Published: Summer 1995

SUBLET SURCHARGES; NON-RESIDENTS ON THE BOARD; MINIMUM PURCHASE PRICE;& PRUDENT MANAGEMENT

Marc Luxemburg, president of the Council of New York Cooperatives & Condominiums, is an attorney specializing in cooperative and condominium law. In each issue of the CNYC Newsletter, Mr. Luxemburg reviews recent court cases. In addition, at the annual Cooperative Housing Conference he presents a workshop on significant legal decisions of the year.

CNYC frequently takes advocacy positions on key legal issues in briefs of amicus curiae. If your building is involved in a legal action that you think is significant to other buildings, please be sure to keep CNYC informed of the status of the case.

SUBLET SURCHARGES MUST BE SPECIFICALLY AUTHORIZED

The Appellate Division, 1st Department, has dealt a severe blow to cooperatives with its affirmation of the decision in Zimiles v. Hotel Des Artistes, Inc., 627 N.Y.S.2d 382 (June 8, 1995). In this case, the proprietary lease required the consent of the directors to any sublease, but did not expressly authorize the board to attach any conditions to its consent, such as charging a sublet fee.

The lower court had found that the board needed express authority to attach conditions to granting or withholding consent. This decision was affirmed by the Appellate Division, which ruled that, "Since the Bylaws and Proprietary Lease ... contained no specific authority for the imposition of a sublet surcharge" and since the cooperative did not amend the proprietary lease to authorize such a surcharge, the surcharge was properly voided from the beginning. The court affirmed that all improperly obtained surcharges had to be returned. The court ignored the possibility that many of these charges may have been paid without protest and without any reservation of rights on the part of the tenant-shareholders.

Additionally, the court held that it was proper to award attorney's fees to the plaintiffs under the attorney's fees provision in the proprietary lease. This provides that attorney's fees arising out of a legal action based on a default are payable to the cooperative by a shareholder. Although the proposition was not stated, apparently the court assumed that the improper imposition of sublet fees constituted a default under the proprietary lease.

CNYC has previously advised its members to be sure that the proprietary lease authorizes the attaching of conditions to the granting of consent to a sublet, and that the bylaws do not limit the fees charged to a reimbursement of expenses. For suggested texts, contact CNYC by e-mail to info@cnyc.coop with your name and address or call (212) 496-7400, but be sure to consult your own attorney.

TO RESTRICT NON-RESIDENTS ON THE BOARD, DOCUMENTS MUST BE EXPLICIT

In Johar v 82-04 Lefferts Tenant Corp., NYLJ, 7/5/95, p.30, c.1 (Sup. Ct., Queens Co.), the issue was whether a non-resident tenant-shareholder was qualified to be elected as a member of the board of directors. The plan gave the sponsor the authority to designate a minority of the board, and the cooperative took the position that these were the only seats that could be occupied by non-residents.

The court found, however, that the bylaws of the cooperative did not distinguish between shareholders who are residents and those who are non-residents, and that they did not restrict eligibility for the majority seats on the board of directors. The court held that the terms of the offering plan restricting the sponsor's rights were not relevant to the current issue, since it was the bylaws and not the offering plan that governed the legal rights between the parties. Since the bylaws simply provided that "not less than a majority of directors shall be tenant-shareholders other than holders of unsold shares," but said nothing about residency, the court declared the plaintiff eligible for election to the board to fill a non-sponsor seat.

Continuing the judicial trend to restrict the authority of the board is Oakley v. Longview Owners, Inc., Sup. Ct., Westchester Co., NYLJ, 5/16/95, p.32, c.1. In this case, the board rejected a purchaser because the purchase price fell below a minimum floor price established by the board. The minimum had been based on an appraisal of two other apartments. The board decided it would not approve a contract that was more than 10% below the appraised value. The disappointed buyer sued the board for damages, and the board moved to dismiss the suit. The court found that despite the special nature of the cooperative corporation that gives it the right to reasonably restrain the alienability of apartments, this power is not unlimited, and the restriction cannot prohibit transfers.

The court found that since the restraint is dependent upon market forces beyond the control of the parties, it is, as adopted, a prohibition of transfer and an unreasonable restraint of alienation. The court also found that the board had no authority to impose this kind of restraint, and that the shareholders must be given an opportunity to vote on such a significant restriction. Accordingly, the motion to dismiss the complaint was denied and the case was set down for trial as to whether the board had any other valid reason for rejecting the purchaser.

COURT UPHOLDS PRUDENT MANAGEMENT

In Muraskin v. 260 Apartments Corp., an unpublished decision in the Sup. Ct., NY Cty, Index No. 107278/93, Justice Cahn (July 7, 1995), plaintiffs were investors who owned two apartments occupied by rent-regulated tenants. They complained that they were unable to collect rent increases because the cooperative had failed to cure numerous building violations or to provide certain documentation.

When the building was converted to cooperative status in 1981, it had approximately 250 building violations; as of 1992, only 15 violations remained. The managing agent asserted that the board of directors had the violations remedied in a manner that was financially feasible and that caused the least amount of inconvenience to the shareholders, and that all of the violations had been cured by 1994, at which time a rent increase had been approved.

The court analyzed the complaint as based on a failure by the board to maintain the building in accordance with the condition required by the proprietary lease. However, the proprietary lease specifically provided that the plaintiff was not entitled to a remedy unless the failure or delay in making repairs was due to negligence by the cooperative. Since the court found that the cooperative had not displayed any negligence in its conduct, the complaint was dismissed.

CNYC SEEKSCO-OP/CONDO PART IN HOUSING COURT

Not only do court decisions resolve issues for those who are directly involved, they also provide guidance for those in parallel situations. Unfortunately, the courts often hand down conflicting decisions, producing more confusion than instruction.

In the interest of providing better, more consistent judicial due process for cooperatives and condominiums, the Council of New York Cooperatives & Condominiums has joined with the Coordinating Council of Cooperatives, the Federation of New York Housing Cooperatives and the Coalition of HDFC's to request a separate part in the Housing Court for cooperative and condominium cases. You can view the Position Paper on Housing Court at this Web site.