Friday, January 23, 2015

Lawton on Housing Cooperatives

LawtonJulie Lawton (DePaul) has posted Unraveling the Legal Hybrid of Housing Cooperatives (UMKC Law Review) on SSRN.  Here's the abstract:

Housing cooperatives are a form of residential property ownership that first populated in the United States in 1876, though they continue to create legal confusion for legislatures and courts around the country. Housing cooperatives are a corporation, formed pursuant to state statute, solely for the purpose of owning and operating real property for residents. The housing cooperative corporation owns multi-family property occupied by members of the housing cooperative. To become a member, individual residents purchase shares in the cooperative corporation providing them co-ownership in the cooperative corporation, and by extension, co-ownership in the real property. In tandem with the purchase of the cooperative share, each resident executes a proprietary lease representing the occupancy agreement between the resident and the cooperative corporation. The proprietary lease can be short term, such as twelve months, or long term, such as ninety-nine years. Regardless of the term, each resident’s occupancy is governed by the proprietary lease. Residents do not own the real property; the cooperative corporation owns the real property and residents own shares in the corporation. This confluence creates the legal hybrid nature of housing cooperatives: a resident is, at once, both a tenant of the cooperative corporation and co-owner in the cooperative corporation. It is this dual nature that creates the legal conflict in trying to define the legal structure of the housing cooperative.

Some courts, such as Arizona, designate housing cooperatives as ownership and specifically reject the idea of a housing cooperative as rental property. Other courts, such as Illinois, designate housing cooperatives as rental property and reject the argument that a housing cooperative is ownership. One jurisdiction, Georgia, noted that a housing cooperative can be designated homeownership or rental property by the language of the cooperative’s corporate documents. Even the federal government added to the confusion. In an argument before the federal Tax Court, the IRS claimed that a housing cooperative was ownership property, not rental property. The Tax Court disagreed, holding that the residents of the housing cooperative were lease holders, not owners of the housing cooperative real property.

This question of the legal structure of housing cooperatives becomes particularly important when determining the legal process for forcibly terminating the membership of a cooperative resident in an effort to reclaim possession of a terminated member’s unit. Housing cooperatives often attempt to reclaim possession of the unit through an eviction proceeding pursuant to a state’s rental property eviction laws. Residents frequently counter, and some courts have held, that since housing cooperatives are not rental properties, the issue cannot thus be resolved pursuant to an eviction action.

After the court determines whether the cooperative resident is a tenant, there remains the question of the resident’s ownership of the cooperative share. An action of eviction is an action for possession and does not directly resolve the resident’s ownership interest in the cooperative share. Most courts avoid the question by ruling solely on the possessory action without addressing the resident’s ownership interest. Frequently, a cooperative corporation’s bylaws give the cooperative the right to terminate the cooperative resident’s membership with a vote of the cooperative Board of Directors or the cooperative’s members. Cooperatives argue that this membership vote terminates the cooperative resident’s proprietary lease with the cooperative as well as the resident’s ownership of the cooperative share. I argue that the membership termination only terminates the resident’s proprietary lease and, thus only affects the resident’s possessory rights, not the resident’s ownership rights. This Article posits that a housing cooperative is ownership of personal property, not solely, or even primarily, a landlord-tenant relationship. I also argue that when a cooperative resident’s membership is terminated, that the cooperative and the court must bifurcate the decision on possessory rights to the unit from the ownership right to the share.

Part I of the Article introduces the reader to housing cooperatives, their prevalence as an American form of residential housing, and their history. Part II details housing cooperative corporations, their formation, corporate documents and the creation and termination of the housing cooperative membership. Part III evaluates the conflict in the federal and state courts and legislatures about the legal structure of a housing cooperative. Part IV argues that a housing cooperative membership creates ownership of personal property, not solely possession of rental property. Part V presents the rationale behind court decisions holding housing cooperatives as rental property. Part VI argues that housing cooperatives are not ownership of real property. Part VII concludes with the argument that housing cooperative membership creates an ownership interest in the cooperative share, the dispossession of which should be bifurcated from the housing cooperative’s action for possession of the housing cooperative unit.

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