Attorney Joe Colbert discusses a recent case allowing New York cooperative boards arguably to charge sublet fees for their sponsors or holders of unsold shares even though their proprietary leases say otherwise.
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New York State has clarified that the Housing Stability and Tenant Protection Act does not restrict Cooperative boards from charging more than $20 for purchase applications.
On September 13, 2019, New York State Department of State issued guidance for real estate professionals (the guidance) concerning the Housing Security & Tenant Protection Act of 2019 (the Act). The guidance loosens the application of the $20 limit on application fees and background checks for coops. Therefore, coop boards may charge application fees in excess of $20 in connection with the sale of a coop unit.
It is not clear how this all affects sublet fees and whether they can till be charged above the limit. The other part of the law that still applies to coops is the limit on security deposits to one month’s rent or maintenance. Some coop boards required substantial maintenance escrows as a condition of the approval of the sale. The law prevents this now. Also, the law limits late fees to $50 or 5 percent of monthly maintenance, and has provisions that will make it more expensive and difficult to evict residents who fail to pay their rent or breach the proprietary lease. Stay tuned as we learn more from the State.
The cooperative at 118 East 60th Street in Manhattan got lucky. Its books and records including alteration records were maintained at its management firm’s office – Matthew Adam Properties. When sued, the cooperative and management was demanded to turn over alteration records but was unable to do so because of water damage at management’s office. The other reason raised was a 7 year document retention policy which the cooperative and management claimed was followed and thus the requested records were no longer available.
Plaintiff’s counsel argued that the cooperative and management, including the individual board members named as defendants, spoiled the evidence and thus, they should be sanctioned in the suit. The Court refused to do so based upon the photos of the water damage that management presented along with what the Court considered a reasonable document retention policy which it had no reason to believe was not followed.
This is all fine for this lawsuit, but what about all the other books and records that were destroyed by the water damage. Maybe some of those books and records were needed by the cooperative and not having them safe kept from such casualty was a bad idea. In today’s digital age, digitizing documents is easy and if property maintained, can withstand casualty. Once the records are in electronic form, they can be maintained (and proven to be maintained) in accordance with a document retention policy.
The Court in the the 118 East 60th Owners Inc. case didn’t speak about individual board member records regarding alteration decisions. Perhaps plaintiff’s counsel did not go after the individual records just yet. In many cases, board members inadvisably use personal email to conduct board business including alteration and other decisions by the board. Maybe the destroyed records are located in the emails. If the cooperative had an electronic office like and Office of the Board (www.officeoftheboard.com), all of those records would be contained in the Office and all of them could have been either maintained to withstand casualty and/or purged and gone forever as a part of a document retention policy. Stay tuned on the lawsuit, there are probably appeals and future decisions to come. Read the decision here.
The New York Court of Appeals’ decision that a shorter 3 year statute of limitations applies to New York Attorney General claims under the Martin Act against developers and others, was changed by a new law just signed by Governor Cuomo. The new law establishes that the statute of limitations is not 3, but 6 years. This will make a difference in going after developers for construction defect and under claims under the Martin Act. Essentially claims that the developer did not deliver what was promised in the publicly filed offering plan. Read more.
A business entity’s business records can be discoverable in lawsuits. When employees or board members of a business entity are using their personal email accounts like gmail, yahoo, etc. to conduct business, those personal email accounts are fair game when it comes to discovery. The complication is that business emails are now mixed with personal emails in those accounts and an adversary could be allowed access to both the business and personal emails. How embarrassing would that be?
This issue just came up in a lawsuit between Exxon Mobil and the State of New York. Manhattan State Supreme Court Justice Barry Ostrager is presiding over the lawsuit in which Exxon Mobil has accused the Attorney General’s Office of official misconduct and acting with a conflict of interest.
Exxon Mobil has alleged that Schneiderman, while in office, used his personal email account to conduct official business related to his office’s investigation of the company. Exxon Mobil had obtained a series of communications relevant to the litigation through discovery that Schneiderman had forwarded to his government account from his personal email. Based on that finding, the company went for the jugular, demanding broader access to Schneiderman’s personal email account to support their claim of official misconduct on his part.
The company suggested in recent filings that there may be additional communications on Schneiderman’s personal email account that he chose not to forward and preserve. Those communications could have shown he was influenced by environmental activists to trigger an investigation and bring litigation against the company.
The Court ruled that, instead of unfettered access to Schneiderman’s account, Exxon Mobil would be provided with a signed declaration from Schneiderman certifying that anything relevant on the account was made available to them through discovery.
What a mess created by Schneiderman using a personal email account instead of just his office’s business email account.
The Court’s resolution of the discoverability issue, for the moment, does not change the fact that business email in personal email accounts is not shielded from discovery. Schneiderman has to provide a sworn declaration certifying that relevant emails in his personal account were all turned over. Exxon Mobil could appeal the decision and continue arguing for access to the entire personal email account to make its own assessment of what is relevant rather than relay on a declaration by its adversary in a contentious litigation. We’ll have to wait and see.
This serves a warning to businesses and their employees and board members. If you allow employees or board members to use personal email accounts to conduct business, those emails are discoverable and will expose the entire email account (both personal and business emails) to discovery.
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.
In a 52-page decision, District Judge Paul A. Engelmayer of the Southern District of New York put a kibosh on New York City’s short-term rental regulation that was set to go into effect on February 2, 2019. NYC has been trying to figure out an efficient way to enforce its short-term rental restrictions and this regulation was a way that it was hoping to do so.
Under the regulation, Airbnb, Homeaway and other short-term rental platforms would have had to provide transparent monthly reporting to NYC which it was going to use to help its enforcement efforts by identifying wrongdoers. The Court preliminarily enjoined NYC with regard to the regulation which essentially amounts to a win for the short term rental platforms.
This however will not stop NYC from continuing to investigate and issue violations to buildings with illegal short term renting. NYC’s Mayor’s Office of Special Enforcement has been cracking down on illegal short term renting, issuing violations with significant monetary penalties, to offenders and building owners including condominiums and cooperatives.
Now that NYC’s latest effort to enforce the law has been stymied by Airbnb’s and Homeaway’s Federal Court injunction, buildings need to be more vigilant and proactive in protecting their own buildings from short term rental violations which violate NY law as well as their own rental restrictions which may be more conservative than NY law. NYC will continue to investigate and issue violations where appropriate and buildings will have to defend themselves and seek mitigation of the violations that are being issued. The only way to do that is to be vigilant and proactive. Buildings that sit idle expecting NYC to do the leg work may find themselves on the wrong side of a violation.
Buildings and jurisdictions like NYC have to keep expanding awareness of rental restrictions and harnessing as much data as possible to identify wrongdoers and deter illegal renting. Once wrongdoers are identified, jurisdictions can still issue subpoenas to Airbnb and the other booking agencies in their enforcement efforts. We expect NYC to keep up its enforcement efforts and it and other jurisdictions in the same boat need buildings to do their proactive part. That seems to be the message sent by the Federal Court in its decision (read it here).
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 will 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 provision there is the same or very like the provision in most cooperative’s proprietary leases. Below is the provision. Please check your proprietary lease and if it contains the same or a very similar provision, you should seriously consider amending your provision. This is not an easy task because it will likely require a supermajority of shareholders, but there are ways of accomplishing this. Some firms like our firm may handle such matter on a flat fee basis so that it is cost effective.
The lease provision provides 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.
If your proprietary lease provision is the same or similar, and you’re in Manhattan or the Bronx, then the law right now is that the provision is not enforceable and thus, your cooperative or its complaining shareholder can’t recover legal fees or costs even if they are victorious based on this provision. This is a lot of legalese and if you’re having problems comparing or understanding the provision you should seek counsel. If you’re not represented and would like to know for sure, we would be happy to provide a free consultation. This is a critical issue for community associations because the ability to seek effectively a reimbursement of legal fees and costs is a tremendous deterrent against bad conduct and could devastate a cooperative or condominium that can’t seek reimbursement.
The Court’s problem with the provision is that it provides for example, that even if the complaining shareholder was the winner in a lawsuit, the cooperative could still demand that the shareholder pay its defense fees and costs. In the Court’s words:
In the present case, we find that an attorneys’ fees provision which provides that the tenant must pay attorneys’ fees if it commences an action against the landlord based upon the default of the landlord is unconscionable and unenforceable as a penalty. Paragraph 6(7)(c) of the proprietary lease permits the landlord to recover attorneys’ fees when the tenant brings an action against the landlord even when the landlord is in default. To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default.
It is not clear whether the Court considered Section 234 of the Real Property Law, which is applicable to co-ops (but not condominiums), and was meant to level the playing field with regard to legal fee and cost reimbursement between landlords and tenants. A review of the legal papers submitted by Amalgamated shows that they did raise Section 234 which provides that if a residential lease permits a landlord to recover legal fees incurred in any action or proceeding arising out of the lease, the tenant is also entitled to recover legal fees if it successfully defends or prosecutes an action arising out of the lease. The Court, however, did not discuss Section 234 in its decision, but it is possible that the Court silence on that point meant that it was just not persuaded by the point.
All of the above applies to cooperatives with proprietary lease provisions like the one above, but it also could have reaching effect for condominium as well. As stated, this decision was by the First Department, Appellate Division which governs the Courts in Manhattan and the Bronx. If you’re a cooperative in other places in New York like Brooklyn, Long Island, Westchester, etc., the Courts governing your cooperative would not be bound by the decision but could decide that they are persuaded by the decision.
If you’re a condominium, you should review your bylaw provision on the reimbursement of legal fees and expenses. If it allows you to recover legal fees and expenses even if the other side prevails, then a court could apply the Krodel decision and hold that your provision unconscionable and unenforceable. As stated, the ability for a cooperative or a condominium to recover its legal fees and costs from a defaulting shareholder or owner is very important.
Click here to read the Court’s decision.
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