When a home or condominium owner loses a deed it is generally not a big deal. When a person buys a home or condominium the deed is recorded in the county where the property is located. Once the deed is of record, the original deed itself is irrelevant. With co-op ownership losing documents is not so simple. When a person buys a cooperative apartment they are issued shares and a proprietary lease. There is no procedure to publically record the share certificate or lease and the original documents must be surrendered to the coop when the apartment is sold in order for the coop to issue new documents to the buyer.
From time to time a cooperative is informed by a shareholder that he or she cannot locate an original stock certificate or proprietary lease for the shareholder’s apartment and a request is made for delivery of a replacement certificate and lease. When a lender has lost the documents (an all-too-common occurrence), the lender will be asked to execute an affidavit stating that the documents have been lost and to sign an indemnification holding the cooperative harmless against any claim that may arise by reason of the issuance of a new stock certificate.
When the shareholder has lost the original documents the practice may not be sufficient as once the apartment is sold, a shareholder may not have the resources to back up the indemnification.
So what actions should a cooperative take to protect itself?
- Accurate Record Keeping. Every cooperative should have a separate file for each shareholder with the cooperative’s copy of the proprietary lease, any assignment or assumption agreements and any recognition agreements. In addition, the cooperative’s records should indicate if the shareholder’s shares and lease are pledged to a lender.
- Lien Searches. When a shareholder asks for a replacement certificate, a lien search should be ordered on the shareholder and the apartment. This will show liens of lenders who have perfected their security interest in the shares and lease by filing a UCC-1 financing statement. Lenders are required to file such statements to perfect their security interest in shares and leases for loans made after October 1, 1988. Note: prior to October 1, 1988, lenders were permitted to perfect their security interest by simply taking possession of the shares and leases, so a lien search might not reflect a pre-October 1, 1988 loan
- Affidavit and Indemnification. An affidavit of lost certificate and indemnification agreement should be obtained from the shareholder. It is important to remember that in the event a claim is made against the cooperative, the indemnity is only valuable if the shareholder has assets and can be located.
- Bond. Cooperatives may want to consider requiring the shareholder to purchase a bond in the amount of the market value of the apartment to indemnify the cooperative against claims. In the event of a claim, the bonding company would be called upon to hold the cooperative harmless. It is important to confirm that the by-laws permit the board of directors to impose the requirement that a bond be provided as a condition to issuance of a replacement stock certificate. Common sense should be used by a board of directors before imposing what could be a severe financial hardship upon a shareholder. Is the building one which does not permit financing? Did the shareholder’s lender lose the certificate? Is there a recognition agreement in the file and does the lender consent to issuance of a new certificate? Was the apartment purchased after October 1, 1988 and does the lien search indicate no liens have been perfected against this shareholder or apartment? Do the cooperative’s records show that the shares and lease are not pledged? All of these factors should be considered when deciding whether or not to impose a bond requirement upon a shareholder.
The determination as to what documentation should be required and the preparation of those documents is often handled by the coop’s attorney or the managing agent and the shareholder will be charged a fee in connection therewith. It is very important that shareholders try and locate the documents as far in advance of closing as possible and not wait until the day of closing to notify the coop if the documents are lost.