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Perspectives

Cooperative Board’s Rejection of Alterations Upheld as “Reasonable” Even Though Not Protected by Business Judgment Rule

A cooperative tenant-shareholder asked the Board of Directors for permission to “raise the height of the ceiling in a portion of his unit by enclosing unfinished common-area space above his unit for his exclusive use, and to replace an existing window in his unit with one of a different type and size.” The Board rejected the request.  The owner sued, contending that the proprietary lease provides that the Board’s consent to alterations may not be unreasonably withheld and that the Board’s rejection here was unreasonable.  A trial court dismissed the lawsuit at the summary judgment stage and an appellate court affirmed.  Perrault v. Village Dunes Apt. Corp., 2018 N.Y. App. Div. LEXIS 5808, 2018 N.Y. Slip Op. 5878 (2d Dep’t Aug. 22, 2018).

In its decisions, the court observed that decisions of cooperative boards often enjoy the broad protection of the business judgment rule, under which “a court should defer to a cooperative board’s determination so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith.”  However, where the proprietary lease provides that a board’s actions in approving or disapproving alterations “are to be reviewed under a reasonableness standard, the board’s actions are not protected by the business judgment rule.” 

Nonetheless, the Board’s decision to reject the tenant-shareholder’s request was upheld.  “A board’s actions are reasonable where they are ‘legitimately related to the welfare of the cooperative.’”  In this case the Board provided the court with evidence that its decision was reasonable, and the tenant-shareholder failed to show that it was not.