Cooperatives & Condominiums

AppDiv, First Dept.

(memorandum opinion)

In their declaratory judgment action, co-op unit owners appealed from the Supreme Court's determination that they were not holders of unsold shares, and that they could not sell their unit without approval from the co-op board. The Appellate Division affirmed, holding that the Supreme Court properly considered the provisions of the offering plan in determining that unit owners did not hold unsold shares.

Sponsor began the process of converting the subject building to cooperative ownership in 1982. At that time, the unit at issue was occupied by a non-purchasing rent-controlled tenant who did not choose to purchase the apartment. Within three years, sponsor sold the shares associated with the apartment to purchaser Mark Greenbaum. An amendment to the offering plan identified Greenbaum as a holder of unsold shares. Greenbaum, however, defaulted on a mortgage obligation, and his shares were sold at a foreclosure sale. The parents of current unit owners purchased the shares. In 2003, current unit owners acquired the shares from their mother. Because the transfer was an intra-family transfer, board approval was not an issue. No amendments to the offering plan ever identified unit owners or their parents as holders of unsold shares. In 2005, the rent-controlled tenant surrendered possession of the apartment, and the following year, unit owners contracted to sell the apartment. The co-op board, however, refused to permit a closing without a formal application for board consent to the sale. Unit owners then brought this declaratory judgment action, contending that because they were holders of unsold shares, board approval of any sale was unnecessary. The Supreme Court held that unit owners were not holders of unsold shares, and unit owners appealed.

In affirming, the Appellate Division first rejected the argument advanced by unit owners that the offering plan is not a controlling document, and that the court could not consider the offering plan in determining whether unit owner was holder of unsold shares. The court then relied on that plan, which provides that if a sponsor holds unsold shares, the sponsor may “assign such ' shares and proprietary leases to individuals designated by it as holders of [u]nsold [shares].” The offering plan also provides that “no later than the third anniversary of [c]losing, the sponsor must have assigned all [u]nsold
[s]hares ' to individuals designated by it as holders of unsold shares.” In the court's view, this language precluded unit owners from status as holders of unsold shares, because they were never designated as holders of unsold shares. The court conceded that the offering plan also provided that unsold shares “retain their character as such (regardless of transfer)” until the holder or another purchaser occupies the apartment, but the court construed the word “transfer” to mean a transfer in which the purchaser is expressly designated as a holder of unsold shares. Unit owners in this case were never so designated, and therefore required board approval for any transfer.

COMMENT

Prior to Kralik v. 239 East 79th Street Owners Corp., 5 NY3d 54, New York courts had held that unit-owners qualified as holders of unsold shares only if they were designated as such by the sponsor and complied with the other prerequisites promulgated by the Attorney General and codified at 13 NYCRR
' 18(w). For example, in Pacella v. 107 W. 25th St. Corp., 271 A.D.2d 342, a unit owner filed an action for a declaration that he was a holder of unsold shares and therefore did not require consent in order to sublet two apartments he owned. The court held that the unit owner was not a holder of unsold shares because he failed to present evidence that the sponsor designated him as the holder of unsold shares as required by 13 NYCRR ' 18.3(w)(1). The Court of Appeals in Kralik explicitly overruled Pacella and any other case that suggests that the requirements of 13 NYCRR ' 18 apply when no shares are offered for sale in a public offering.

In Kralik, unit owners sought a declaration that they were holders of unsold shares and therefore entitled to sublet without obtaining the board's consent or paying a sublet fee. The lower courts held that the unit owners were not holders of unsold shares because neither they nor the sponsor complied with a number of prerequisites set out in 13 NYCRR ' 18(w). The Court of Appeals reversed, holding that since 13 NYCRR ' 18 is a disclosure statute intended to protect the public from fraud in the sale of real estate securities, it only applies to disclosures made in a public offering of shares. Since the unit-owners were not offering the apartment's shares for sale to the public, the court held that their status as holders of unsold shares should be determined by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. The Court of Appeals concluded that the unit-owners were holders of unsold shares based upon its examination of the certificate of incorporation, the corporation's bylaws, and the proprietary lease.

In Sassi-Lehner, the unit-owners argued that the court erred in examining the offering plan since it was drafted to reflect 13 NYCRR ' 18(w), the regulatory prerequisites that the Kralik court held were irrelevant when making this determination. The unit owners in Sassi-Lehner were denied status as holder of unsold shares for the same reason as the unit-owner in Pacella: They were not designated as such by the sponsor. The only difference was that in Pacella, the court made this determination by relying on the language of 13 NYCRR ' 18(w)(1), while the court in Sassi-Lehner relied on the identical language found in the offering plan.

But the Court of Appeals in Kralik did not address the situation where the proprietary lease makes explicit reference to the offering plan's definition of unsold shares, nor did the Kralik court explicitly state that the offering plan could never be examined as a matter of law. As a result, the Appellate Division reasoned that in Sassi-Lehner, the definition of a holder of unsold shares could not be understood without examining the offering plan since the proprietary lease stated that “the term Unsold Shares' means and has exclusive reference to the shares of the [l]essor which were issued to the [s]ponsor or individuals produced by the [s]ponsor pursuant to the [o]ffering [s]tatement [p]lan of [c]ooperative [o]rganization.” (emphasis added) The decision in Sassi-Lehner, therefore, seems to create an exception to Kralik in cases where the documents cited by Kralik (certificate of incorporation, the corporation's bylaws, and the proprietary lease) explicitly refer to the offering plan.

Breach of Implied Warranty Of Habitability Entitles Shareholder to Abate All Maintenance Payments

Granirer v. The Bakery, Inc.

NYLJ 8/14/08, p. 36, col. 3

AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by McGuire, J.)

In co-op unit owner's action for breach of the proprietary lease and breach of the implied warranty of habitability, the co-op corporation appealed from the Supreme Court's order granting unit owner an abatement of maintenance. The Appellate Division modified to dismiss a breach of fiduciary duty claim as duplicative, but otherwise affirmed, holding that the co-op's breach entitled unit owner to an abatement of all rent and maintenance expenditures including those attributable to taxes and mortgage payments. Unit owner's apartment is not currently inhabitable. Although no trial has yet taken place to determine whether the co-op corporation failed to make the required repairs, and whether unit owner barred the co-op access to the apartment, the trial court concluded that the defects would support a 100% abatement of unit owner's maintenance. The Supreme Court ordered an abatement of all payments, and the co-op corporation appealed.

In affirming the order abating all payments, the Appellate Division relied on a lease provision which provided that in case damages shall render the apartment partly or wholly untenantable, “the rent ' shall proportionately abate until the apartment shall again be rendered wholly tenantable '” The court then noted that the proprietary lease defined rent to include the amount in cash that the directors shall determine necessary for specified purposes, including “the payment of all obligations, liabilities or expenses incurred or to be incurred.” In light of that definition, the court concluded that rent included amounts assessed for mortgages and tax payments. The court also concluded that unit owners had properly pleaded a cause of action for breach of the covenant of quiet enjoyment by alleging that unit owners had been constructively evicted.

COMMENT

Generally, a cooperative unit owner may assert a breach of the implied warranty of habitability against a cooperative corporation. See, generally, Frisch v. Bellmarc Management, Inc., 190 A.D.2d 383, 384 (“It is clear that tenant-shareholders in a cooperative can rely on Section 235-b in actions against the cooperative corporation.”) Thus, in Suarez v. Rivercross Tenants' Corp., 438 N.Y.S.2d 164, cited by the Appellate Division in Frisch, the Appellate Term held that the implied warranty of habitability codified by RPL 235-b was applicable to cooperative housing because the proprietary lease creates a landlord-tenant relationship between the cooperative corporation and the tenant-stockholder. In Suarez, a cooperative shareholder had alleged that acute heating problems resulting from a malfunctioning air-conditioning and heating unit constituted a violation of the implied warranty of habitability.

In a successful action for breach of the implied warranty of habitability, damages are limited to the differential between the maintenance fees paid by the tenant-shareholder and the fair market rental value of the premises during the period of the breach. See Mastrangelo v. Five Riverside Corp., 262 A.D.2d 218, (affirming trial court's calculation of damages as the difference between maintenance paid and rental value of the premises, amounting to $32,224). In Granirer, the court's finding that shareholder was entitled to a 100% abatement of “rent” and maintenance, implies that the trial court suggested that the fair market rental value of the uninhabitable premises was zero.

In most cases, however, co-op shareholders who establish a breach of the warranty of habitability are unlikely to receive the “windfall” lamented by the dissent in Granirer. The rental value of most co-op apartments is far higher than the monthly maintenance; if it were not, the apartment would not have significant market value. As a result, if the court uses the damage formula articulated in Mastrangelo, the damages recoverable by the unit owner will be small, because the difference between maintenance and rental value in uninhabitable condition will not be large. Thus, even after due damages or maintenance abatement, the cooperative corporation will still be entitled to collect a monthly amount sufficient to cover mortgage and tax payments. The result in Granirer stems from the rare situation in which a court finds the fair market value of the uninhabitable unit to be zero.

Non-Purchasing Stabilized Tenant Not Entitled to Parking Space

Matter of 110-15 71st Road Associates, LLC v. DHCR

NYLJ 9/8/08, p. 32, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an article 78 proceeding brought by co-op sponsor to challenge the determination made by the Division of Housing & Community Renewal (DHCR) that a rent-stabilized tenant had been denied use of a parking space, sponsor appealed from the Supreme Court's judgment denying the petition and dismissing the proceeding. The Appellate Division reversed and granted the petition, holding that the rental of the parking space was not part of tenant's rent-stabilized lease.

Tenant first rented the subject rent-stabilized apartment in 1980. At that time, tenant's lease did not include use of parking facilities. In 1988, co-op sponsor converted the building to co-operative ownership. The offering plan noted that the 74-unit building's garage had 40 parking spaces, rented to both tenants and non-tenants. The offering plan also noted that once the building was converted, the garage would be operated by the co-op corporation, which would allocate those spaces not occupied by non-purchasing tenants on a first-come, first served basis. The offering plan expressly provided that spaces occupied by non-purchasing tenants would not be reallocated until those tenants purchased their apartments or moved out of the building. Ten years later, in 1998, co-op sponsor, as holder of the unsold shares referable to tenant's apartment, leased a parking space to tenant on a month-to-month basis. Seven years later, the co-op corporation notified the tenant that the corporation did not recognize her lease of the parking space. Tenant then filed a complaint with DHCR, seeking a rent reduction based upon decreased building-wide service. DHCR's district rent administrator concluded that because the tenant rented the lease from the sponsor, the lease was not a sublease, and the parking space was an ancillary service provided to the rent-stabilized tenant. DHCR's deputy commissioner affirmed the determination, concluding that both the sponsor and the co-op corporation were required to maintain ancillary services. The Supreme Court denied the article 78 petition, concluding that DHCR's determination of the statutes and regulations were entitled to deference. Sponsor appealed. In reversing, the Appellate Division first rejected the contention that parking was a building-wide service, because there were fewer spots than apartments. As a result, reduction of parking for tenants would not justify a rent reduction as a reduction in building-wide services. The court then held that because the rental of the parking space was not part of tenant's rent-stabilized residential lease, the co-op corporation had a right to terminate the tenancy in the parking space.

Offering Plan Relevant on Unsold Shares

Sassi-Lehner v. Charlton Tenants Corp.

NYLJ 8/18/08, p. 18, col. 1

AppDiv, First Dept.

(memorandum opinion)

In their declaratory judgment action, co-op unit owners appealed from the Supreme Court's determination that they were not holders of unsold shares, and that they could not sell their unit without approval from the co-op board. The Appellate Division affirmed, holding that the Supreme Court properly considered the provisions of the offering plan in determining that unit owners did not hold unsold shares.

Sponsor began the process of converting the subject building to cooperative ownership in 1982. At that time, the unit at issue was occupied by a non-purchasing rent-controlled tenant who did not choose to purchase the apartment. Within three years, sponsor sold the shares associated with the apartment to purchaser Mark Greenbaum. An amendment to the offering plan identified Greenbaum as a holder of unsold shares. Greenbaum, however, defaulted on a mortgage obligation, and his shares were sold at a foreclosure sale. The parents of current unit owners purchased the shares. In 2003, current unit owners acquired the shares from their mother. Because the transfer was an intra-family transfer, board approval was not an issue. No amendments to the offering plan ever identified unit owners or their parents as holders of unsold shares. In 2005, the rent-controlled tenant surrendered possession of the apartment, and the following year, unit owners contracted to sell the apartment. The co-op board, however, refused to permit a closing without a formal application for board consent to the sale. Unit owners then brought this declaratory judgment action, contending that because they were holders of unsold shares, board approval of any sale was unnecessary. The Supreme Court held that unit owners were not holders of unsold shares, and unit owners appealed.

In affirming, the Appellate Division first rejected the argument advanced by unit owners that the offering plan is not a controlling document, and that the court could not consider the offering plan in determining whether unit owner was holder of unsold shares. The court then relied on that plan, which provides that if a sponsor holds unsold shares, the sponsor may “assign such ' shares and proprietary leases to individuals designated by it as holders of [u]nsold [shares].” The offering plan also provides that “no later than the third anniversary of [c]losing, the sponsor must have assigned all [u]nsold
[s]hares ' to individuals designated by it as holders of unsold shares.” In the court's view, this language precluded unit owners from status as holders of unsold shares, because they were never designated as holders of unsold shares. The court conceded that the offering plan also provided that unsold shares “retain their character as such (regardless of transfer)” until the holder or another purchaser occupies the apartment, but the court construed the word “transfer” to mean a transfer in which the purchaser is expressly designated as a holder of unsold shares. Unit owners in this case were never so designated, and therefore required board approval for any transfer.

COMMENT

Prior to Kralik v. 239 East 79th Street Owners Corp., 5 NY3d 54, New York courts had held that unit-owners qualified as holders of unsold shares only if they were designated as such by the sponsor and complied with the other prerequisites promulgated by the Attorney General and codified at 13 NYCRR
' 18(w). For example, in Pacella v. 107 W. 25th St. Corp., 271 A.D.2d 342, a unit owner filed an action for a declaration that he was a holder of unsold shares and therefore did not require consent in order to sublet two apartments he owned. The court held that the unit owner was not a holder of unsold shares because he failed to present evidence that the sponsor designated him as the holder of unsold shares as required by 13 NYCRR ' 18.3(w)(1). The Court of Appeals in Kralik explicitly overruled Pacella and any other case that suggests that the requirements of 13 NYCRR ' 18 apply when no shares are offered for sale in a public offering.

In Kralik, unit owners sought a declaration that they were holders of unsold shares and therefore entitled to sublet without obtaining the board's consent or paying a sublet fee. The lower courts held that the unit owners were not holders of unsold shares because neither they nor the sponsor complied with a number of prerequisites set out in 13 NYCRR ' 18(w). The Court of Appeals reversed, holding that since 13 NYCRR ' 18 is a disclosure statute intended to protect the public from fraud in the sale of real estate securities, it only applies to disclosures made in a public offering of shares. Since the unit-owners were not offering the apartment's shares for sale to the public, the court held that their status as holders of unsold shares should be determined by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. The Court of Appeals concluded that the unit-owners were holders of unsold shares based upon its examination of the certificate of incorporation, the corporation's bylaws, and the proprietary lease.

In Sassi-Lehner, the unit-owners argued that the court erred in examining the offering plan since it was drafted to reflect 13 NYCRR ' 18(w), the regulatory prerequisites that the Kralik court held were irrelevant when making this determination. The unit owners in Sassi-Lehner were denied status as holder of unsold shares for the same reason as the unit-owner in Pacella: They were not designated as such by the sponsor. The only difference was that in Pacella, the court made this determination by relying on the language of 13 NYCRR ' 18(w)(1), while the court in Sassi-Lehner relied on the identical language found in the offering plan.

But the Court of Appeals in Kralik did not address the situation where the proprietary lease makes explicit reference to the offering plan's definition of unsold shares, nor did the Kralik court explicitly state that the offering plan could never be examined as a matter of law. As a result, the Appellate Division reasoned that in Sassi-Lehner, the definition of a holder of unsold shares could not be understood without examining the offering plan since the proprietary lease stated that “the term Unsold Shares' means and has exclusive reference to the shares of the [l]essor which were issued to the [s]ponsor or individuals produced by the [s]ponsor pursuant to the [o]ffering [s]tatement [p]lan of [c]ooperative [o]rganization.” (emphasis added) The decision in Sassi-Lehner, therefore, seems to create an exception to Kralik in cases where the documents cited by Kralik (certificate of incorporation, the corporation's bylaws, and the proprietary lease) explicitly refer to the offering plan.

Breach of Implied Warranty Of Habitability Entitles Shareholder to Abate All Maintenance Payments

Granirer v. The Bakery, Inc.

NYLJ 8/14/08, p. 36, col. 3

AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by McGuire, J.)

In co-op unit owner's action for breach of the proprietary lease and breach of the implied warranty of habitability, the co-op corporation appealed from the Supreme Court's order granting unit owner an abatement of maintenance. The Appellate Division modified to dismiss a breach of fiduciary duty claim as duplicative, but otherwise affirmed, holding that the co-op's breach entitled unit owner to an abatement of all rent and maintenance expenditures including those attributable to taxes and mortgage payments. Unit owner's apartment is not currently inhabitable. Although no trial has yet taken place to determine whether the co-op corporation failed to make the required repairs, and whether unit owner barred the co-op access to the apartment, the trial court concluded that the defects would support a 100% abatement of unit owner's maintenance. The Supreme Court ordered an abatement of all payments, and the co-op corporation appealed.

In affirming the order abating all payments, the Appellate Division relied on a lease provision which provided that in case damages shall render the apartment partly or wholly untenantable, “the rent ' shall proportionately abate until the apartment shall again be rendered wholly tenantable '” The court then noted that the proprietary lease defined rent to include the amount in cash that the directors shall determine necessary for specified purposes, including “the payment of all obligations, liabilities or expenses incurred or to be incurred.” In light of that definition, the court concluded that rent included amounts assessed for mortgages and tax payments. The court also concluded that unit owners had properly pleaded a cause of action for breach of the covenant of quiet enjoyment by alleging that unit owners had been constructively evicted.

COMMENT

Generally, a cooperative unit owner may assert a breach of the implied warranty of habitability against a cooperative corporation. See, generally, Frisch v. Bellmarc Management, Inc., 190 A.D.2d 383, 384 (“It is clear that tenant-shareholders in a cooperative can rely on Section 235-b in actions against the cooperative corporation.”) Thus, in Suarez v. Rivercross Tenants' Corp. , 438 N.Y.S.2d 164, cited by the Appellate Division in Frisch, the Appellate Term held that the implied warranty of habitability codified by RPL 235-b was applicable to cooperative housing because the proprietary lease creates a landlord-tenant relationship between the cooperative corporation and the tenant-stockholder. In Suarez, a cooperative shareholder had alleged that acute heating problems resulting from a malfunctioning air-conditioning and heating unit constituted a violation of the implied warranty of habitability.

In a successful action for breach of the implied warranty of habitability, damages are limited to the differential between the maintenance fees paid by the tenant-shareholder and the fair market rental value of the premises during the period of the breach. See Mastrangelo v. Five Riverside Corp. , 262 A.D.2d 218, (affirming trial court's calculation of damages as the difference between maintenance paid and rental value of the premises, amounting to $32,224). In Granirer, the court's finding that shareholder was entitled to a 100% abatement of “rent” and maintenance, implies that the trial court suggested that the fair market rental value of the uninhabitable premises was zero.

In most cases, however, co-op shareholders who establish a breach of the warranty of habitability are unlikely to receive the “windfall” lamented by the dissent in Granirer. The rental value of most co-op apartments is far higher than the monthly maintenance; if it were not, the apartment would not have significant market value. As a result, if the court uses the damage formula articulated in Mastrangelo, the damages recoverable by the unit owner will be small, because the difference between maintenance and rental value in uninhabitable condition will not be large. Thus, even after due damages or maintenance abatement, the cooperative corporation will still be entitled to collect a monthly amount sufficient to cover mortgage and tax payments. The result in Granirer stems from the rare situation in which a court finds the fair market value of the uninhabitable unit to be zero.

Non-Purchasing Stabilized Tenant Not Entitled to Parking Space

Matter of 110-15 71st Road Associates, LLC v. DHCR

NYLJ 9/8/08, p. 32, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an article 78 proceeding brought by co-op sponsor to challenge the determination made by the Division of Housing & Community Renewal (DHCR) that a rent-stabilized tenant had been denied use of a parking space, sponsor appealed from the Supreme Court's judgment denying the petition and dismissing the proceeding. The Appellate Division reversed and granted the petition, holding that the rental of the parking space was not part of tenant's rent-stabilized lease.

Tenant first rented the subject rent-stabilized apartment in 1980. At that time, tenant's lease did not include use of parking facilities. In 1988, co-op sponsor converted the building to co-operative ownership. The offering plan noted that the 74-unit building's garage had 40 parking spaces, rented to both tenants and non-tenants. The offering plan also noted that once the building was converted, the garage would be operated by the co-op corporation, which would allocate those spaces not occupied by non-purchasing tenants on a first-come, first served basis. The offering plan expressly provided that spaces occupied by non-purchasing tenants would not be reallocated until those tenants purchased their apartments or moved out of the building. Ten years later, in 1998, co-op sponsor, as holder of the unsold shares referable to tenant's apartment, leased a parking space to tenant on a month-to-month basis. Seven years later, the co-op corporation notified the tenant that the corporation did not recognize her lease of the parking space. Tenant then filed a complaint with DHCR, seeking a rent reduction based upon decreased building-wide service. DHCR's district rent administrator concluded that because the tenant rented the lease from the sponsor, the lease was not a sublease, and the parking space was an ancillary service provided to the rent-stabilized tenant. DHCR's deputy commissioner affirmed the determination, concluding that both the sponsor and the co-op corporation were required to maintain ancillary services. The Supreme Court denied the article 78 petition, concluding that DHCR's determination of the statutes and regulations were entitled to deference. Sponsor appealed. In reversing, the Appellate Division first rejected the contention that parking was a building-wide service, because there were fewer spots than apartments. As a result, reduction of parking for tenants would not justify a rent reduction as a reduction in building-wide services. The court then held that because the rental of the parking space was not part of tenant's rent-stabilized residential lease, the co-op corporation had a right to terminate the tenancy in the parking space.