Business

As we previously reported, the New York Appellate Court that oversees the Manhattan and the Bronx Supreme Courts issued a unanimous decision at the beginning of November, 2018, which may significantly impact the right of cooperatives, and likely condominiums, that try to seek the reimbursement of legal fees from defaulting shareholders or owners.

In Krodel v. Amalgamated Dwellings, the Appellate Division, First Department held that the provision in the cooperative defendant’s proprietary lease covering reimbursement of legal fees is “unconscionable and unenforceable as a penalty.”  Thus, even though the cooperative there may have prevailed in the lawsuit, it could not recover its defense counsel’s fees and costs from the shareholder plaintiff who lost.

The lease provision in Krodel provided in Section 7 of the proprietary lease that:

[i] Lessor shall incur any cost, fee or expense (whether paid or not), including reasonable legal fees and other professional fees and disbursements: (a) in performing any act which the Lessee is required to perform; or (b) in connection with any action or proceeding brought by the Lessor against the Lessee, including any counterclaim asserted therein, which is based on a default of the Lessee hereunder or which is based on any other matter or thing relating to this lease, or to the Lessee’s failure to perform any act which the Lessee is required to perform, or to the Lessee’s occupancy in the Apartment, or to the shares of the Lessor issued to the Lessee, or to the Lessor’s Bylaws, Certificate of Incorporation, House Rules, or regulations duly adopted by the Board of Directors; or (c) in connection with any action or proceeding brought by the Lessee against the Lessor, including any counterclaim asserted therein, which is based on an alleged default of the Lessor hereunder or which is based on any other matter or thing relating to this lease, or to any alleged failure by the Lessor to perform any act which the Lessor is required to perform, or to the Lessee’s occupancy in the Apartment, or to the shares of the Lessor issued to the Lessee, or to the Lessor’s Bylaws, Certificate of Incorporation, House Rules, or regulations duly adopted by the Board of Directors, then such cost or expense shall be paid by the Lessee to the Lessor, on demand as additional rent.  The Lessee’s obligation to reimburse the Lessor for such costs, fees and expenses shall include the costs, fees and expenses incurred by the Lessor in (a) obtaining an award of such costs, fees and expenses, including but not limited to proceedings to determine the amount of reasonable legal fees and other professional fees to be awarded, and (b) recovering payment in full of such costs, fees and expenses from the Lessee.

Click here to read the Krodel Court’s decision.

Notwithstanding the First Department Decision, in Board of Directors of 340 East 93 St. Corp. v. Acevedo, the Supreme Court, New York County, granted the coop plaintiff’s summary judgment motion for an award of legal fees for having to bring an injunction lawsuit.  The Court granted summary judgment against the defendants on the ground that the coop was entitled to award under the proprietary lease because it prevailed. 

An interesting component of this case is that the parties entered into a Court ordered stipulation regarding the injunction and the Court deemed this prevailing in the action.  The proprietary lease in the case contained the typical attorneys’ fees provision that:

28.  If the Lessee shall at any time be in default hereunder and the Lessor shall incur any expense (whether paid or not) in performing acts which the Lessee is required to perform, or in instituting any action or proceeding based on such default, or defending, or asserting a counterclaim in, any action or proceeding brought by the Lessee, the expense thereof to the Lessor, including reasonable attorneys’ fees and disbursements, shall be paid by the Lessee to the Lessor, on demand, as additional rent.

The 340 East 93rd St. Corp proprietary lease doesn’t seem much different than the Krodel proprietary lease in that both do not require the coop to prevail in order to be able to recover attorneys fees.  The Krodel Court invalidated the lease provision, but the 340 East 93rd St. Corp Court did not.

I suggest waiting to see if the parties move to reargue or appeal the decision.  The Court ordered a hearing on the amount of legal fees.  If the parties appeal, this may be an opportunity to ask the First Department to have another look at the provision and perhaps amicus briefs will be submitted by interested industry organizations in support of the typical proprietary lease provision which coop and similarly condo clients have been relying upon for years.

Here’s the decision in 340 East 93rd St. Corp case.

New York City coops, condos and other community associations must take action to ensure they are in compliance with short term rental rules.  If not, it will be difficult to defend against the thousands of dollars in fines that NYC is imposing for violations. And, lack of knowledge of the illegal short term renting, is not a defense.

In response to illegal renting on short term rental sites like Airbnb, NY State and NYC has been enacting new regulations and starting to enforce them by issuing violations with significant fines.  Short term rental violations are seen as important public concern because buildings with short-term rentals in NYC and around the world are reporting that they suffer from life, health and safety problems because of transient tenancy.

NYC’s position is clearly that lack of knowledge that short term renting is happening in a building is no defense to a violation and fine. The Appeals Court in Manhattan just agreed upholding a $53,100 fine. NYC has been warning owners, property managers and hosts that violations will be issued to the property owner even if tenants are doing the illegal short term renting.  See NYC Office of Special Enforcement warning.  

The $53,100 fine against the 264 unit building at 360 West 43^rd Street in Manhattan, should be “a shot in the arm” for NYC coop and condo boards.  Even though only 3 of the 264 units were caught illegally short term renting and the owner claimed it didn’t know, NYC was steadfast in its position that  ignorance is no defense.  

According to the City, owners have the responsibility to maintain the premises and to be up to code.  For example, any transient use in the building requires full compliance with applicable fire-alarm and sprinkler requirements, and the owners are legally responsible for its tenants’ illegal use of the premises.

According to a unanimous panel of the Appellate Division, First Department, the violations issued by NYC were “supported by substantial evidence” and the building’s attempt to get out of the $53,100 fine by arguing lack of knowledge was “unavailing”.

Buildings should be taking action to bring awareness to  short term rental restrictions that apply to them.  NYC prohibits renting for less than 30 days in most cases, but a condo or coop may not allow it for less than 1 year.  It is important to make sure that people know your rental restrictions and the jurisdictional ones that apply to you.  

Know Your Rental (knowyourrental.org) is a new official building registry which buildings can use to inform people worldwide of the short term rental restrictions applicable to their building.  If you are registered and taking such proactive measures to try to comply with the law and informing the public of the short term rental restrictions, you can raise that as a part of your defense if you’re issued a NYC violation and fine. Coops, condos and community associations need to be proactive to avoid short term rental violations and the steep fines; particularly, now that lack of knowledge is not going to help them.