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Appellate Court Decision Discusses Rights Of Unsold Shares

Holders of unsold shares in cooperatives, or unsold units in condominiums, typically enjoy greater rights than other tenant-shareholders or unit owners.  For example, a holder of unsold shares or units is often exempted from board approval requirements for sales or sublets in a cooperative or the board’s right of first refusal in a condominium.  From time to time, disputes and litigations arise when an owner and a board disagree as to whether the owner is an owner of unsold shares or units, or how broadly such an owner’s special rights are to be interpreted.

In Pastena v. 61 W. 62 Owners Corp., 169 A.D.3d 600 (1st Dep’t Feb. 26, 2019), the Appellate Division sitting in Manhattan surprised many lawyers by issuing a decision holding that paragraph 38 of the proprietary lease was void as a matter of law.  Paragraph 38 in many proprietary leases, including the one at issue in this case, is the provision bestowing special rights on holders of unsold shares.  A court decision invalidating that provision would have broad significance.

However, upon looking more closely at the arguments in the case, it appears the provision actually at issue was paragraph 39 (not 38) of the proprietary lease in question.  That paragraph deals with the payment of administrative fees on a transfer, and arguably provides special rights to original purchasers in the cooperative, as opposed to subsequent purchasers.  A series of prior court decisions have held that proprietary lease provisions or cooperative board policies providing special rights to original or “grandfathered” purchasers, as opposed to subsequent or more recent purchasers, are invalid because they effectively create two classes of stock in the cooperative, in violation of the Business Corporation Law.  This is a completely separate issue from the rights of holders of unsold shares, which were not actually involved in the case that the court decided.

Thus, while the court’s decision exists, if a future plaintiff tries to rely on it for a broad proposition that a proprietary lease cannot confer special rights on a holder of unsold shares, counsel will be able to seek to distinguish the case and urge that the court did not actually intend, or have a basis, to address that issue.  In the two months since this case was decided, it has not been discussed or relied upon in any subsequently reported court decision.  We will report on any future developments in this Client Advisory.