Re: co-op and lenders
From: Evdavwes (
Date: Fri, 2 Jun 2006 04:39:30 -0700 (PDT)
Re reference to a "recognition agreement" required by banks and co-ops in  
order for "tenants"  (i.e., co-op share owners) to get loans.  
I have heard on this list that a Co-operative is the legal form of  ownership 
most congenial to an intentional community or cohousing, but that few  co-ops 
exist in cohousing because banks hesitate to lend money to buy  co-op shares. 
 New York has lots of co-ops, and evidently the  "recognition agreement" 
makes it possible for tenants to borrow to purchase  shares in a co-op.
I found a good article explaining this at 
I'll append it here:

Everyone's heard of the recognition agreement, but most  don't know what it 
By Edward T. Braverman 
Edward T. Braverman is senior partner of Braverman & Associates, a  Manhattan 
law firm that specializes in cooperative and condominium housing  law. 
Almost everyone who has ever purchased a co-op has heard about the  
"recognition agreement." It is required by lenders, it is talked about by 
boards  and 
their agents, and it is delivered at closings. However, most co-op owners do  
not really know why it exists, what it is, what it does, and what precautions  
are necessary on behalf of co-ops in connection with executing it. Here are 
some  answers. 
Some proprietary leases specifically provide that a shareholder may borrow  
money and pledge his shares and lease as security for a loan. Some leases  
prohibit loans for the purpose of purchasing the shares and lease without first 
securing the consent of the corporation. Many proprietary leases are completely 
 silent as to a shareholder's ability to borrow money and pledge his shares 
and  lease as security for a loan. 
Prior to the advent of the formal recognition agreement as we know it today,  
lenders sought to negotiate directly with developers/converters to provide  
corporate documents that facilitated the loans ultimately necessary to sell the 
 units. Accordingly, many of the buildings converted in the late sixties and  
early seventies have proprietary leases that contemplate share and lease 
loans.  However, as conversions in the metropolitan area became more prevalent, 
converters, as well as boards of directors, sought to develop a document which  
would satisfy a lender's fear concerning the enforceability of their 
security.  At the same time, they tried to protect the co-op in its desire to 
the  transfer of the shares and the occupancy of the apartment should the 
lender  foreclose after a default by a tenant-shareholder. 
The form developed is the recognition agreement, and it was first put forward 
 by Aztec Document Systems. Subsequently dubbed the Aztec form, it represents 
a  balancing act between the rights and desires of the lender and those of 
the  co-op. 
Except for those few buildings fronting Fifth Avenue, Park Avenue, and other  
exclusive locations where purchasers pay for their apartments completely in  
cash, every board must realize that the value of their apartments partially  
rests upon the ability of prospective purchasers to obtain financing. 
To this end, a board must provide accommodations to a lender to protect its  
security and realize upon default, the value of its loan, through foreclosure 
or  otherwise, and to assure the lender that the mere fact of extending the 
loan  will not constitute a default under the borrower's proprietary lease. 
Moreover,  the agreement creates an early warning system of a borrower's 
 difficulty, through notification of the lender concerning the  
tenant-shareholder's default. 
Lenders, on the other hand, recognize the need to protect the board's ability 
 to pass upon who shall reside in the building (including purchasers at a  
foreclosure). Accordingly, lenders have agreed to specifically recognize the  
co-op's right to judge any transfers they may make upon foreclosure. 
A recognition agreement is a three-party contract. Primarily, it is between a 
 tenant-shareholder's lender and the co-op, which is then signed and approved 
by  the shareholder. The highlights of this contract can be summarized as  
§ It certifies to the lender that the tenant-shareholder is the owner of the  
apartment (shares and lease). 
§ It acknowledges that the corporation has consented to the lender making a  
loan to the shareholder, in exchange for which the lender has taken back a 
lien  on the borrower's shares and lease. 
§ It prohibits the co-op from giving its consent to any further encumbrances  
(pledge), subletting, termination, or surrender of the lease without the  
ledger's approval. 
§ It requires the co-op's intention to terminate the lease; setting out these 
    *   If the tenant-shareholder's default can be cured by the payment of 
money,  the lender must be promptly notified of defaults involving any amount 
equal  to, or exceeding, three months maintenance. The co-op agrees to take no 
action  to terminate the lease or cancel the shares if the default is cured by 
the  lender within 15 days.  
    *   If the tenant-shareholder's default cannot be cured by the payment of 
 money, the co-op agrees to take no action until such time as the lender had  
had a reasonable opportunity to induce the tenant-shareholder to cure (but no 
 less time then is provided in the proprietary lease to make such a cure).  
    *   If the co-op terminates the lease and cancels the shares for a 
default not  curable by the payment of money, then, provided the lender pays 
monies due  under the proprietary lease when due, the co-op agrees not to sell 
sublet  the apartment without lender's approval, unless the net proceeds of 
such sale  or subletting shall equal or exceed the amount owing to the lender.  
    *   The agreement exculpates the cooperative from liability should the 
co-op  fail to notify the lender of the tenant-shareholder's default before  
terminating the lease. That only occurs, though, if the lender is promptly  
advised when the co-op discovers its failure and, if the co-op has already  
sold or 
contracted to sell the apartment, that the lender is paid the net  proceeds 
of such sale (to the extent of the loan balance) after the co-op is  reimbursed 
for all suns owed it. 
§ It provides that the co-op must accept payment from the lender on behalf of 
 the tenant-shareholder, without limiting the lender's right against the  
§ The co-op recognizes the lender's lien against the shares and lease, and if 
 the lease be terminated, or the shares canceled, against the net proceeds of 
any  sale or subletting, after the co-op receives reimbursement for all sums 
due to  it. 
§ It gives the co-op the right to demand and receive a copy of the financial  
and credit information provided by the tenant/shareholder to the lender. 
§ The lender acknowledges that it has no right or power to transfer the  
shares and proprietary lease to anyone without the co-op's approval, as 
by the proprietary lease. 
§ The lender indemnifies the co-op against any liability incurred in  
connection with any claim the tenant-shareholder or his successor may make 
arises pursuant to the co-op's actions under the recognition agreement. 
§ It provides that notices under the agreement that are required to be sent  
to the co-op will be sent by registered or certified mail care of the managing 
 agent and provides a space to insert an address to which notices are to be 
sent  to the lender. 
The specific provisions, as stated above, are clear and speak for themselves. 
 However, there are subliminal benefits to the co-op not readily apparent 
when  perusing the specific terms of the agreement. Specifically, the 
notification  provisions designed to permit the lender to monitor its borrower, 
with  the provision facilitating the ability of the lender to make payment 
directly to  the co-op for the tenant-shareholder's default, effectively 
creates a 
situation  wherein the lender becomes the shareholder's guarantor of 
performance and  payment. 
Many co-ops have already found that sending a defaulting shareholder's lender 
 a copy of a notice to cure increases the change of a positive response form 
the  tenant-shareholder, who is usually more concerned with the bank calling 
his loan  then with his obligation to pay his maintenance regularly. In those 
situations  where the share holder does not cure, the coop will receive funds 
directly from  the lender seeking to avoid foreclosure by the co-op, who 
maintains a first and  superior lien (under the proprietary lease and/or 
bylaws) to 
that of the  lender. 
Moreover, the symbiotic relationship created by the agreement affords  
prospective buyers a source of funds with which to purchase apartments in the  
building. By doing so, demand for apartments is kept high, which in turn keeps  
market prices high, thereby benefiting all of the tenant-shareholders. 
The bylaws of every cooperative corporation grant to the co-op a first lien  
upon the cooperative shares to secure any sums which may be due and owing from 
 the tenant-shareholders to the corporation. This provision which creates a 
lien  on the shares, should be (and is generally) noted on each share 
certificate,  thus limiting, by statute, the bank's ability to obtain a 
superior lien.  
Accordingly, a board of directors need not generally fear that a prospective  
lender who forecloses its lien will adversely affect the co-op's ability to  
collect any money which may be due it. In fact, on foreclosure, the lien of 
the  co-op must be paid before that of the lender. 
However, the co-op must carefully review any proposed recognition agreement  
submitted by a lender other than the Aztec form or one very similar to it. 
Many  banks have attempted to modify the agreement, by using their own form, to 
divest  the co-op of rights that it may otherwise have. Some lenders have even 
tried to  eliminate the exculpatory language which frees the co-op from 
liability should  it, in error, fail to notify the lender of a default. These 
modifications should  not be permitted, so as to keep the delicate balance 
the co-op and the  lender created by the Aztec form. 
With the full understanding go the historical background which gave rise to  
the agreement in use today, coupled with the knowledge of the form's various 
and  principal terms and conditions, a co-op and its managing agent can 
maintain the  delicate balance which will protect the rights of the lender, 
continuing  to facilitate the co-op's need to control the occupancy of the 
building and its  economic and social homogeneity. 
Reprinted with permission from Habitat magazine.

David Clements, Evan  Richardson, Wesley Clements, Lila Richardson
_Westwood Cohousing_ ( 
43 Vermont Court,  #G24
Asheville, NC 28806

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