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COURT CASES

Published: Winter 2005

LAUNDRY ISSUE RESOLVED
TO CO-OP’S BENEFIT

On October 18, 2005, a New York appellate court invalidated a right of first refusal contained in a lease between Coinmach Industries, a provider of coin-operated laundry equipment services to apartment buildings in the New York area, and a New York City cooperative. Inwood Apartment Corp. v. Coinmach Industries Co. (2005 NY Slip Op 07630, series/2005.2005_0763.htm) has broad implications because Coinmach Industries endeavors to incorporate this same right of first refusal in all of its leases.

The cooperative was represented by Jacques F. Rose of the law firm of Hartman, Ule, Rose & Ratner, LLP. Mr. Rose invoked and the Court enforced the ancient rule against “unreasonable restraints upon alienation”, which was developed to promote the free and ready transfer of property and to prevent owners from tying up title to their properties for too long a time.

The cooperative had leased a room in its building to Coinmach in 1994 and Coinmach agreed to provide laundry services to residents of the building. The cooperative was unhappy with the services received from Coinmach, but when the lease expired in 2003, Coinmach refused to vacate, relying upon its right of first refusal, which stated that at the expiration of the lease, Coinmach had a right to meet any outside offer to lease the laundry room or to provide coin-metered laundry equipment services. If the cooperative did not receive such an offer, then Coinmach had the right to remain in possession and operate the laundry room until an offer was received and Coinmach was afforded its right of first refusal.

In 2003, the cooperative commenced an action seeking a judgment that the right of first refusal in its lease was an unreasonable restraint on alienation. The cooperative argued that Coinmach’s right of first refusal put a total hammerlock on the cooperative’s freedom to use its property because:
1) Coinmach’s right of first refusal could be exercised at any time after the expiration of the lease term and Coinmach had the right to remain in possession of the room until an offer was received, even if no outside offer were to be received for 50 years. 2) There were no limits on the time in which Coinmach was required to exercise its right of first refusal once an outside offer was received. 3) The lease required that the outside offer be an offer to lease the space as a laundry room and not for other purposes.

The Supreme Court, the first court to hear the case, ruled in the cooperative’s favor and on October 18, 2005, the Appellate Division, First Department unanimously affirmed, stating: “Permitting [Coinmach] such a temporally unrestricted right would constitute an unreasonable restraint upon the alienation of the property. We perceive no beneficial purpose to be served by effectively requiring plaintiff residential cooperative to retain [Coinmach’s] services indefinitely.”

COURT OF APPEALS DECISION
ON HOLDERS OF UNSOLD SHARES

On June 18, 2005, New York’s highest court, the Court of Appeals, in a case entitled Kralik v. East 79th Street Owners Corp. (2005 N.Y. Lexis 1261 June 16, 2005) reversed long-standing case law that a Holder of Unsold Shares had to meet the Attorney General’s six requirements for designation as a “Holder”. The Attorney General (AG) had required that the following tests be met: 1. Sponsor designation of the new owner as a holder of unsold shares; 2. Compliance by the shareholder with AG escrow and trust fund requirements; 3. Registration by the holder with the AG as a “broker dealer”; 4. Filing by the holder of an amendment to the offering plan;
5. Written guaranty by the sponsor of the holder’s payment of maintenance and assessments; and 6. No occupancy of the unit by the holder.
The Court held that the provisions of the proprietary lease defining “Holder” (paragraph 38 in most proprietary leases) control rather than AG rules. That paragraph usually provides that shares held by a sponsor are “Unsold Shares” until the apartment to which the shares are allocated is occupied by the shareholder or a member of the shareholder’s family.

Under most co-op bylaws and proprietary leases, the original sponsor of the conversion is exempt from certain obligations that are imposed on the other shareholders. Sponsors typically do not have to get board approval for a sale or sublet, and do not have to pay sublet fees or transfer fees imposed on sales. These privileges can often be transferred to someone who buys a sponsor-owned apartment for investment purposes only, because if he is considered a holder of unsold shares, he is entitled to the same treatment. But the status was not heretofore automatic.

In the Kralik case, both the trial court and the Appellate Division held that the investor had never become a holder of unsold shares because he had not complied with several of the AG regulations. The Court of Appeals reversed those rulings, holding that the regulations apply only to public offering of shares and not to sale of shares to an investor.

 
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