Cooperatives & Condominiums

AppDiv, First Dept

(memorandum opinion)

In an action by condominium unit owner to set aside an amendment to the bylaws of the condominium association, the condominium board appealed from Supreme Court's grant of summary judgment to unit owner. The Appellate Division reversed and awarded summary judgment to the condominium association, concluding that the amendment did not impose an unreasonable restraint on alienation.

The subject condominium includes 38 large multi-bedroom luxury units and five studio apartments located on the same floor as the laundry room, gym, and superintendent's unit. The condominium was marketed as a luxury building that included studio units for the household help of the purchasers of the large units. Neither the condominium's offering plan nor the bylaws included any restriction on sale of the studio units, although a selling agent told some purchasers of large units that studios could not be sold to persons who did not live in the condominium. Plaintiff unit owner purchased a four-bedroom apartment and a studio. Subsequently, when the condominium board discovered the absence of restrictions on sale of the studios, the board proposed, and the unit owners approved, an amendment to the bylaws. The amendment restricted sale or lease of the studio units to owners of the larger residential units. Unit owner brought this action to set aside the amendment as an invalid restraint on alienation. Supreme Court awarded summary judgment to unit owner.

In reversing, the Appellate Division first cited section 339-v(2)(a) of the Real Property Law, which explicitly permits condominium bylaws to contain provisions restraining alienation, leasing, purchase, ownership and occupancy of units, so long as the provisions do not discriminate on the basis of race, creed, color or national origin. The court conceded that the bylaws are also subject to the common law rule against unreasonable restraints on alienation, but concluded that the restriction in this case was not unreasonable. The court noted that the purpose of the restriction — to preserve the condominium's character — is not unreasonable, and noted as well that the restriction can be modified at any time by the condominium association.

COMMENT

While N.Y. Real Property Law ' 339-v(2) provides that bylaws may contain provisions governing alienation so long as they do not restrict alienation because of race, creed, color, or national origin, the statute is silent regarding whether bylaws are subject to the common law rule against restraints on alienation. However, the Appellate Division has held that an absolute prohibition on leasing does not constitute an unreasonable restraint on alienation. In Four Brothers Homes at Heartland Condominium II v. Gerbino, 262 A.D.2d 279, the court upheld condo bylaws that limited occupancy to owners of the units. After holding that under 339-v(2), bylaws containing rules governing leasing are valid, the court went on to reject the argument that the restriction was an unreasonable restraint on alienation, emphasizing that condominium owners willingly give up rights and privileges to be part of the condominium community.

A court will invalidate a restraint on alienation as unreasonable only if, first, it is open-ended or long-lasting, and second, it will discourage a landowner from selling their property, or force the landowner to retain it. Thus, a preemptive right to purchase land at a low price (which discourages sale by making sale unprofitable for the seller) will often be found invalid. In Kowalsky v. Familia, 71 Misc. 2d 287, a holder of an option to purchase land for $2000 sought to enforce her right when the county was given an option to buy the land for $26,000. The Supreme Court held that the disparity between the option price and the market value, as well as the lack of any legitimate purpose in instituting or enforcing the option, rendered it invalid. Courts also invalidate as unreasonable restrictions that prohibit the sale of property unless a certain price is met. In Oakley v. Longview Owners, 165 Misc. 2d 192, a cooperative adopted a resolution that provided that approval for the sale of cooperative shares would be withheld if the contract price was lower than ten percent below the appraised value of sample units. The Supreme Court held that this resolution was an unreasonable restraint on alienation because it in effect prohibited owners from selling unless the market was comparable to, or better than, the market at the time of appraisal. However, even permanent rights of first refusal have been found to be reasonable, so long as the holder of the right must exercise it within a short period of time. Such rights merely postpone, but do not prevent, alienation. In Anderson v. 50 East 72nd Street Condominium, 119 A.D.2d 73, the Appellate Division held that a condominium's right of first refusal was not an unreasonable restraint on alienation, as it had to be exercised within 30 days of notification of sale and at the same price offered by a third party.

Owners of condominium units are subject to restrictions in the bylaws that are in place at the time of purchase. As Four Brothers Homes at Heartland Condominium II v. Gerbino, 262 A.D.2d 279, noted, purchasers willingly give up rights and privileges normally associated with property ownership in order to be part of the condominium community. The New York Condominium Act requires that bylaws contain methods for enacting or amending rules and regulations as well as restrictions on the use and maintenance of units and common elements. Real Property Law ' 339-v. When this is so, condominium owners will be subject to regulations enacted pursuant to the bylaws, even after they purchase, so long as the regulations are enacted in good faith and in furtherance of the interests of the condominium community as a whole. In Gillman v. Pebble Cove Homeowners Association, 154 A.D.2d. 508, a townhouse association enacted a parking regulation pursuant to the bylaws. The Appellate Division held that the parking regulation could be enforced because it was within the authority of the association to enact it, as provided by the bylaws, and because there was no showing that the regulation was enacted in bad faith. However, the Condominium Act specifically provides that bylaws may contain rules governing alienation. It is unclear, and case law is silent, as to whether a court would enforce a rule or regulation, not a bylaw, governing alienation, even if the regulations was enacted before the unit owner purchased the unit.

Life Estate Created in Co-Op Apartment

Matter of Pollack

NYLJ 5/16/05, p. 34, col. 6

AppDiv, Second Dept

(memorandum opinion)

In a proceeding by occupant of a co-operative apartment to enjoin trustees of the trust that owned the apartment from taking steps to evict her, trustees appealed from a Surrogate Court order granting the injunctive relief. The Appellate Division modified to delete language reserving decision about interpretation of the proprietary lease, and otherwise affirmed, holding that the language of the trust instrument made it clear that occupant was intended to have a life interest in the apartment.

In 1994, decedent executed a trust agreement devising to his “dear friend” the right to “use, occupy and possess” the subject co-operative apartment “for and during her lifetime.” In 2002, the trust purchased shares in the co-op corporation, and the purchase agreement designated decedent and occupant as the individuals who would occupy the apartment. In 2003, decedent died, and his children became co-trustees of the trust. They sent occupant a 3-day notice terminating her “month-to-month” tenancy and directing her to vacate the apartment. Occupant then brought this proceeding for injunctive relief. The Surrogate's Court granted the injunction, “subject to the further Order of a Court which may find that … an interpretation of the proprietary lease requires a different result.” The trustees, decedent's children, appealed.

In modifying, the Appellate Division agreed with the Surrogate's Court that it is possible to convey a life estate in a co-operative apartment, even though the apartment is generally treated as personal property rather than real property. The Appellate Division also agreed that a trust would be bound by provisions of a proprietary lease restricting creation of life estates. In this case, however, the purchase agreement expressly granted the occupant a right to live in the apartment, and the co-op corporation had acknowledged occupant's continued right to live in the apartment, negating any argument that the proprietary lease barred her life estate. The court remanded to Surrogate's Court for a determination of occupant's motion to impose a sanction on trustees for frivolous conduct and for an award of attorneys' fees.

Sale Restriction in Bylaw Amendment Does Not Constitute Unreasonable Restraint on Alienation

Demchick v. 90 East End Avenue Condominium

NYLJ 6/2/05, p. 24, col. 1

AppDiv, First Dept

(memorandum opinion)

In an action by condominium unit owner to set aside an amendment to the bylaws of the condominium association, the condominium board appealed from Supreme Court's grant of summary judgment to unit owner. The Appellate Division reversed and awarded summary judgment to the condominium association, concluding that the amendment did not impose an unreasonable restraint on alienation.

The subject condominium includes 38 large multi-bedroom luxury units and five studio apartments located on the same floor as the laundry room, gym, and superintendent's unit. The condominium was marketed as a luxury building that included studio units for the household help of the purchasers of the large units. Neither the condominium's offering plan nor the bylaws included any restriction on sale of the studio units, although a selling agent told some purchasers of large units that studios could not be sold to persons who did not live in the condominium. Plaintiff unit owner purchased a four-bedroom apartment and a studio. Subsequently, when the condominium board discovered the absence of restrictions on sale of the studios, the board proposed, and the unit owners approved, an amendment to the bylaws. The amendment restricted sale or lease of the studio units to owners of the larger residential units. Unit owner brought this action to set aside the amendment as an invalid restraint on alienation. Supreme Court awarded summary judgment to unit owner.

In reversing, the Appellate Division first cited section 339-v(2)(a) of the Real Property Law, which explicitly permits condominium bylaws to contain provisions restraining alienation, leasing, purchase, ownership and occupancy of units, so long as the provisions do not discriminate on the basis of race, creed, color or national origin. The court conceded that the bylaws are also subject to the common law rule against unreasonable restraints on alienation, but concluded that the restriction in this case was not unreasonable. The court noted that the purpose of the restriction — to preserve the condominium's character — is not unreasonable, and noted as well that the restriction can be modified at any time by the condominium association.

COMMENT

While N.Y. Real Property Law ' 339-v(2) provides that bylaws may contain provisions governing alienation so long as they do not restrict alienation because of race, creed, color, or national origin, the statute is silent regarding whether bylaws are subject to the common law rule against restraints on alienation. However, the Appellate Division has held that an absolute prohibition on leasing does not constitute an unreasonable restraint on alienation. In Four Brothers Homes at Heartland Condominium II v. Gerbino, 262 A.D.2d 279, the court upheld condo bylaws that limited occupancy to owners of the units. After holding that under 339-v(2), bylaws containing rules governing leasing are valid, the court went on to reject the argument that the restriction was an unreasonable restraint on alienation, emphasizing that condominium owners willingly give up rights and privileges to be part of the condominium community.

A court will invalidate a restraint on alienation as unreasonable only if, first, it is open-ended or long-lasting, and second, it will discourage a landowner from selling their property, or force the landowner to retain it. Thus, a preemptive right to purchase land at a low price (which discourages sale by making sale unprofitable for the seller) will often be found invalid. In Kowalsky v. Familia, 71 Misc. 2d 287, a holder of an option to purchase land for $2000 sought to enforce her right when the county was given an option to buy the land for $26,000. The Supreme Court held that the disparity between the option price and the market value, as well as the lack of any legitimate purpose in instituting or enforcing the option, rendered it invalid. Courts also invalidate as unreasonable restrictions that prohibit the sale of property unless a certain price is met. In Oakley v. Longview Owners, 165 Misc. 2d 192, a cooperative adopted a resolution that provided that approval for the sale of cooperative shares would be withheld if the contract price was lower than ten percent below the appraised value of sample units. The Supreme Court held that this resolution was an unreasonable restraint on alienation because it in effect prohibited owners from selling unless the market was comparable to, or better than, the market at the time of appraisal. However, even permanent rights of first refusal have been found to be reasonable, so long as the holder of the right must exercise it within a short period of time. Such rights merely postpone, but do not prevent, alienation. In Anderson v. 50 East 72nd Street Condominium, 119 A.D.2d 73, the Appellate Division held that a condominium's right of first refusal was not an unreasonable restraint on alienation, as it had to be exercised within 30 days of notification of sale and at the same price offered by a third party.

Owners of condominium units are subject to restrictions in the bylaws that are in place at the time of purchase. As Four Brothers Homes at Heartland Condominium II v. Gerbino, 262 A.D.2d 279, noted, purchasers willingly give up rights and privileges normally associated with property ownership in order to be part of the condominium community. The New York Condominium Act requires that bylaws contain methods for enacting or amending rules and regulations as well as restrictions on the use and maintenance of units and common elements. Real Property Law ' 339-v. When this is so, condominium owners will be subject to regulations enacted pursuant to the bylaws, even after they purchase, so long as the regulations are enacted in good faith and in furtherance of the interests of the condominium community as a whole. In Gillman v. Pebble Cove Homeowners Association, 154 A.D.2d. 508, a townhouse association enacted a parking regulation pursuant to the bylaws. The Appellate Division held that the parking regulation could be enforced because it was within the authority of the association to enact it, as provided by the bylaws, and because there was no showing that the regulation was enacted in bad faith. However, the Condominium Act specifically provides that bylaws may contain rules governing alienation. It is unclear, and case law is silent, as to whether a court would enforce a rule or regulation, not a bylaw, governing alienation, even if the regulations was enacted before the unit owner purchased the unit.

Life Estate Created in Co-Op Apartment

Matter of Pollack

NYLJ 5/16/05, p. 34, col. 6

AppDiv, Second Dept

(memorandum opinion)

In a proceeding by occupant of a co-operative apartment to enjoin trustees of the trust that owned the apartment from taking steps to evict her, trustees appealed from a Surrogate Court order granting the injunctive relief. The Appellate Division modified to delete language reserving decision about interpretation of the proprietary lease, and otherwise affirmed, holding that the language of the trust instrument made it clear that occupant was intended to have a life interest in the apartment.

In 1994, decedent executed a trust agreement devising to his “dear friend” the right to “use, occupy and possess” the subject co-operative apartment “for and during her lifetime.” In 2002, the trust purchased shares in the co-op corporation, and the purchase agreement designated decedent and occupant as the individuals who would occupy the apartment. In 2003, decedent died, and his children became co-trustees of the trust. They sent occupant a 3-day notice terminating her “month-to-month” tenancy and directing her to vacate the apartment. Occupant then brought this proceeding for injunctive relief. The Surrogate's Court granted the injunction, “subject to the further Order of a Court which may find that … an interpretation of the proprietary lease requires a different result.” The trustees, decedent's children, appealed.

In modifying, the Appellate Division agreed with the Surrogate's Court that it is possible to convey a life estate in a co-operative apartment, even though the apartment is generally treated as personal property rather than real property. The Appellate Division also agreed that a trust would be bound by provisions of a proprietary lease restricting creation of life estates. In this case, however, the purchase agreement expressly granted the occupant a right to live in the apartment, and the co-op corporation had acknowledged occupant's continued right to live in the apartment, negating any argument that the proprietary lease barred her life estate. The court remanded to Surrogate's Court for a determination of occupant's motion to impose a sanction on trustees for frivolous conduct and for an award of attorneys' fees.