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.