and co-ops have many similarities. Both provide separate dwelling units for residents, with shared common areas. Both require residents to contribute to common area expenses. And both have comprehensive house rules designed to curtail objectionable behavior.
However, there are big differences between the legal structures of condominiums and co-ops. Condominium residents have deeded ownership of real estate, consisting of exclusive possession of a dwelling unit and shared rights to common areas. In contrast, co-op residents do not receive deeds to their dwelling units. They instead own stock in corporations or similar entities that hold title to the dwelling units. Co-op residents have leasehold tenancies in their apartments under long-term “proprietary leases.”
These differences are huge from a legal perspective. Generally, condominium owners can freely sell their units to whomever they want, because applicable law discourages restraints on real estate transfers by willing sellers to willing buyers. However, that general rule does not apply to sales of corporate stock in co-ops. Therefore, transfers of co-op interests can be, and usually are, conditioned upon approval by the co-op’s board of directors. Because co-op boards can block sales, lenders hesitate to offer mortgage financing for co-op apartments. Therefore, co-op residents are often wealthy individuals who can pay cash for their apartments.
The Rationale for Rejections
This right to reject prospective buyers is defensible in some cases. For example, if the co-op building has a mortgage or high maintenance and operating costs, the co-op needs assurance that residents have the financial wherewithal to cover those expenses. Co-op residents who fail to pay their share of carrying costs burden other residents and put properties at risk of foreclosure or deterioration.
Fair housing laws prohibit co-ops from rejecting prospective buyers because of race, religion, gender, sexual orientation and other illegal discriminatory reasons. Yet co-ops can still reject applicants for myriad other reasons, such as an applicant’s profession, net worth, personality, political affiliations, level of education and tastes in clothing. Even if a co-op rejects an applicant for illegal reasons, it is difficult to prove the misconduct.
Although the deck is stacked against rejected applicants seeking legal recourse against co-ops, that did not stop John Walsh from suing 68 Beacon Street Inc. in Suffolk Superior Court when that co-op rejected his application in 2006. The 68 Beacon St. co-op sits across from the Boston Public Garden. It was established in 1926, with 16 apartments subject to proprietary leases scheduled to expire in 2025.
A Famous Case
According to the Boston Globe, Walsh was the wealthy CEO of The Elizabeth Grady Cos. when he tried to buy into 68 Beacon St. Despite Walsh’s financial prowess, the board rejected his application, stating concerns that Walsh would not “reasonably coalesce as a member of the cooperative community.” This is another way of saying that Walsh would not fit in with 68 Beacon St.’s coterie of residents. Walsh was less diplomatic in his descriptions of the board members, characterizing them as “bigoted people” having “ancient and archaic values.”
Christopher Vaccaro
Walsh’s lawsuit accused the co-op and several residents of illegal discrimination. After months of hard-fought litigation, Walsh dropped his suit under a confidential settlement agreement subject to a court-ordered impoundment. The Boston Globe later reported that the co-op paid Walsh $2.2 million to walk away from 68 Beacon St. When the co-op sought to reopen the case to address this leak to the press, the presiding judge tersely ruled that “fishing season is over and this case is closed.”
Walsh presumably found acceptable housing elsewhere. As for 68 Beacon St., it may find itself in the news again if the residents’ proprietary leases expire in 2025 without being renewed or extended.
Despite the lawsuit at 68 Beacon St., co-ops are well-suited for people seeking to exclude undesirable neighbors from their buildings. As to prospective buyers aggrieved by a co-op board’s rejection, they can draw some comfort in knowing that many distinguished individuals have been similarly snubbed.
Christopher R. Vaccaro, Esq. is a partner at Dalton & Finegold LLP in Andover. His email address is cvaccaro@dfllp.com.
