COOPERATIVES. Cooperatives 7/2000

Transcription

1 COOPERATIVES A cooperative is an apartment building that is owned by a corporation and occupied by the corporation s shareholders. The stock owned by each shareholder represents the value of a particular apartment in the building. Each shareholder also is a lessee, entitled to the exclusive right of possession of a designated apartment in the cooperative pursuant to the terms of a long-term proprietary lease. Ownership of the stock may not be separated from the leasehold interest. Rather, stock may be transferred only to an assignee of a lease and only under the conditions and restrictions imposed by the corporation s by-laws. In some cooperatives, fee title is held by a land trustee. The beneficiary in such cases often is the cooperative corporation with which the various shareholders have entered into the individual apartment leases. In other cooperatives, title is held by a land trustee but no cooperative corporation has ever been established. Instead, the beneficial interest is owned and divided among the occupants in percentages which are proportional to the value of each apartment. In most of these instances, the beneficiaries occupy their individual apartments pursuant to specific leases. In rare instances, however, an informal cooperative exists in which there are no written leases and the various beneficiaries merely have an understanding as to who may possess the various apartments. In a cooperative, real estate taxes are assessed against the entire property rather than against each individual apartment. The assessment, however, may be reduced by senior citizen and homeowner exemptions that are available to the shareholder-lessees. Nevertheless, the interest of each shareholder-lessee is subject to the lien of real estate taxes for the entire cooperative. In addition, the fee title of the cooperative often is encumbered by an underlying mortgage. A significant risk borne by each shareholderlessee, therefore, is the possibility that the underlying land may be sold (and that the various tenancies may be terminated) through a sale of the property for non-payment of real estate taxes or a sale resulting from a foreclosure of 1

2 such a mortgage. As a result, each lessee has a vital interest in ensuring that the other lessees (and prospective lessees) have the financial means of contributing their share of the assessments that have been levied to pay such taxes, mortgages and other common expenses relating to the building s repair and maintenance. Typically, the board of directors must consent (or waive its right of first refusal) before a leasehold may be assigned and shares transferred. The approval and interview process - and the credit checks usually associated therewith - serve as one means of assuring the financial success of the cooperative venture. Ownership in a cooperative typically entails both personal property rights (that is, ownership of either shares in the title-holding corporation or a fraction of the beneficial interest of the title-holding trustee) and real property interests (that is, the leasehold or possessory estate). When the land being examined is a cooperative, there are two methods by which interests therein may be insured: 1. A leasehold owner s and/or loan policy may be issued, insuring the leasehold interest in an individual apartment (that is, the real property aspect of a cooperative); or 2. A regular owner s and/or loan policy may be issued, examining the fee title of the entire cooperative. This method is used primarily in two situations: (A) when the fee is being mortgaged or refinanced; and (B) when the property is an informal cooperative, that is, when leasehold coverage is not available because there is no written lease for the various apartments. The following pages should be used as a guide when the Company is requested to insure a cooperative. 2

3 INSURING THE LEASEHOLD INTEREST IN A SPECIFIC COOPERATIVE APARTMENT SCHEDULE A - PARTY IN TITLE - At the new order stage, normally the name of the current fee owner of the land (that is, the corporation or land trustee) should be entered. If, however, the application indicates that an assignment of a currently-existing lease is contemplated and the application, the prior file or the chain disclose the identity of the current lessee/assignor of the particular apartment being examined, input the name of such lessee [note the name of the fee owner for use when taking in clearance and for continuation purposes]. In this latter instance, it may be necessary to raise the following as a note in Schedule A or as a note in Schedule B: OUR TITLE-FINDING IS FOR CONVENIENCE ONLY AND IS BASED ON THE ASSUMPTION THAT WE WILL FIND SAID PARTY(IES) TO BE THE CURRENT LESSEE(S) UPON OUR RECEIPT AND REVIEW OF THE DOCUMENTATION REQUESTED HEREIN. ~ LEGAL DESCRIPTION - The apartment number and the street address of the cooperative should be shown, followed by the legal description of the underlying land, for example: APARTMENT B ON THE 7TH FLOOR OF AN APARTMENT BUILDING COMMONLY KNOWN AS 3500 N. LAKE SHORE DRIVE, WHICH BUILDING IS LOCATED ON THE FOLLOWING DESCRIBED REAL ESTATE: - or - APARTMENT 8-C OF 3500 N. LAKE SHORE DRIVE, WHICH IS LOCATED ON THE FOLLOWING DESCRIBED REAL ESTATE: PROPOSED LENDER - If a leasehold loan policy is to be issued, show the name of the proposed lender on Schedule A. PROPOSED INSURED - LEASEHOLD - If a leasehold owner s policy is to be issued, show the name of the proposed lessee on Schedule A. 3

4 LEASEHOLD TERM INSURED - Enter the term of the lease. If the term is not yet known, enter: A TERM OF YEARS BEGINNING ~ AND ENDING ~. LEASEHOLD DESCRIPTION: THE LEASEHOLD ESTATE (SAID LEASEHOLD ESTATE BEING DEFINED IN PARAGRAPH 1(H) OF THE CONDITIONS AND STIPULATIONS OF THE POLICY), CREATED BY THE INSTRUMENT HEREIN REFERRED TO AS THE LEASE, EXECUTED BY: ~, AS LESSOR, AND ~, AS LESSEE, DATED ~, WHICH LEASE WAS RECORDED ~ AS DOCUMENT ~. If information is unknown, the tildes should remain (or should be replaced by underscores) so that the information may be entered once it becomes available. If only a memorandum of the lease has been or is to be recorded, revise the language to read: "...A MEMORANDUM OF WHICH LEASE WAS RECORDED..." SCHEDULE B - Raise all mortgages, mechanics liens, laundry room leases, etc., which affect or purport to affect either the common areas or the entire building, even those matters which arose after the leasehold to be insured. Matters which affect only another apartment, however, should not be raised. Note: It is preferred that the following exceptions be raised using the boilerplate. These exceptions may need to be amended as clearance and further information is received to name the particular instrument(s) or to more precisely state the relevant provisions contained therein. Raise the following: TERMS, PROVISIONS, COVENANTS, RIGHTS AND OPTIONS CONTAINED IN THE BY-LAWS OF THE ~ COOPERATIVE AND ANY OTHER INSTRUMENT WHICH GOVERNS THE MANAGEMENT, USE OR OCCUPANCY OF THE LAND, INCLUDING BUT NOT LIMITED TO RIGHTS OF REFUSAL, CONSENT PROVISIONS AND PROVISIONS RELATING TO THE LEVYING AND ENFORCEMENT OF ASSESSMENTS AND SPECIAL ASSESSMENTS, AND ANY PLEDGES OF OR LIENS UPON THE CAPITAL STOCK AND THE CONSEQUENCES OF THE ENFORCEMENT THEREOF. ~ 4

5 Raise the following: WE SHOULD BE FURNISHED THE FOLLOWING, AND THIS COMMITMENT IS SUBJECT TO SUCH FURTHER EXCEPTIONS AS THEN MAY BE DEEMED NECESSARY: (A) A COPY OF THE CORPORATE BY-LAWS AND ANY OTHER INSTRUMENTS WHICH GOVERN THE MANAGEMENT, USE OR OCCUPANCY OF THE LAND; (B) AN EXECUTED COPY OF THE ORIGINAL LEASE CREATING TITLE TO THE LEASEHOLD ESTATE DESCRIBED IN SCHEDULE A, TOGETHER WITH ALL ASSIGNMENTS THEREOF, IF ANY; (C) A WRITTEN STATEMENT FROM THE BOARD OF DIRECTORS WHICH AUTHORIZES AND CONSENTS TO THE LEASE, ASSIGNMENT OR MORTGAGE TO BE INSURED AND TO ANY TRANSFER OR PLEDGE OF STOCK RELATED THERETO; AND (D) A WRITTEN STATEMENT FROM THE BOARD OF DIRECTORS THAT THERE ARE NO UNPAID ASSESSMENTS, SPECIAL ASSESSMENTS OR OTHER CHARGES WITH RESPECT TO SAID LEASEHOLD AND THAT THERE HAS BEEN NO DEFAULT UNDER THE TERMS OF SAID LEASE. THIS STATEMENT SHOULD COVER THE RECORDING DATE OF SUCH LEASE, ASSIGNMENT OR MORTGAGE. ~ The lease, when produced, should be reviewed for the following: The name(s) of the lessor(s), which should be the record owner of the fee estate. If an assignment of an existing lease is to be insured, copies of the original lease and all intervening assignments must be reviewed in order to verify that an insurable leasehold chain of title exists. Note: The name search should include all such intervening tenants as well as the fee owner and the current and proposed lessee(s). The name(s) of the lessee(s)/last assignee(s), which will be entered as the party in title for the leasehold policy. The term of the lease. The lease commencement and termination dates should be stated. If a termination date is not recited, raise the following: 5

6 CONSEQUENCES OF THE FAILURE OF THE LEASE DESCRIBED IN SCHEDULE A TO RECITE A TERMINATION DATE. ~ A description of the demised unit (referencing, at a minimum, the floor and apartment number) and the underlying legal description for the cooperative. If a floor plan depicting the location of the apartment is neither referenced therein nor otherwise available, raise the following: NOTHING CONTAINED HEREIN SHOULD BE CONSTRUED AS INSURING THE EXACT LOCATION OR DIMENSIONS OF THE LAND DEMISED BY THE LEASE DESCRIBED IN SCHEDULE A. ~ Words of demise, (e.g., "I hereby demise..." or "I hereby let..."). Proper execution and notarization. If insuring the assignment of a lease and the lessor(s) is/are individual(s), verify that the assignors homestead rights have been waived. Special provisions relating to consents, rights of first refusal and options in the event of an assignment, sublease or mortgage of the leasehold. The clearance obtained must, of course, establish that all such requirements have been met. The lease and/or assignment(s) of lease, as applicable, (or memoranda thereof) should be recorded. If not, an exception should be raised requesting recordation. Such as: THE LEASE CREATING THE LEASEHOLD ESTATE DESCRIBED IN SCHEDULE A HEREOF, OR A PROPER MEMORANDUM THEREOF, SHOULD BE RECORDED, AND THIS COMMITMENT IS SUBJECT TO SUCH FURTHER EXCEPTIONS, IF ANY, AS MAY THEN BE DEEMED NECESSARY. ~ Helpful information - which may be added at the end of the exception as an aid to the customer when drafting the memorandum - might read as follows: IF A MEMORANDUM OF LEASE IS TO BE RECORDED, SAID MEMORANDUM SHOULD CONTAIN THE NAMES OF THE PARTIES THERETO, A DESCRIPTION OF THE DEMISED PREMISES, THE COMMENCEMENT AND TERMINATION DATES OF SAID LEASE AND WORDS OF ACTUAL DEMISE. 6

7 If the customer has indicated that no lease or memorandum thereof is to be recorded, a leasehold owner s policy still may issue. An exception such as the following, however, should be raised: THE INSURANCE AFFORDED BY THIS COMMITMENT/POLICY IS BASED ON THE FACT THAT THE INSURED IS AND REMAINS IN PERSONAL POSSESSION OF THE COOPERATIVE UNIT DESCRIBED IN THE SCHEDULE A. TRANSFER TAXES: If the land is located in any municipality which imposes a tax on corporate stock transfers, the appropriate transfer tax exceptions should be raised. The applicable transfer tax exceptions also should be raised if title to the fee is in a land trust (to cover the anticipated assignment of the beneficial interest). UCC FILINGS: If a leasehold loan policy is to be issued, the leasehold mortgage often will be accompanied by financing statements which will be filed in order to perfect a lender s security interest in the borrower s shares of stock. See 810 ILCS 5/9-101 et seq. In some instances, the customer may request that a UCC search be made prior to closing in order to determine whether the shares have been previously assigned or pledged as security for a loan. If an assignment or pledge is disclosed by the search, it should be raised in an exception, such as: SECURITY INTEREST OF ~, IN THE CORPORATE STOCK, AS DISCLOSED BY THE INSTRUMENT EXECUTED BY ~ AND FILED ON ~. 7

8 A Note Regarding Extended Coverage: The following factors should be considered prior to approving extended coverage for a leasehold owner s policy covering a cooperative apartment: Coverage over General Exception 2 (matters of survey) may be provided upon submission and review of an ALTA-standard survey of the entire cooperative. Coverage over General Exception 4 (unrecorded mechanics lien claims) requires the submission of ALTA Statements executed by the board of directors or other representative of the fee owner (that is, the corporation or land trustee) in addition to the current and proposed lessee. A Note Regarding Informal : If the cooperative is an informal cooperative in which there are no written leases for the individual apartments, leasehold coverage should be declined. As an alternative, the coverage described in the following section should be offered. The following section also is applicable in those situations in which the fee title of the entire cooperative is being mortgaged or refinanced. 8

9 INSURING THE FEE TITLE OF AN ENTIRE COOPERATIVE SCHEDULE A - Complete the appropriate information relating to proposed insured(s), policy amounts, title findings, etc., manner. in the usual SCHEDULE B - Raise the appropriate exceptions from the continuation, the chain, etc., in the usual manner. Mortgages, laundry room leases and other matters which affect the entire building must, of course, be raised. Leases, mortgages, financing statements, etc., however, which affect only individual apartments normally should not be raised on the new order examination. Note: It is preferred that the following exceptions be raised using the boilerplate. These exceptions may need to be amended as clearance and further information is received to name the particular instrument(s) or to more precisely state the relevant provisions contained therein. Raise the following: TERMS, PROVISIONS, COVENANTS, RIGHTS AND OPTIONS CONTAINED IN THE BY-LAWS OF THE ~ COOPERATIVE AND ANY OTHER INSTRUMENT WHICH GOVERNS THE MANAGEMENT, USE OR OCCUPANCY OF THE LAND, INCLUDING BUT NOT LIMITED TO RIGHTS OF REFUSAL, CONSENT PROVISIONS AND PROVISIONS RELATING TO THE LEVYING AND ENFORCEMENT OF ASSESSMENTS AND SPECIAL ASSESSMENTS, AND ANY PLEDGES OF OR LIENS UPON THE CAPITAL STOCK AND THE CONSEQUENCES OF THE ENFORCEMENT THEREOF. ~ Raise the following: RIGHTS OF THE TENANTS UNDER THE PROPRIETARY LEASES AND THE RIGHTS OF ALL PARTIES CLAIMING THEREUNDER, INCLUDING SUBLESSEES, LEASEHOLD 9

10 MORTGAGEES, JUDGMENT CREDITORS AND OTHER LIENHOLDERS OF THE VARIOUS LEASEHOLD ESTATES. ~ If a corporation is in title, raise the following: WE SHOULD BE FURNISHED THE FOLLOWING AND THIS COMMITMENT IS SUBJECT TO SUCH FURTHER EXCEPTIONS AS THEN MAY BE DEEMED NECESSARY: (A) A CURRENT COPY OF THE CORPORATE BY-LAWS AND ANY OTHER DOCUMENT WHICH GOVERNS THE MANAGEMENT OF THE LAND; (B) A CURRENT CERTIFICATE OF GOOD STANDING FROM THE ILLINOIS SECRETARY OF STATE; AND (C) CORPORATE RESOLUTIONS WHICH AUTHORIZE THE CONVEYANCE OR MORTGAGE TO BE INSURED. SAID RESOLUTIONS SHOULD EVIDENCE THE SHAREHOLDER APPROVAL WHICH IS REQUIRED BY THE TERMS OF THE BY- LAWS. ~ The above clearance must be reviewed carefully for prerequisites which must be met prior to the sale or mortgage of the cooperative. Normally, the approval of at least 2/3 of the shareholders/beneficiaries is required before such an action may be taken. If a trustee is in title, raise an exception relating to the terms of the trust. If the customer has indicated that it wishes that leases, mortgages and other matters which encumber or affect the individual apartments be shown, the following exception should be raised: WE SHOULD BE FURNISHED WITH A COPY OF A REPRESENTATIVE LEASE AND A CERTIFIED LIST OF ALL OF THE CURRENT LESSEES AND SUBLESSEES, IF ANY. THIS COMMITMENT IS SUBJECT TO SUCH FURTHER EXCEPTIONS AS THEN MAY BE DEEMED NECESSARY UPON OUR REVIEW OF SAID LEASE, AN EXAMINATION OF THE VARIOUS LEASEHOLD ESTATES AND A NAME SEARCH OF THE LESSEES AND SUBLESSEES. ~ Upon such a request, the continuation file and the chain must be re-checked and a name search must be performed against all such lessees/sub-lessees and exceptions raised for matters disclosed thereby. Include appropriate language as additional information for those matters which affect only particular apartments, e.g., (AFFECTS APARTMENT 8-B.). In addition, 10

11 the desirability of billing for an additional work charge should be considered. If the customer has requested that the exception relating to the rights of the tenants under proprietary leases and those parties claiming thereunder be shown on Schedule B Part II for the loan policy, an underwriter of the company should be consulted. In such an instance, the leases must be reviewed carefully to verify that they in fact are subordinate to the lien of any current and future mortgage of the fee estate. A Note Regarding Informal : If requested to insure an apartment in an informal cooperative - that is, a cooperative owned by a trustee and in which the various beneficiaries have no written leases for the individual apartments - the above guidelines should be followed with the following comments and modifications: As noted above, leasehold coverage is not available because written leases do not exist. Rather, the examination will be of the fee estate of the entire cooperative; the resulting owner s policy will insure the Insured as to the status of title of the entire cooperative rather than that of any individual apartment. Because the insured on the owner s policy (that is, the new beneficiary/ies) is a different party than the record owner of the land (that is, the trustee), the following exception should be raised: THIS CHAPTER WILL WIN THE AWARD FOR LEAST READ IN SOUTHERN ILLINOIS THE RIGHTS OF THE INSURED HEREUNDER SHALL BE SUBJECT TO THE DEFENSES, IF ANY, WHICH THE COMPANY MIGHT HAVE AGAINST THE PARTY/PARTIES IN TITLE TO THE ESTATE OR INTEREST IN THE LAND DESCRIBED IN SCHEDULE A AS IF SAID PARTY/PARTIES WERE THE INSURED UNDER THIS POLICY. Requests to issue a loan policy insuring a mortgage or other security interest made by the beneficiary should be referred to an underwriter of the company. 11