As discussed in previous issues of this Client Advisory, most proprietary leases for cooperative apartments allow the cooperative, by vote of a specified percentage of either the board of directors or the shareholders, to terminate the proprietary lease of a tenant-shareholder who has engaged in “objectionable conduct.” While most cooperatives will treat this option as a last resort in dealing with difficult tenant-shareholders, because the process can be time-consuming and often leads to litigation, the courts typically uphold a cooperative’s decision to terminate a proprietary lease where the decision to terminate the lease is supported by evidence and the appropriate procedures have been followed. A recent example is Gordon v. 476 Broadway Realty Corp., 2014 N.Y. Slip Op. 31291(U) (Sup. Ct. N.Y. Co. May 21, 2014).
This dispute stemmed from an alleged decade-long leak problem at the cooperative. To address the leaks, the cooperative arranged and paid 60% of the cost of an extensive exterior waterproofing project. During the project, the tenant-shareholders refused necessary access to their apartment and refused to pay maintenance and assessments arising from it, only to then turn around and blame the cooperative for the leaks and for failing to remedy them. Litigation ensued concerning access to the apartment as well as non-payment of maintenance. Thereafter, the cooperative held a shareholder meeting and vote on the issue of terminating the tenant-shareholders’ tenancy for objectionable conduct. More than 90% of the voting shares supported termination.
The tenant-shareholders commenced a new action seeking to overturn the termination. The court observed that in reviewing termination of a proprietary lease, the business judgment rule protects the cooperative’s determination, “so long as the [cooperative] acts for the purposes of the cooperative, within the scope of its authority and in good faith.” Here, among other misconduct, the tenant-shareholders had denied access to their apartment in direct violation of a proprietary release provision, so there was sufficient “competent evidence” of objectionable conduct. The court rejected the tenant-shareholders’ argument that the cooperative had acted in bad faith in terminating the lease to retaliate against them because it had not been fully successful in the prior litigation.
The court noted with approval that the cooperative had given the tenant-shareholders notice of the shareholder meeting at which termination of their lease was to be considered. They were present at their meeting, with their counsel, were allowed an opportunity to explain their position prior to the vote. In addition, before the special shareholders meeting was called, the cooperative’s attorney had previously warned that if the tenant-shareholders continued to refuse needed access to their apartment, the cooperative reserved its right to call a shareholder meeting to consider terminating the proprietary lease, which is exactly what ultimately happened. Finally, the court concluded that Real Property and Procedure Law § 753(4), which provides a residential tenant who is being evicted for breaching a lease provision with an opportunity to cure the breach, does not apply to a termination by vote of the shareholders as authorized in the proprietary lease.