A Share Loan is a type of financing that allows for an incoming Cooperative member to finance the initial purchase price of a membership and unit, or can be obtained by an existing member for improvements as specified in a Cooperative’s Bylaws. As part of the Share Loan process, a Recognition Agreement is executed by a Cooperative and a lending institution which sets forth the rights and responsibilities of the parties as well details as what happens if the member-borrower defaults on the member-borrower’s Share Loan. Generally, standard Recognition Agreements are overly Lender friendly and do not provide for specific rights that must be afforded to the Cooperative in the event of a default by the member-borrower. It is pertinent that any Recognition Agreement that is presented to a Cooperative from a Lender be specifically tailored to the needs of the Cooperative.
The main crux of a Recognition Agreements is to explain what happens when the member-borrower defaults and whether the rights of the Lender or the Cooperative are superior. While standard Recognition Agreements do provide for rights and remedies available to both the Cooperative and the Lender in the event of a member-borrower default, it does not address the real-life issues that Cooperatives face when the Lender becomes the owner of the proprietary documents as a result of a member-borrower default. It is for this reason alone that that any Recognition Agreement that is presented to a Cooperative from a Lender be specifically tailored to the needs of the Cooperative.
Standard Lender Recognition Agreements are often times silent with respect to the specific rights that must be afforded to the Cooperative in the event of a default by the borrower-member. For example, standard Recognition Agreements often fail to provide for a Cooperative’s right to initiate a summary proceedings action against the defaulted member-borrower for violations of his/her Occupancy Agreement. The Cooperative must be able to take action against the defaulted member-borrower without having to be fully tied to the lender’s approval to bring a summary proceedings action for non-payment or termination and without being in breach of the Recognition Agreement.
Standard Lender Recognition Agreements also often fail to provide for timelines for the Lender to take action. This holds true if the Lender is exercising its rights to cure a member-borrower’s monetary default or induce the member-borrower to cure the default or if the Lender is requesting that the Cooperative initiate a summary proceedings action against the member-borrower when there has been a default under the Share Loan. Cooperatives must be able to press Lenders to take action with specific timeframes provided for in the Recognition Agreement.
Other default provisions that we see that do not benefit and protect Cooperatives relate to priority of lien rights when the membership and occupancy is foreclosed upon by the Lender as a result of a default. Specifically, as it relates to the Cooperatives not having superior lien status for the unpaid rent, maintenance, other sums due, pro rata share of prior mortgage loans, current real estate taxes and special assessments. It is pertinent that a Cooperative have superior lien status as it should be made whole for the unpaid rent, maintenance, other sums due, pro rata share of prior mortgage loans, current real estate taxes and special assessments.
A major issue that we see with non-specifically tailored Recognition Agreements is that there are no provisions detailing the responsibilities and obligations of the Lender when it becomes the owner of the Proprietary Documents. Pertinent provisions must be added to include restrictions on what the Lender can do while holding the ownership of the membership. A few examples include the following:
Adding these provisions protects the Cooperative and forces the Lender to assume the membership, without any rights, and fully adhere to and abide by the governing documents of the Cooperative.
It is not lost that Lenders must protect their rights under the Share Loan through the Recognition Agreement. However, most Lenders do not fully understand how Cooperatives are organized and operate. This is why it is vital that any Recognition Agreement that is provided to a Cooperative be amended to be specifically tailored to the needs of the Cooperative. The best practices of Share Loans and Recognition Agreements is to get your cooperative attorney involved at the start to ensure that the Recognition Agreement will protect and benefit the Cooperative.