Cooperatives & Condominiums

Sponsor Lacked Power to Give Unit Owner Preferential Right to Sublet Her Unit

Bregman v. 111 Tenants Corp.

NYLJ 2/10/11

Supreme Ct., N.Y. Cty.

(Madden, J.)

In an action by co-op unit owner to enjoin the co-op corporation from refusing to approve her sublet application, the co-op corporation sought summary judgment dismissing the complaint. The court granted the motion, holding that no agreement with the sponsor could give unit owner a preferential right to sublet her apartment.

In 1972, when the subject building was undergoing the process of co-operative conversion, unit owner bought two apartments. She alleges that the sponsors assured her that if she bought two apartments, she would have unconditional and perpetual rights to sublet both apartments, and that the building's board would adopt a resolution giving her those perpetual and unconditional rights. Thirty years later, however, the co-op board adopted a resolution restricting the right of unit owners to sublet for more than two years during any four-year period unless consent has been obtained from the board or from owners of two-thirds of the shares. Subsequently, the board rejected unit owner's application to sublet one of her apartments, and unit owner brought this action. The co-op corporation moved for summary judgment.

In granting the corporation's motion, the court first relied on the proprietary lease, which provides that consent to subletting may be subject to such conditions as the board may impose, and which provides that there shall be no limitations on the right of the board to grant or withhold consent to subletting. The court then turned to the bylaws, which give the board authority to fix conditions in connection with subleases, and to a letter signed by the sponsor in 1972 demonstrating that at the time unit owner purchased her apartment, she was aware that the owners only agreed to use their best efforts to have the board not unreasonably withhold consent to subletting. Based on this evidence, the court concluded that unit owner was aware that the board had the right to place conditions on subletting. But the court then turned to Business Corporation Law section 501(c), and concluded that even if the sponsor had given unit owner a perpetual right to sublet without restriction, the preferential treatment given to this unit owner was in violation of the statute, which requires equal treatment of shareholders holding the same class of shares. The court indicated that the board's restriction on subletting must be applied equally to all shareholders.

COMMENT

In 1986, in response to Fe Bland v. Two Trees Management, 66 N.Y.2d 556, the legislature carved out an exception to the 501(c) rule against treating shareholders of the same class unequally. The amended statute, drafted to allow a co-op to charge transfer fees and flip taxes to some, but not all, shareholders, provides that “shares of the same class shall not be considered unequal because of variations in fees or charges payable to the corporation upon sale or transfer of shares and appurtenant proprietary leases.” The statute does require, however, that the fees be authorized in the proprietary lease, occupancy agreements, or offering plans.

Not all shares of a co-op are in the same class. Nearly every cooperative proprietary lease provides that holders of “unsold shares” enjoy certain rights, which the average cooperative shareholder does not have. These rights include selling or subleasing units without board approval, and also avoiding sublease fees or “flip taxes” on units sold. In Laufer v. Columbus W. 82 Apartments Corp., 215 A.D.2d 533 (1995), the court acknowledged that a sponsor, unlike other shareholders, has the right to sell, transfer or sublet without board approval. The sponsor's shares, typically called “unsold shares” fall within a second shareholder class. As a result, BCL 501(c) permits different treatment of those shares. Co-op proprietary leases will usually contain a paragraph stating that “unsold shares, generally retain their character as such, until they are sold to a bona fide purchaser for occupancy by himself or his family, or until the holder of the shares becomes a bona fide occupant.” They will then cease to be “unsold shares” and become part of the same class of shares as the unit owners.

Although BCL 501(c) prohibits unequal treatment of shares, the statute does not explain what happens when the co-op violates the statutory prohibition. For instance, if a co-op gives some shareholders the right to sublet without board approval, is that grant invalid, or does it bind the board to permit all shareholders to sublet without board approval? In Bregman, the court followed Spiegel v. 1065 Park Ave. Corp, 305 A.D.2d 204, in suggesting that the grant of subletting rights to one shareholder would be invalid. In Spiegel, the proprietary lease and by-laws give original purchasers more favorable subletting rights than non-original purchasers. They held that the preferential rights of the original purchasers were invalid, but the court did not explain why the statute should not be read to require the board to extend more favorable subletting rights to all purchasers. Similarly, in Bregman itself, the court offered no explanation.

Seller Properly Made Time of the Essence

Tarlovsky v. Falk

NYLJ 2/2/11, Supreme Ct.

N.Y. Cty.

(York, J.)

In an action by condominium seller against contract vendee for release of the down payment, seller moved for summary judgment. The court granted seller's motion, holding that seller had properly made time of the essence, and contract vendee had defaulted on the sale contract.

Contract vendee contracted to purchase a condominium unit for $2,030,000, and paid a 10% down payment. The contract gave contract vendees the right to cancel within five business days of July 23, 2007 if they could not obtain financing. To exercise the right, contract vendee was required to provide timely notice to seller, and in the absence of notice, she would waive her right to cancel and forfeit her down payment. Contract vendee could not obtain financing, but failed to provide seller with notice of cancellation. She failed to close on the contract closing date of July 23, 2007 or on the extended closing date of Aug. 8, 2007. On Oct. 10, seller informed contract vendee that there would be a final closing date extension until Oct. 31, or if an only if contract vendee paid certain costs, until Nov. 7. The letter stated that time was of the essence. On Oct. 30, contract vendee's counsel objected to the Oct. 31 closing date, and requested seller financing if contract vendee could not obtain a mortgage by Nov. 15. Seller later informed contract vendee that he was willing to provide her with seller financing for a limited time, and later offered to give contract vendee $28,000 from the down payment as a further concession. On Aug. 25, 2008, seller notified contract vendee that he was cancelling the contract and demanded release of the down payment, which had been held by his lawyer. When contract vendee objected, seller brought this action, and moved for summary judgment.

In granting seller's motion, the court held that seller had effectively made time of the essence by the Oct. 10 letter setting a closing date of Oct. 31. The court noted that either party may unilaterally give notice that time is of the essence, so long as the time set for closing is reasonable. Here, the court held that the Oct. 31 date was reasonable, and that the seller's notice was unambiguous. The court also rejected contract vendee's argument that seller's continued negotiations with contract vendee for give months after the stated closing date established an intent not to make time of the essence. As a result, seller was entitled to summary judgment.

Sponsor Lacked Power to Give Unit Owner Preferential Right to Sublet Her Unit

Bregman v. 111 Tenants Corp.

NYLJ 2/10/11

Supreme Ct., N.Y. Cty.

(Madden, J.)

In an action by co-op unit owner to enjoin the co-op corporation from refusing to approve her sublet application, the co-op corporation sought summary judgment dismissing the complaint. The court granted the motion, holding that no agreement with the sponsor could give unit owner a preferential right to sublet her apartment.

In 1972, when the subject building was undergoing the process of co-operative conversion, unit owner bought two apartments. She alleges that the sponsors assured her that if she bought two apartments, she would have unconditional and perpetual rights to sublet both apartments, and that the building's board would adopt a resolution giving her those perpetual and unconditional rights. Thirty years later, however, the co-op board adopted a resolution restricting the right of unit owners to sublet for more than two years during any four-year period unless consent has been obtained from the board or from owners of two-thirds of the shares. Subsequently, the board rejected unit owner's application to sublet one of her apartments, and unit owner brought this action. The co-op corporation moved for summary judgment.

In granting the corporation's motion, the court first relied on the proprietary lease, which provides that consent to subletting may be subject to such conditions as the board may impose, and which provides that there shall be no limitations on the right of the board to grant or withhold consent to subletting. The court then turned to the bylaws, which give the board authority to fix conditions in connection with subleases, and to a letter signed by the sponsor in 1972 demonstrating that at the time unit owner purchased her apartment, she was aware that the owners only agreed to use their best efforts to have the board not unreasonably withhold consent to subletting. Based on this evidence, the court concluded that unit owner was aware that the board had the right to place conditions on subletting. But the court then turned to Business Corporation Law section 501(c), and concluded that even if the sponsor had given unit owner a perpetual right to sublet without restriction, the preferential treatment given to this unit owner was in violation of the statute, which requires equal treatment of shareholders holding the same class of shares. The court indicated that the board's restriction on subletting must be applied equally to all shareholders.

COMMENT

In 1986, in response to Fe Bland v. Two Trees Management, 66 N.Y.2d 556, the legislature carved out an exception to the 501(c) rule against treating shareholders of the same class unequally. The amended statute, drafted to allow a co-op to charge transfer fees and flip taxes to some, but not all, shareholders, provides that “shares of the same class shall not be considered unequal because of variations in fees or charges payable to the corporation upon sale or transfer of shares and appurtenant proprietary leases.” The statute does require, however, that the fees be authorized in the proprietary lease, occupancy agreements, or offering plans.

Not all shares of a co-op are in the same class. Nearly every cooperative proprietary lease provides that holders of “unsold shares” enjoy certain rights, which the average cooperative shareholder does not have. These rights include selling or subleasing units without board approval, and also avoiding sublease fees or “flip taxes” on units sold. In Laufer v. Columbus W. 82 Apartments Corp., 215 A.D.2d 533 (1995), the court acknowledged that a sponsor, unlike other shareholders, has the right to sell, transfer or sublet without board approval. The sponsor's shares, typically called “unsold shares” fall within a second shareholder class. As a result, BCL 501(c) permits different treatment of those shares. Co-op proprietary leases will usually contain a paragraph stating that “unsold shares, generally retain their character as such, until they are sold to a bona fide purchaser for occupancy by himself or his family, or until the holder of the shares becomes a bona fide occupant.” They will then cease to be “unsold shares” and become part of the same class of shares as the unit owners.

Although BCL 501(c) prohibits unequal treatment of shares, the statute does not explain what happens when the co-op violates the statutory prohibition. For instance, if a co-op gives some shareholders the right to sublet without board approval, is that grant invalid, or does it bind the board to permit all shareholders to sublet without board approval? In Bregman, the court followed Spiegel v. 1065 Park Ave. Corp, 305 A.D.2d 204, in suggesting that the grant of subletting rights to one shareholder would be invalid. In Spiegel, the proprietary lease and by-laws give original purchasers more favorable subletting rights than non-original purchasers. They held that the preferential rights of the original purchasers were invalid, but the court did not explain why the statute should not be read to require the board to extend more favorable subletting rights to all purchasers. Similarly, in Bregman itself, the court offered no explanation.

Seller Properly Made Time of the Essence

Tarlovsky v. Falk

NYLJ 2/2/11, Supreme Ct.

N.Y. Cty.

(York, J.)

In an action by condominium seller against contract vendee for release of the down payment, seller moved for summary judgment. The court granted seller's motion, holding that seller had properly made time of the essence, and contract vendee had defaulted on the sale contract.

Contract vendee contracted to purchase a condominium unit for $2,030,000, and paid a 10% down payment. The contract gave contract vendees the right to cancel within five business days of July 23, 2007 if they could not obtain financing. To exercise the right, contract vendee was required to provide timely notice to seller, and in the absence of notice, she would waive her right to cancel and forfeit her down payment. Contract vendee could not obtain financing, but failed to provide seller with notice of cancellation. She failed to close on the contract closing date of July 23, 2007 or on the extended closing date of Aug. 8, 2007. On Oct. 10, seller informed contract vendee that there would be a final closing date extension until Oct. 31, or if an only if contract vendee paid certain costs, until Nov. 7. The letter stated that time was of the essence. On Oct. 30, contract vendee's counsel objected to the Oct. 31 closing date, and requested seller financing if contract vendee could not obtain a mortgage by Nov. 15. Seller later informed contract vendee that he was willing to provide her with seller financing for a limited time, and later offered to give contract vendee $28,000 from the down payment as a further concession. On Aug. 25, 2008, seller notified contract vendee that he was cancelling the contract and demanded release of the down payment, which had been held by his lawyer. When contract vendee objected, seller brought this action, and moved for summary judgment.

In granting seller's motion, the court held that seller had effectively made time of the essence by the Oct. 10 letter setting a closing date of Oct. 31. The court noted that either party may unilaterally give notice that time is of the essence, so long as the time set for closing is reasonable. Here, the court held that the Oct. 31 date was reasonable, and that the seller's notice was unambiguous. The court also rejected contract vendee's argument that seller's continued negotiations with contract vendee for give months after the stated closing date established an intent not to make time of the essence. As a result, seller was entitled to summary judgment.