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Perspectives

Proprietary Lease Provision Requiring Shareholder to Pay the Board’s Legal Fees Even if the Shareholder Prevails is Invalid

The proprietary leases of many cooperatives contain a provision requiring that in the event the Cooperative incurs legal fees or expenses in enforcing the terms of the proprietary lease against a tenant-shareholder, the shareholder must pay the Cooperative’s reasonable legal fees and expenses. Such provisions are generally enforceable, subject to the application of Real Property Law § 234.  That statute requires that where a lease entitles a landlord to attorneys’ fees if it prevails in a dispute, the clause will be enforced reciprocally so that the tenant is equally entitled to recover attorneys’ fees if the tenant is the prevailing party. 

In Matter of Krodel v. Amalgamated Dwellings Inc., 2018 N.Y. App. Div. LEXIS 7479, 2018 N.Y. Slip Op. 07531 (1st Dep’t Nov. 8, 2018), a proprietary lease included a more one-sided provision:  “If the Lessor [the Cooperative] shall incur any cost, fee or expense . . . including reasonable legal fee . . . in connection with any action or proceeding brought by the Lessee [tenant-shareholder] against the Lessor . . . which is based on an alleged default of the Lessor hereunder or which is based on any other matter relating to this lease, or to any alleged failure by the Lessor to perform any act which the Lessor is required to perform . . . or to the shares of the Lessor issued to the Lessee, or to the Lessor’s Bylaws . . . such cost or expense shall be paid by the Lessee to the Lessor, on demand, as additional rent.”  This provision would require a tenant-shareholder who sued the Cooperative to pay the Cooperative’s legal fees even if the tenant-shareholder won the litigation.

The Cooperative argued that this proprietary lease provision was valid “because New York courts have regularly enforced fee-shifting provisions.”  An appellate court disagreed and invalidated the provision.  A series of previous decisions by lower courts had already disapproved of such provisions, holding that “permitting a landlord to seek attorneys’ fees for a case which it lost . . . would be an absurd and oppressive result.”   The appellate court agreed, holding that “an attorneys’ fees provision which provides that the tenant must pay attorneys’ fees if it commences an action against the landlord based upon the default of the landlord is unconscionable and unenforceable as a penalty.  [The provision] permits the landlord to recover attorneys’ fees when the tenant brings an action against the landlord even when the landlord is in default.  To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default.”