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Cooperative Board Required to Approve Transfer to Family Member

Cooperative boards generally have the right to approve or disapprove the transfer of a cooperative unit for any reason or for no reason (but not for an impermissibly discriminatory reason). Such board decisions are ordinarily subject only to limited judicial review under the Business Judgment Rule. However, when a proprietary lease provides that a cooperative board’s consent to the transfer of a unit under specific circumstances “will not be unreasonably withheld,” the board’s decision to disapprove a transfer is subject to more searching judicial review than would ordinarily be available.

In Matter of Kotler v 979 Corp., 2021 N.Y. App. Div. LEXIS 802, 2021 N.Y. Slip Op 00801 (1st Dep’t Feb. 9, 2021), the proprietary lease provided that if the lessee (tenant-shareholder) should die, then the Board’s “consent shall not be unreasonably withheld to any assignment or transfer of this lease and the appurtenant stock by bequest or by assignment …, provided that such legatee or assignee shall be a financially responsible member of the Lessee’s family.” The court held that this language “triggered application of a ‘heightened standard of reasonableness’ to be applied in lieu of the usual business judgment rule.” As a result, in an action challenging the Board’s disapproval of a transfer to the deceased tenant-shareholder’s daughter, the Board had the burden of showing that the daughter was not “financially responsible.”

The court held that the Board did not meet this burden, where “[t]he daughter produced financial statements and other documents showing assets of magnitude greater than the annual maintenance and other costs associated with the apartment, as well as annual income more than double those costs.” The court annulled the board’s decision and directed it to allow the transfer. The court also held that the Board could not impose a transfer fee, since none was provided for in the By-Laws or in the proprietary lease. Further, the court required the Board to pay the plaintiff damages for breaching the proprietary lease, measured by “the amounts paid after [the Board] unreasonably withheld its consent to the assignment,” as well as the plaintiff’s reasonable attorneys’ fees.