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.
