On Thursday, January 28th, the Appeals Court in the First Department which covers Manhattan and Bronx coops issued a decision which clarifies and changed the complicated law regarding holders of unsold shares and their entitlement to special privileges.
In Pastena v 61 W. 62 Owners Corp. (1st Dept 2019) the First Department said that “paragraph 38 of the proprietary lease, which purportedly exempts holders of unsold shares from certain expenses and fees assessed by the landlord, is void as a matter of law (see Spiegel v 1065 Park Ave. Corp., 305 AD2d 204 [1st Dept 2003])”. The Court’s pronouncement allowed coops to take a strong position that the paragraph in the proprietary lease that holders of unsold shares relied upon to say they didn’t have to pay sublet fees, was void and thus, holders of unsold shares had to pay like all other subletting shareholders. There was a lot of commentary and debate over whether the Court was correct in its statement, but that was the law in Manhattan and the Bronx.
At least until Thursday January 28, 2021, when the Court was given a softball opportunity to clear up its pronouncement. Although not argued below before the Supreme Court, on appeal, a coops counsel raised the Pastena pronouncement for the first time on appeal. The First Department disregarded the argument as not being raised before the Supreme Court below and thus not appropriate for appeal, but decided to speak on it anyway.
In Bellstell 7 Park Ave., LLC v Seven Park Ave. Corp., the First Department clarified/changed its pronouncement in Pastena, explaining now that only original purchasers from the sponsor can benefit from its prior decision voiding a paragraph from the proprietary lease as against public policy, not a subsequent holder of unsold shares.
The First Department now says that “This did not render the entirety of paragraph 38 void, however, as holders of unsold shares are routinely granted special privileges in exchange for their regulatory obligations, as they are, de facto, a different class of stock than an ordinary purchaser”. This clouds the issue though because the question now is what are the “regulatory obligations” and did the proposed holder of unsold shares comply with the “regulatory obligations” and what if they didn’t.
Coops with these complicated questions could put the burden on the proposed holder of unsold shares who has the burden of establishing their preferential status. Instead of expensive litigation, the parties may be able to negotiate an acceptable resolution. Having experienced counsel to navigate these complex waters is critical.
