On October 4, 2024, Governor Kathy Hochul signed into law the Ground Lease Renewal Bill, dramatically improving the rights of land-lease co-op owners in New York to renew their ground leases. Shareholders in land-lease cooperatives are now permitted to exercise renewal rights under their ground leases at any time prior to expiration, irrespective of the exercise date restrictions specified in their lease.
The Problem: Co-op owners in buildings subject to a ground lease face a number of difficult scenarios if the term of that ground lease is about to expire. If a co-op ground lease is allowed to expire, title to the land, including all structures and capital improvements, reverts to the landowner. In that event, the co-op shareholder loses their unit without compensation and are left with only a rent-stabilized month-to-month leasehold estate.
Co-op ground leases usually run for a term of 99 years and contain renewal rights. Such ground lease renewal rights often are only exercisable during a fixed period of time in the last years of the ground lease. This timing markedly strengthens the bargaining power of the landowner/ground lessor and creates considerable problems for both the cooperative corporations and their shareholders.
For example, if the remaining term on the ground lease is less than 35 years, many lenders (including Fannie Mae) will not grant a conventional mortgage secured by the co-op leasehold. This cripples the value of the unit and can grossly impair the ability to sell.
Market forces add the risk that, because of the disproportionately greater bargaining power of landowners, they will seek sharp rent increases upon renewal to reflect and reap the benefits of spiraling real estate values.
What the new Law does: The Bill signed into law by Governor Hochul permits co-op shareholders to exercise their renewal options at any time during the term of the lease, irrespective of the exercise date restrictions contained in the ground lease. Thus, shareholders need not wait until the remaining term of the lease is reduced so low that their bargaining power is significantly weakened and refinancing is all but impossible.
Additional bills that would have capped ground lease rent increases and provide cooperative corporations a right of first refusal were proposed, but these bills were vigorously opposed by the real estate industry and did not pass. Ground lease co-ops typically sell for 20% to 30% less than conventional fee cooperative units; industry leaders argued that the buyers of these units reaped the benefits of the reduced prices with full knowledge of the risks of a ground lease arrangement. Capping ground rent increases or other such measures, they argued, would therefore constitute an impermissible taking and an inappropriate interference with a contractual relationship. So far, those arguments appear to have won the day.
Bleakley Platt & Schmidt’s Real Estate Practice Group can help co-op owners understand and navigate this important change in the law. Contact Peter Bassano at 914-287-6102 or pbassano@bpslaw.com.
