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Court Decision Adds to Uncertainty Regarding Unsold Shares

In the May 2019 issue of this Client Advisory, we reported on the decision in Pastena v 61 W. 62 Owners Corp., 169 A.D.3d 600 (1st Dep’t 2019). In this decision, the appellate court whose jurisdiction includes Manhattan and the Bronx appeared to invalidate certain proprietary lease provisions under which holders of unsold cooperative shares are exempted from flip taxes and sublet fees. However, as we discussed at the time, a closer look at the arguments presented in the case suggested that the decision could also be subject to a much narrower reading. We anticipated that this issue would come up again in future cases.

In Matter of Ross v. Wakefield Owners Corp., Index No. 5572/2019 (Sup. Ct. Queens Co. June 18, 2020), a lower court followed the broader interpretation of Pastena. In this case, the owner of two coop units challenged the board’s decision to impose sublet fees on leases of the units. The court found that it was not clear whether the owners were, in fact, holders of unsold shares. However, citing Pastena, the court held that even if the owners were holders of unsold shares, “the provisions of the Operating Documents, which purportedly exempt holders of unsold shares from certain expenses and fees assessed by the landlord, are void as a matter of law.”

If other courts follow this interpretation, it will effectuate a major change in the common understanding of the rights that holders of unsold shares enjoy. However, the grounds for questioning this interpretation continue to exist, and we can certainly anticipate further litigation on this issue.