Oct 27, 2011

Restrictive Covenant: Right of First Refusal

Manhattan Real Estate Q&A

Q: Do Manhattan condominium and cooperative apartments have restrictive covenants and what is a restrictive covenant?

A: Manhattan housing is primarily made up of coop and condominiums. Both coops and condos in Manhattan have restrictive covenants.

The legal definition for a restrictive covenant: "A provision in a deed limiting the use of the property and prohibiting certain uses".

Most all condominiums in Manhattan have the restrictive covenant: Right of first refusal.

Most coops in Manhattan have the restrictive covenant: Right to refuse AKA board approval 

Many people confuse the two different covenants.  Right of first refusal means the condominium has the first right of refusal on any offer. They have the right to match the offer and buy the condominium unit for the same price and terms being offered. They either exercise that right and purchase the unit or they waive the right and issue a waiver so the condominium unit owner can close the sale and transfer title. 

A coop's right to refuse gives the coop board the right to refuse any coop purchaser for any reason or no reason.  A coop is not required to give a reason for a board turn down. Coops must adhere to fair housing and human rights laws. The burden is on the buyer or seller to prove the coop turned down a sale because of discrimination.

A flip tax that many coops and some condominiums impose is also a restrictive covenant requiring the seller to pay a portion of their sale price or profit to the coop or condo board.

Restrictive covenants may prohibit certain financing. FHA does not loan in coops and condominium buildings with restrictive covenants. The Federal Housing Finance Agency was considering a rule that would prohibit Fannie Mae from purchasing loans in buildings where there is a private Transfer Tax AKA "Flip Tax" The real estate board of NY, REBNY successfully lobbied against the rule because of the adverse affect it would have on the NYC housing market.


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