Cooperatives & Condominiums

AppDiv, Second Dept.

(memorandum opinion)

In an article 78 proceeding by a co-op shareholder, the board appealed Supreme Court's judgment rescinding a $3,000 sublet fee imposed by the board, while the shareholder appealed from Supreme Court's denial of attorneys' fees. The court affirmed the judgment rescinding the fee, and also awarded attorneys' fees, holding that the board had exceeded its authority in imposing the fee.

Shareholder purchaser the shares associated with her apartment in 2002. Beginning in 2009-10, the co-op board received complaints from a number of other shareholders that shareholder was no longer residing in the apartment, and that the person residing in the apartment was making excessive noise. The board responded by assessing a $3,000 sublet fee on shareholder. The latter's lawyer responded by asserting that shareholder continued to reside in the unit with her sister, and that the proprietary lease permitted occupancy with specified relatives, including sisters. The board refused to rescind the fee and indicated that it would impose additional fees unless the noise issue were solved. Shareholder then brought this article 78 proceeding, and Supreme Court granted the petition, but denied each party's request for attorneys' fees.

In affirming Supreme Court's rescission of the sublet fee, the Appellate Division started by noting that the business judgment rule insulates co-op board decisions from judicial review only when the board acts within the scope of its authority. The court concluded that in this case, the proprietary lease, the co-op's bylaws, the house rules, and the shareholder handbook failed to substantiate the board's claim that a sublet policy recited in the handbook was an enforceable house rule binding on the shareholder. As a result, the board's action was not protected by the business judgment rule because not taken within the scope of the board's authority.

The court then concluded that because the shareholder was the prevailing party, shareholder was entitled to attorneys' fees under Real Property Law section 234, which provides tenants with a reciprocal right to attorneys' fees when they prevail if the lease itself entitles prevailing landlords to attorneys' fees.

COMMENT

A coop board may impose subletting fees on tenants only if the building's governing documents expressly authorize sublet fees. Thus, in Zimiles v. Hotel des Artistes, Inc., 216 A.D.2d 45,the proprietary lease authorized the board to approve or reject subleases, but the First Department invalidated a sublet fee imposed by the board because the building's governing documents contained no language that authorized the board to place any conditions, monetary or otherwise, on written approval of a sublet. By contrast, in Zuckerman v. 33072 Owners Corp., 97 A.D.2d 736, the First Department upheld a fee imposed by a board, relying on language in the proprietary lease which explicitly made subletting “subject to such conditions as the board or shareholders may impose.” The court indicated that this language, found in many proprietary leases, grants the board wide-ranging authority to impose a reasonable sublet fee as a condition to consenting to a sublease.

Even when the governing documents authorize sublet fees, co-op boards may not impose fees greater than those the documents authorize. For instance, the First Department, in Bailey v. 800 Grand Concourse Owners, Inc., 199 A.D.2d 1, 2, denied summary judgment to a co-op board when a unit owner challenged a sublease fee of 30 percent of the annual maintenance. The court emphasized that the bylaws restricted the co-op to charging a “reasonable amount” to cover actual expenses and attorneys' fees of the corporation, and gave the unit owner an opportunity, at trial, to establish that the 30% sublet fee bore “no reasonable relation to the corporation's actual expenses in connection with the proposed sublet.”

As with fees, the co-op board may only impose sanctions for violating house rules if the governing documents expressly authorize the board to impose those sanctions. For instance, the court in North Broadway Estates, Ltd. v. Schmoldt, 147 Misc.2d 1098, held that the co-op board exceeded its authority by amending a house rule requiring shareholders to pay a $30 flat fee for late rent payments. The court held that the board “exceeded its authority in attempting to change the type of penalty '” because the proprietary lease only allowed a shareholder to be assessed an interest fee on the late payment, but made no explicit provision for any other penalty. Id. (See also Yusin v. Saddle Lakes Home Owners Ass'n, Inc., 73 A.D.3d 1168, holding that condominium lacked power to enact a house rule imposing a $50 fine on shareholders for walking their pets in the condominium's common areas when the bylaws did not expressly authorize such a fine). North Broadway suggests that even if the proprietary lease expressly prohibited subleases, a coop board could not use that prohibition as a basis for imposing a sublet fee unless the governing documents authorized the board to impose that sanction for violation of the prohibition.

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Board Exceeded Its Authority in Imposing Sublet Fee on Shareholder

Matter of Cohan v. Board of Directors of 700 Shore Road Waters Edge, Inc.

NYLJ 7/26/13, p. 25, col. 5

AppDiv, Second Dept.

(memorandum opinion)

In an article 78 proceeding by a co-op shareholder, the board appealed Supreme Court's judgment rescinding a $3,000 sublet fee imposed by the board, while the shareholder appealed from Supreme Court's denial of attorneys' fees. The court affirmed the judgment rescinding the fee, and also awarded attorneys' fees, holding that the board had exceeded its authority in imposing the fee.

Shareholder purchaser the shares associated with her apartment in 2002. Beginning in 2009-10, the co-op board received complaints from a number of other shareholders that shareholder was no longer residing in the apartment, and that the person residing in the apartment was making excessive noise. The board responded by assessing a $3,000 sublet fee on shareholder. The latter's lawyer responded by asserting that shareholder continued to reside in the unit with her sister, and that the proprietary lease permitted occupancy with specified relatives, including sisters. The board refused to rescind the fee and indicated that it would impose additional fees unless the noise issue were solved. Shareholder then brought this article 78 proceeding, and Supreme Court granted the petition, but denied each party's request for attorneys' fees.

In affirming Supreme Court's rescission of the sublet fee, the Appellate Division started by noting that the business judgment rule insulates co-op board decisions from judicial review only when the board acts within the scope of its authority. The court concluded that in this case, the proprietary lease, the co-op's bylaws, the house rules, and the shareholder handbook failed to substantiate the board's claim that a sublet policy recited in the handbook was an enforceable house rule binding on the shareholder. As a result, the board's action was not protected by the business judgment rule because not taken within the scope of the board's authority.

The court then concluded that because the shareholder was the prevailing party, shareholder was entitled to attorneys' fees under Real Property Law section 234, which provides tenants with a reciprocal right to attorneys' fees when they prevail if the lease itself entitles prevailing landlords to attorneys' fees.

COMMENT

A coop board may impose subletting fees on tenants only if the building's governing documents expressly authorize sublet fees. Thus, in Zimiles v. Hotel des Artistes, Inc., 216 A.D.2d 45,the proprietary lease authorized the board to approve or reject subleases, but the First Department invalidated a sublet fee imposed by the board because the building's governing documents contained no language that authorized the board to place any conditions, monetary or otherwise, on written approval of a sublet. By contrast, in Zuckerman v. 33072 Owners Corp., 97 A.D.2d 736, the First Department upheld a fee imposed by a board, relying on language in the proprietary lease which explicitly made subletting “subject to such conditions as the board or shareholders may impose.” The court indicated that this language, found in many proprietary leases, grants the board wide-ranging authority to impose a reasonable sublet fee as a condition to consenting to a sublease.

Even when the governing documents authorize sublet fees, co-op boards may not impose fees greater than those the documents authorize. For instance, the First Department, in Bailey v. 800 Grand Concourse Owners, Inc., 199 A.D.2d 1, 2, denied summary judgment to a co-op board when a unit owner challenged a sublease fee of 30 percent of the annual maintenance. The court emphasized that the bylaws restricted the co-op to charging a “reasonable amount” to cover actual expenses and attorneys' fees of the corporation, and gave the unit owner an opportunity, at trial, to establish that the 30% sublet fee bore “no reasonable relation to the corporation's actual expenses in connection with the proposed sublet.”

As with fees, the co-op board may only impose sanctions for violating house rules if the governing documents expressly authorize the board to impose those sanctions. For instance, the court in North Broadway Estates, Ltd. v. Schmoldt, 147 Misc.2d 1098, held that the co-op board exceeded its authority by amending a house rule requiring shareholders to pay a $30 flat fee for late rent payments. The court held that the board “exceeded its authority in attempting to change the type of penalty '” because the proprietary lease only allowed a shareholder to be assessed an interest fee on the late payment, but made no explicit provision for any other penalty. Id. (See also Yusin v. Saddle Lakes Home Owners Ass'n, Inc., 73 A.D.3d 1168, holding that condominium lacked power to enact a house rule imposing a $50 fine on shareholders for walking their pets in the condominium's common areas when the bylaws did not expressly authorize such a fine). North Broadway suggests that even if the proprietary lease expressly prohibited subleases, a coop board could not use that prohibition as a basis for imposing a sublet fee unless the governing documents authorized the board to impose that sanction for violation of the prohibition.

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