Cooperatives & Condominiums

Co-Op Board Entitled to Terminate Proprietary Lease

Breezy Point Cooperative, Inc. v. Young

NYLJ 8/15/07, p. 37, col. 5

AppTerm, 2nd & 11th Districts

(memorandum opinion)

In cooperative corporation's summary holdover proceeding against proprietary lessee, proprietary lessee appealed from Civil Court's grant of summary judgment to the co-op corporation, and consequent award of possession of the subject apartment. The Appellate Term affirmed, holding that the co-op board had used proper procedures in terminating the proprietary lease.

The proprietary lease of the apartment provides that the lease may be terminated when the shareholders determine that because of lessee's objectionable conduct, the tenancy of the lessee is undesirable. The lease further provides that repeated violation of the cooperative's rules and regulations constitute objectionable conduct. The coop's corporate bylaws provide that shareholders may propose resolutions at any time, provided that a petition shall be signed by 200 shareholders and filed with the secretary. Resolutions may be adopted when a majority of shareholders are present and two-thirds vote in favor of the resolution.

In 2004, 225 shareholders signed a petition to require a vote on a resolution terminating subject tenant's proprietary lease. At the annual shareholders meeting, 1259 of the 1380 voting shareholders supported the resolution. Coop corporation then served proprietary lessee with a notice that the lease had been terminated, alleging 94 violations of the coop's bylaws or rules and regulations, including repeated harassment of security officers, violation s of noise, litter, animal, and motor vehicle regulations, and interfering with the rights of other shareholders ' in part by bringing repeated litigation against the coop. Coop then brought this proceeding, and sought summary judgment, setting forth proprietary lessee's violations, including a lengthy history of largely meritless litigation against the coop, which had cost the coop several hundred thousand dollars in legal fees. Tenant responded, arguing in part that prior litigation was an impermissible basis for terminating the proprietary lease. Civil Court awarded the coop corporation a judgment of possession, and proprietary lessee appealed.

In affirming, the Appellate Term started by noting that the business judgment rule governs judicial review of a coop's decision to terminate a proprietary lease. The court then noted that a proprietary lessee can overcome the presumption that the coop board acted properly only when the less can show that the coop's action was unauthorized, that the coop did not follow its own procedures, or that the coop did not act in good faith. In this case, the court rejected tenant's claim that rules violations and litigation were insufficient basis to terminate the proprietary lease, and the court also found no violation of the coop's procedures. As a result, the corporation was entitled to possession.

COMMENT

Courts generally defer to a cooperative board's termination of a proprietary lease for objectionable conduct. Thus, in 40 West 67th Street v. Pullman, 100 NY2D 147, the court invoked the business judgment rule to insulate from judicial review a cooperative board's termination of a lease, pursuant to a lease provision authorizing termination for 'objectionable conduct.' The court noted that the cooperative acted in accordance with the terms of the tenant's lease: the board called a special meeting at which a majority of shareholders voted to terminate tenant's lease due to tenant's altercations with other tenants as well as tenant's unapproved construction work.

The Pullman court articulated three exceptions to the business judgment rule, none of which are likely to be helpful to the typical tenant whose lease has been terminated for objectionable conduct. First, if a tenant can prove that a cooperative board acted outside the scope of its authority in terminating tenant's lease, the court will not defer to the decision of the cooperative board. A cooperative board that terminates a tenant's proprietary lease without providing notice to the tenant acts outside the scope of its authority. See 49 West 12 Tenants Corp. v. Seidenberg, 6 A.D.3d 243 (holding that a cooperative board acted outside the scope of its authority by terminating tenant's lease without first meeting the termination notice requirements set in the proprietary lease). Tenants probably will not find this exception helpful, however, because cooperative boards, based on prior case law, will be careful to give proper notice to tenants.

Second, Pullman suggested that a tenant can overcome the business judgment rule by demonstrating that a cooperative board acted in a manner that does not legitimately advance its corporate purpose. This exception, too, will typically be of little value to tenants because terminating a lease for objectionable conduct advances a co-op's corporate purpose. For example, in 1050 Tenants Corp. v. Lapidus, 2007 NY Slip Op 3558 , the court held that a cooperative board acted in furtherance of a legitimate purpose in terminating the lease of tenants who installed without permission an air conditioning system that caused significant water damage to other tenants and who also withheld payments, triggering numerous nonpayment proceedings that cost the co-op over $400,000 in attorneys' fees

Third, the deferential business judgment rule does not apply where a court finds that a cooperative board acted in bad faith. Although the Lapidus court suggested, in dictum, that a showing of malice would establish bad faith, courts are unlikely to find malice or bad faith when a co-op board terminates a lease following a majority vote that a particular tenant's conduct was objectionable.

Co-Op Board Entitled to Terminate Proprietary Lease

Breezy Point Cooperative, Inc. v. Young

NYLJ 8/15/07, p. 37, col. 5

AppTerm, 2nd & 11th Districts

(memorandum opinion)

In cooperative corporation's summary holdover proceeding against proprietary lessee, proprietary lessee appealed from Civil Court's grant of summary judgment to the co-op corporation, and consequent award of possession of the subject apartment. The Appellate Term affirmed, holding that the co-op board had used proper procedures in terminating the proprietary lease.

The proprietary lease of the apartment provides that the lease may be terminated when the shareholders determine that because of lessee's objectionable conduct, the tenancy of the lessee is undesirable. The lease further provides that repeated violation of the cooperative's rules and regulations constitute objectionable conduct. The coop's corporate bylaws provide that shareholders may propose resolutions at any time, provided that a petition shall be signed by 200 shareholders and filed with the secretary. Resolutions may be adopted when a majority of shareholders are present and two-thirds vote in favor of the resolution.

In 2004, 225 shareholders signed a petition to require a vote on a resolution terminating subject tenant's proprietary lease. At the annual shareholders meeting, 1259 of the 1380 voting shareholders supported the resolution. Coop corporation then served proprietary lessee with a notice that the lease had been terminated, alleging 94 violations of the coop's bylaws or rules and regulations, including repeated harassment of security officers, violation s of noise, litter, animal, and motor vehicle regulations, and interfering with the rights of other shareholders ' in part by bringing repeated litigation against the coop. Coop then brought this proceeding, and sought summary judgment, setting forth proprietary lessee's violations, including a lengthy history of largely meritless litigation against the coop, which had cost the coop several hundred thousand dollars in legal fees. Tenant responded, arguing in part that prior litigation was an impermissible basis for terminating the proprietary lease. Civil Court awarded the coop corporation a judgment of possession, and proprietary lessee appealed.

In affirming, the Appellate Term started by noting that the business judgment rule governs judicial review of a coop's decision to terminate a proprietary lease. The court then noted that a proprietary lessee can overcome the presumption that the coop board acted properly only when the less can show that the coop's action was unauthorized, that the coop did not follow its own procedures, or that the coop did not act in good faith. In this case, the court rejected tenant's claim that rules violations and litigation were insufficient basis to terminate the proprietary lease, and the court also found no violation of the coop's procedures. As a result, the corporation was entitled to possession.

COMMENT

Courts generally defer to a cooperative board's termination of a proprietary lease for objectionable conduct. Thus, in 40 West 67th Street v. Pullman , 100 NY2D 147, the court invoked the business judgment rule to insulate from judicial review a cooperative board's termination of a lease, pursuant to a lease provision authorizing termination for 'objectionable conduct.' The court noted that the cooperative acted in accordance with the terms of the tenant's lease: the board called a special meeting at which a majority of shareholders voted to terminate tenant's lease due to tenant's altercations with other tenants as well as tenant's unapproved construction work.

The Pullman court articulated three exceptions to the business judgment rule, none of which are likely to be helpful to the typical tenant whose lease has been terminated for objectionable conduct. First, if a tenant can prove that a cooperative board acted outside the scope of its authority in terminating tenant's lease, the court will not defer to the decision of the cooperative board. A cooperative board that terminates a tenant's proprietary lease without providing notice to the tenant acts outside the scope of its authority. See 49 West 12 Tenants Corp. v. Seidenberg, 6 A.D.3d 243 (holding that a cooperative board acted outside the scope of its authority by terminating tenant's lease without first meeting the termination notice requirements set in the proprietary lease). Tenants probably will not find this exception helpful, however, because cooperative boards, based on prior case law, will be careful to give proper notice to tenants.

Second, Pullman suggested that a tenant can overcome the business judgment rule by demonstrating that a cooperative board acted in a manner that does not legitimately advance its corporate purpose. This exception, too, will typically be of little value to tenants because terminating a lease for objectionable conduct advances a co-op's corporate purpose. For example, in 1050 Tenants Corp. v. Lapidus, 2007 NY Slip Op 3558 , the court held that a cooperative board acted in furtherance of a legitimate purpose in terminating the lease of tenants who installed without permission an air conditioning system that caused significant water damage to other tenants and who also withheld payments, triggering numerous nonpayment proceedings that cost the co-op over $400,000 in attorneys' fees

Third, the deferential business judgment rule does not apply where a court finds that a cooperative board acted in bad faith. Although the Lapidus court suggested, in dictum, that a showing of malice would establish bad faith, courts are unlikely to find malice or bad faith when a co-op board terminates a lease following a majority vote that a particular tenant's conduct was objectionable.