Cooperatives & Condominiums

(memorandum opinion)

In two separate actions by co-op shareholders against the co-op corporation, the shareholders appealed from Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the co-op was entitled to amend the proprietary lease to authorize use of the roof overlooking shareholders' apartment for “any purpose,” including potentially a roof garden to which shareholders objected.

Shareholders occupy a penthouse apartment on the lower roof of a building. When the shareholders became concerned that the co-op would build a roof garden on the building's upper roof, overlooking their apartment and terrace, they brought an action contending that construction of a roof garden would constitute a breach of their proprietary lease. While the action was pending, the co-op corporation, upon a vote of 91% of the shareholders, amended the proprietary lease to authorize corporation to use the roof for any purpose. Shareholders then brought another action contending that the amendment constituted a breach of the covenant of good faith and fair dealing. Supreme Court granted summary judgment to the co-op corporation in both actions.

In affirming, the Appellate Division first rejected shareholders' contention that permitting construction of a roof garden would constitute a frustration of the purpose of the proprietary lease. The court was unwilling to conclude that the proprietary lease would have made no sense without the assurance that a roof garden would not be built. The court then rejected the shareholders' argument that the lease amendment violated the covenant of good faith and fair dealing, noting that the lease had always included a provision permitting amendment upon a vote of two-thirds of the shareholders, and that the corporation had complied with the amendment provision.

COMMENT

Under the frustration of purpose doctrine, a party can obtain rescission of a contract when an unforeseeable intervening event outside his control undermines the fundamental assumptions on which both parties entered into the contract. Rescission, however, does not prevent the other party from recovering in quantum meruit for work performed in reliance on the rescinded contract. D&A Structural Contractors Inc. v. Unger, 25 Misc.3d 1221(A), illustrates both points. When a homeowner's wife obtained an unanticipated TRO restraining payment of fire insurance proceeds to her husband, homeowner was entitled to rescission of a home improvement contract which provided that the improvements would be paid for from the proceeds of the insurance policy. While the court held that homeowner was entitled to rescission for frustration of purpose, the court also indicated the contractors should be able to recover the reasonable value of work performed and the reasonable value of materials purchased in preparation for the renovation.

A party may not obtain rescission of a contract when the parties contemplate the intervening event and allocate the risk associated with that event. For example, in Warner v. Kaplan,'892 N.Y.S.2d 311, the First Department granted summary judgment to a seller against an estate which sought rescission of a sale contract entered into by the decedent as purchaser. The express language of the contract of sale bound the purchaser's “heirs, personal and legal representative and successors in interest.” The court determined that this language explicitly contemplated death of the purchaser, and allocated the associated risk to the purchaser and his estate.

Even if the frustration of purpose doctrine were otherwise applicable in Baker, it would not help the unit owner. The general remedy available under the frustration of purpose doctrine is rescission of a contract. D&A Structural Contractors Inc. v. Unger, supra. Rescission would prove problematic in Baker v. 16 Sutton Place Apartment Corp., as the contract between the shareholders and the co-operative corporation is the same document establishing ownership of the shareholders apartment. Therefore, the general remedy under the frustration of Purpose Doctrine would require rescission of the proprietary lease, potentially resulting in eviction of the tenants.

Co-Op Board Cannot Reallocate Shares

Goldman v. 7 East 35th Street Owners

NYLJ 10/9/13, p. 21, col. 3
Supreme Ct., N.Y. Cty.

(Moulton, J.)

Shareholders brought a proceeding to annul a determination by the co-op board allocating additional shares to their apartment. The court annulled the determination, holding that an earlier determination not to allocate additional shares was binding on the board.

In 2005, shareholders (then the board president and his wife) sought approval to enclose much of their roof terrace to create a master bedroom suite. At a 2006 special board meeting, the board approved the addition, and determined that no additional maintenance or assessments would be charged to shareholders' apartment. The board did not allocate any additional shares to the apartment. The board president did not vote at any meeting involving the alteration, but he did aggressively advocate his position (that no additional maintenance should be assessed against his apartment) with the board's lawyer and the co-op's managing agent. Neither the board's lawyer nor the managing agent presented to the board their opinion, which was that additional shares should be allocated to the apartment. Only the board president's lawyer presented a position to the board.

In 2010, when shareholders decided to sell their apartment, two new board members questioned the 2006 proceedings. Then in 2012, the board's executive committee promulgated a resolution allocating 400 additional shares to shareholder's apartment based on the alteration. Shareholders then brought this proceeding to annul the determination. The board relied on the business judgment rule, unclean hands, failure to act in good faith, and breach of fiduciary duty by the board president.

In granting the petition and annulling the 2012 determination, the court emphasized that any damages caused by the board's 2006 determination were caused not by the board president's misconduct, but by the board's own failures in communicating with its attorney and managing agent. The court concluded that the president had no duty to disclose to the board the opinions of the board's own agents. Moreover, the court held that the business judgment rule did not protect the board because the 2012 decision was an improper attempt to rescind the 2006 decision, on which the shareholders were entitled to rely.

COMMENT

When a co-op board complies with the provisions set out in the bylaws and proprietary lease, courts will uphold a board decision to reallocate shares, citing either the business judgment rule, acquiescence by the unit owner, or both. Thus, in Cohen v. 120 Owners Corp., 205 A.D.2d 394 (1994), the court upheld a reallocation, citing the business judgment rule, where the co-op board created five new office units and allocated more shares to the complaining owner's unit than to the other four spaces. The court emphasized that because the bylaws explicitly named marketability as a factor governing reallocation decisions, and the complaining owner's unit had enhanced market value attributable to owner's access to certain building amenities not shared by the other professional tenants.

Because proprietary lease language and by-laws typically limit reallocation to new spaces or those significantly altered by the owner, challenges to reallocation typically arise where an owner alleges his unit is overvalued as a result of a reallocation that occurred prior to his purchase. In these cases, courts need not even rely on the business judgment rule. They emphasize instead that the owner purchased with knowledge of the shares allocated to the unit. In Glassmeyer v. 310 Lexington Owners Corp., 232 A.D.2d 229 (1st Dept. 1996), the court summarily dismissed a claim for reallocation brought by owners who discovered that eight feet of a terrace they believed to be exclusively theirs was in fact commonly owned. The court dismissed the claim because the owners were aware of the share allocation at the time of purchase and should have understood the terrace demarcation, since the apartment had been owned previously for many years by the father of one of the complaining owners.

However, if an allocation is the product of an erroneous characterization in the offering plan, a claim for reallocation may be successful. In Goodman v. 225 East 74th Apartments Corp., NYLJ, 8/19/97, p.22, c.6 (Sup. Ct. NY Co.), the court denied the co-op summary judgment and allowed the reallocation claim to proceed on the theory of mutual mistake where the owners had purchased an apartment from a sponsor subject to the tenancy of a rent-regulated tenant, and discovered only when the tenant moved out a decade later that they had purchased a studio and not the two-bedroom apartment described in the offering plan.

Although in Goldman the court overturned the board's reallocation of shares, it did so because the landowner had made renovations based on a prior allocation. The court relied on the principle that the business judgment rule is inapplicable when a board attempts to rescind a decision on which an owner has relied. See, e.g., Whalen v. 50 Sutton Place S. Owners, Inc., 276 A.D.2d 356 (1st Dept. 2000) (rejecting the claim that the cooperative's decision to rescind approval to renovate an apartment was protected by the business judgment rule).

Penthouse Owner Can't Stop Roof Garden

Baker v. 16 Sutton Place Apartment Corp.

NYLJ 10/10/13, p. 24, col. 1
AppDiv, First Dept.

(memorandum opinion)

In two separate actions by co-op shareholders against the co-op corporation, the shareholders appealed from Supreme Court's grant of summary judgment to the co-op corporation. The Appellate Division affirmed, holding that the co-op was entitled to amend the proprietary lease to authorize use of the roof overlooking shareholders' apartment for “any purpose,” including potentially a roof garden to which shareholders objected.

Shareholders occupy a penthouse apartment on the lower roof of a building. When the shareholders became concerned that the co-op would build a roof garden on the building's upper roof, overlooking their apartment and terrace, they brought an action contending that construction of a roof garden would constitute a breach of their proprietary lease. While the action was pending, the co-op corporation, upon a vote of 91% of the shareholders, amended the proprietary lease to authorize corporation to use the roof for any purpose. Shareholders then brought another action contending that the amendment constituted a breach of the covenant of good faith and fair dealing. Supreme Court granted summary judgment to the co-op corporation in both actions.

In affirming, the Appellate Division first rejected shareholders' contention that permitting construction of a roof garden would constitute a frustration of the purpose of the proprietary lease. The court was unwilling to conclude that the proprietary lease would have made no sense without the assurance that a roof garden would not be built. The court then rejected the shareholders' argument that the lease amendment violated the covenant of good faith and fair dealing, noting that the lease had always included a provision permitting amendment upon a vote of two-thirds of the shareholders, and that the corporation had complied with the amendment provision.

COMMENT

Under the frustration of purpose doctrine, a party can obtain rescission of a contract when an unforeseeable intervening event outside his control undermines the fundamental assumptions on which both parties entered into the contract. Rescission, however, does not prevent the other party from recovering in quantum meruit for work performed in reliance on the rescinded contract. D&A Structural Contractors Inc. v. Unger, 25 Misc.3d 1221(A), illustrates both points. When a homeowner's wife obtained an unanticipated TRO restraining payment of fire insurance proceeds to her husband, homeowner was entitled to rescission of a home improvement contract which provided that the improvements would be paid for from the proceeds of the insurance policy. While the court held that homeowner was entitled to rescission for frustration of purpose, the court also indicated the contractors should be able to recover the reasonable value of work performed and the reasonable value of materials purchased in preparation for the renovation.

A party may not obtain rescission of a contract when the parties contemplate the intervening event and allocate the risk associated with that event. For example, in Warner v. Kaplan,'892 N.Y.S.2d 311, the First Department granted summary judgment to a seller against an estate which sought rescission of a sale contract entered into by the decedent as purchaser. The express language of the contract of sale bound the purchaser's “heirs, personal and legal representative and successors in interest.” The court determined that this language explicitly contemplated death of the purchaser, and allocated the associated risk to the purchaser and his estate.

Even if the frustration of purpose doctrine were otherwise applicable in Baker, it would not help the unit owner. The general remedy available under the frustration of purpose doctrine is rescission of a contract. D&A Structural Contractors Inc. v. Unger, supra. Rescission would prove problematic in Baker v. 16 Sutton Place Apartment Corp., as the contract between the shareholders and the co-operative corporation is the same document establishing ownership of the shareholders apartment. Therefore, the general remedy under the frustration of Purpose Doctrine would require rescission of the proprietary lease, potentially resulting in eviction of the tenants.

Co-Op Board Cannot Reallocate Shares

Goldman v. 7 East 35th Street Owners

NYLJ 10/9/13, p. 21, col. 3
Supreme Ct., N.Y. Cty.

(Moulton, J.)

Shareholders brought a proceeding to annul a determination by the co-op board allocating additional shares to their apartment. The court annulled the determination, holding that an earlier determination not to allocate additional shares was binding on the board.

In 2005, shareholders (then the board president and his wife) sought approval to enclose much of their roof terrace to create a master bedroom suite. At a 2006 special board meeting, the board approved the addition, and determined that no additional maintenance or assessments would be charged to shareholders' apartment. The board did not allocate any additional shares to the apartment. The board president did not vote at any meeting involving the alteration, but he did aggressively advocate his position (that no additional maintenance should be assessed against his apartment) with the board's lawyer and the co-op's managing agent. Neither the board's lawyer nor the managing agent presented to the board their opinion, which was that additional shares should be allocated to the apartment. Only the board president's lawyer presented a position to the board.

In 2010, when shareholders decided to sell their apartment, two new board members questioned the 2006 proceedings. Then in 2012, the board's executive committee promulgated a resolution allocating 400 additional shares to shareholder's apartment based on the alteration. Shareholders then brought this proceeding to annul the determination. The board relied on the business judgment rule, unclean hands, failure to act in good faith, and breach of fiduciary duty by the board president.

In granting the petition and annulling the 2012 determination, the court emphasized that any damages caused by the board's 2006 determination were caused not by the board president's misconduct, but by the board's own failures in communicating with its attorney and managing agent. The court concluded that the president had no duty to disclose to the board the opinions of the board's own agents. Moreover, the court held that the business judgment rule did not protect the board because the 2012 decision was an improper attempt to rescind the 2006 decision, on which the shareholders were entitled to rely.

COMMENT

When a co-op board complies with the provisions set out in the bylaws and proprietary lease, courts will uphold a board decision to reallocate shares, citing either the business judgment rule, acquiescence by the unit owner, or both. Thus, in Cohen v. 120 Owners Corp., 205 A.D.2d 394 (1994), the court upheld a reallocation, citing the business judgment rule, where the co-op board created five new office units and allocated more shares to the complaining owner's unit than to the other four spaces. The court emphasized that because the bylaws explicitly named marketability as a factor governing reallocation decisions, and the complaining owner's unit had enhanced market value attributable to owner's access to certain building amenities not shared by the other professional tenants.

Because proprietary lease language and by-laws typically limit reallocation to new spaces or those significantly altered by the owner, challenges to reallocation typically arise where an owner alleges his unit is overvalued as a result of a reallocation that occurred prior to his purchase. In these cases, courts need not even rely on the business judgment rule. They emphasize instead that the owner purchased with knowledge of the shares allocated to the unit. In Glassmeyer v. 310 Lexington Owners Corp., 232 A.D.2d 229 (1st Dept. 1996), the court summarily dismissed a claim for reallocation brought by owners who discovered that eight feet of a terrace they believed to be exclusively theirs was in fact commonly owned. The court dismissed the claim because the owners were aware of the share allocation at the time of purchase and should have understood the terrace demarcation, since the apartment had been owned previously for many years by the father of one of the complaining owners.

However, if an allocation is the product of an erroneous characterization in the offering plan, a claim for reallocation may be successful. In Goodman v. 225 East 74th Apartments Corp., NYLJ, 8/19/97, p.22, c.6 (Sup. Ct. NY Co.), the court denied the co-op summary judgment and allowed the reallocation claim to proceed on the theory of mutual mistake where the owners had purchased an apartment from a sponsor subject to the tenancy of a rent-regulated tenant, and discovered only when the tenant moved out a decade later that they had purchased a studio and not the two-bedroom apartment described in the offering plan.

Although in Goldman the court overturned the board's reallocation of shares, it did so because the landowner had made renovations based on a prior allocation. The court relied on the principle that the business judgment rule is inapplicable when a board attempts to rescind a decision on which an owner has relied. See, e.g., Whalen v. 50 Sutton Place S. Owners, Inc., 276 A.D.2d 356 (1st Dept. 2000) (rejecting the claim that the cooperative's decision to rescind approval to renovate an apartment was protected by the business judgment rule).