A Brief Introduction of Recognition Agreement
Buying a co-op apartment is a lot different from buying a regular apartment in the US. There are certain requirements that the bank imposes before giving the loan. The bank requires this agreement or Aztec Recognition Agreement to give a loan to the buyer. It is essentially a tri-party agreement that involves three parties, namely borrower, lender, and co-op.
First, it is important to note that the borrower or the buyer buys shares in the co-op apartment instead of a regular purchase. So basically, you don’t buy the apartment, you are receiving a stock certificate to occupy the co-op apartment. If the shareholder fails to pay on time, the co-op has the right to approach the lender on behalf of the shareholder. Further, if the shareholder needs to sublease the apartment or take another loan, the lender must be notified.
The agreement contains all such terms and conditions. Other names for this agreement are Aztec Recognition Agreement, Recognition Agreement Co-op, and Aztec Form.
Who Takes the Recognition Agreement?
As discussed above, this is a tri-party agreement that requires the involvement of shareholders, co-op, and the lender. All these members are an integral part of the agreement; however, the agreement is signed to ensure notifications by the co-op to the bank about various aspects of the co-op apartment purchase.
Purpose of the Recognition Agreement
In addition to a stock certificate, the shareholder also receives the proprietary lease document from the co-op. However, due to many inconsistencies in the language contained in those documents, an Aztec form seemed more beneficial. Stock certificate and proprietary lease documents allow the buyer to live in the apartment that he purchases.
Prior to the Aztec form, the lenders would directly negotiate with a co-op that would allow the financing for the shareholder.
Here are a few reasons to choose the agreement –
- Allows co-ops on lease
- Ensures consistency in the language used
- keeps the lender or bank in the loop
- Allows the bank to monitor shareholder’s payments
- Allows the bank to intervene if the shareholder doesn’t make payments on time
- Makes the bank a guarantor
- Confirms the rights of each individual involved
Contents of the Recognition Agreement
Like any other tri-party agreement, the Aztec form also includes the basic details of all involved parties.
- Basic details are names, phone numbers, addresses, etc.
- It further must include the basic details of the co-op, which includes its condition, size, address, etc.
- It must confirm that the bank has a lien on the stock certificate and proprietary lease.
- It must mention that the shareholder is the owner of the co-op and its shares.
- It should also confirm that the proprietary lease will act as a collateral for the loan.
How to Draft the Recognition Agreement?
In many cities in the US, it has become mandatory to sign this agreement for consistency in the language used. To draft the agreement, all parties must first understand why the agreement is so crucial for their relationship and mention the respective clauses in the agreement. The agreement should confirm the following conditions.
- The lender should get clarity about his rights and responsibilities in case the shareholder fails to pay on time.
- The co-op must also realize its conditions before drafting the agreement. All parties must read the legality of the agreement.
They can also take the help of an attorney who can help them understand everything in detail. A real estate expert can also suggest parties on the intricacies involved.
Most terms and confirmations of these agreements are standard. However, there is always some scope of negotiations. Negotiations are deemed important in any agreement. Since this agreement includes three parties, they all can negotiate on the terms and responsibilities.
Benefits & Drawbacks of the Recognition Agreement
A proprietary lease document and stock certificates are not sufficient enough for a co-op apartment purchase. A Recognition contract or Aztec Agreement has several more benefits than a propriety lease agreement. Here are a few benefits of signing this agreement –
- It ensures there is no unnecessary confusion between involved parties.
- It makes sure all parties are on the same page and understand their roles and responsibilities.
- It confirms that the shareholder owns the apartment.
- It elucidates the lender of his/her responsibilities if the shareholder defaults or fails to pay
- It stops the co-op from subletting the apartment, approving another loan, or terminating it without the lender’s approval.
- It allows the bank to monitor payment timelines.
- It makes the shareholders pay on time
If drafted well, keeping all the important aspects in mind, this agreement has no drawbacks.
What Happens in Case of Violation?
It is important to note that the co-op always has a first lien on the lease(1), and shares which means in case of any default, the co-op will be paid before the bank or the lender. Parties must be aware of these basic features of this agreement. In case of any default by the shareholder, the co-op can inform the lender, who can further send a notice to the shareholder.
However, in the case of any bigger default, all parties are well within their rights to approach the court and take the help of it.
To secure the collateral, it has become extremely important to draft this agreement carefully. The agreement protects everyone involved and makes things easy to tackle. In many states in the US, and especially in New York, signing this agreement is considered vital.
There are many Recognition Agreement templates available online. You can use the important indicators mentioned above to draft an effected agreement or alternatively choose an expert.