What is a co-op?
Cooperative housing (commonly described by referring to an individual cooperative or “co-op”) is a type of homeownership. A co-op can be defined as a building that is owned by a corporation, whose shareholders are all of its inhabitants. When buying into a co-op, you’re not directly purchasing a parcel of property, you’re actually buying shares in a corporation that allows you to live in one of the building’s units via a contractual arrangement referred to as a “proprietary lease.” Although cooperatives are for-profit businesses, they do not exist to maximize profit. A cooperative ownership structure is common in large cities, like New York City and Miami.
What happens to the co-op when someone dies?
A proprietary lease in a co-op will not terminate upon the death of an owner, regardless of if there is a Will or not. Most co-op boards will allow family members to continue to occupy an apartment after the death of a shareholder, provided that they resided with the deceased shareholder prior to his or her death. However, if the shareholder lived alone, no one can move into the apartment without permission from the co-op board. If someone occupies the apartment without the permission of the co-op board, the corporation may begin an action against the estate for a breach of the proprietary lease.
It is very hard for co-op shareholders to transfer their co-op stock out of his/her name during their lifetime for estate planning purposes, as most co-op boards will not approve transfers to trusts, LLCs or even non-occupant beneficiaries. If the decedent had a Will, it is likely that the co-op shares will need to be transferred during the estate administration to the estate beneficiary(ies) pursuant to the terms of the will or sold by the executor or personal representative, with the proceeds passing to the beneficiary(ies). If the decedent died without a will, it is likely that the co-op shares will need to be transferred to the decedent’s heirs pursuant to state law (i.e., the state intestacy statutes). However, the beneficiary of co-op shares will not have an automatic right to occupy the unit, as the approval of an occupant, even if a new shareholder due to an inheritance, will still be subject to co-op board approval. Additionally, the co-op stock transfer to the estate beneficiary usually cannot be done without board approval either. Quite often, the estate will simply list the property for sale and sell the shares to a third party and allocate the proceeds to the appropriate estate beneficiaries. This way, there is only one share transfer / occupancy transfer process where the board must be involved.
As discussed, regardless of how the transfer is initiated, the board usually has the right to approve the occupancy prior to the transfer. The terms of the occupancy agreement will determine how much control the board has to approve the heir or whether or not the family member will have the right not only to own, but ultimately to occupy, the apartment.
Throughout this process, it is important to note that maintenance and other such building-related expenses may accrue. The co-op cannot accept payment of the maintenance from anyone other than the estate of the shareholder, without risking an assertion of waiver, even if the proprietary lease states otherwise. This can become a huge problem for the estate, as it may not have the liquidity to pay the carrying costs of the property without being able to sell it, and then the property cannot be sold without all outstanding fees being paid in full.
Another issue, which is frequently faced after the death of a shareholder, occurs when the co-op shares are owned as tenants in common—or if the apartment was purchased prior to 1996 by a married couple who failed to designate themselves on the shares as joint tenants. When the first spouse dies, their interest passes to the estate and can be inherited by a beneficiary in the will or by the next of kin that may not be the surviving co-owner—or even the spouse of the decedent. The surviving shareholder can be at risk of having to split the shares with other heirs, a situation that can lead to lawsuits, an unwanted buyout of the heirs, or an unanticipated sale of the apartment. It is important for shareholders to check their stock certificates to ensure that the shares are designated properly and that their wills are consistent with their posthumous wishes.
What is Eagle 9 Insurance?
Since co-op buyers are not purchasing actual physical real estate, but rather, shares in a corporation accompanied by a proprietary lease that gives the buyer the right to live in the co-op, traditional title insurance would not cover the buyer's ownership interest in the shares. Consequently, the Title Rate Service Association (or Tirsa) created an endorsement to the standard title insurance policy that would cover co-ops.
The Tirsa endorsement is known in the title industry as "leasehold title insurance." This endorsement insures the buyer's interest created by the proprietary lease. Just as title insurance provides protection if the title search prior to closing failed to uncover a valid lien against thel property, the leasehold endorsement provides similar protection in the event the lien search failed to uncover liens against the seller of the co-op. However, the Tirsa endorsement (title insurance for co-ops) never really caught on with co-op buyers.
As an alternative to the Tirsa endorsement, the State Insurance Department, approved Eagle 9 policies for title companies to sell to co-op buyers to assure that the buyer is not exposed to unnecessary risk. An Eagle 9 policy - unlike a Tirsa policy, is not a real estate policy with an endorsement. Rather, it is a policy specifically designed to insure the buyer's interest in the co-op. An Eagle 9 policy insures the buyer for loss and legal expenses resulting from claims arising against previous owners of the co-op. Additionally, the Eagle 9 policy is significantly less expensive than the Tirsa policy.
Not sure where to start? Read this quick article: Co-op in an Estate Administration - What to do first.