Why is an Aztech Recognition Agreement needed?
It’s important to realize that the language of co-op proprietary leases can vary regarding the ability to get a loan backed by the shareholder’s lease and shares as collateral. Some proprietary leases allow for it, some require the prior consent of the co-op corporation and others are completely silent regarding this matter.
Prior to the development and mainstream usage of today’s Aztech Recognition Agreement, lenders would negotiate directly with developers and co-op converters to create custom documents that would allow for financing for individual shareholders.
What is an Aztech Recognition Agreement?
An Aztec form is an agreement between three parties: the bank, the co-op and the shareholder. It is primarily an understanding between the co-op corporation and the bank lender which is signed and acknowledged by the shareholder. It confirms that the shareholder is the owner of the shares and holder of the proprietary lease. It confirms consent by the co-op corporation to the lender extending a loan to the shareholder in exchange for a lien on the shareholder’s lease and shares as security.
It prevents the co-op corporation from consenting to any further encumbrances of the collateral without the lender’s approval. This means no further loans, subletting, termination or surrendering of the lease without the lender’s consent.
It requires the co-op to accept payment from the bank on behalf of a delinquent shareholder.
The co-op recognizes the bank’s lien against the shares and lease, and in the event the lease is terminated and a sale occurs, the bank will be paid the net proceeds of the sale after all sums owed to the co-op are first satisfied. If there is anything left after the co-op and bank’s loan are repaid in full, the remaining amounts will go to the shareholder.
Meanwhile, the lender agrees it has no power to transfer the proprietary lease or shares to anyone else without the co-op’s approval.
Interestingly enough, the Aztech Recognition Agreement also states that the bank will indemnify the co-op against any liability incurred by any claim the shareholder makes as a result of the co-op’s actions under the Aztec form.
An additional benefit for co-op boards is their shareholders will generally be much more timely on their maintenance payments. If a shareholder is being difficult or in actual default, all it often takes is sending a copy of a notice to cure to the shareholder’s bank. This works wonders as most shareholders are more afraid of being in default on their loan than of being late on their maintenance payments.
It is important to note that a co-op corporation always has a first lien on shares and leases. This means in any shareholder default, a co-op corporation will be paid first on any sums owed to it before a bank.
Sometimes banks will try to get co-op corporations to agree to their own version of the agreement. If this happens the co-op’s attorney may agree to minor variations but will likely outright reject anything that eliminates the language protecting the co-op from liability if the co-op accidentally forgets to notify the lender of a default.
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