GANFER & SHORE, LLP CLIENT ADVISORY FEBRUARY 2011 ALTERATION PROVISIONS OF PROPRIETARY LEASE ARE VALID AND ENFORCEABLE, COURT HOLDS
A standard provision contained in proprietary leases for cooperative units, requiring that alterations be approved by the Cooperative and that tenant-shareholders post security as a condition of approval, are valid and enforceable, according to the recent court decision in 510 East 84th Street Corp. v. Genitrini, Index No. 114465/2010 (Sup. Ct. N.Y. Jan. 14, 2011).
In this case, a Cooperative sued the tenant-shareholders of two adjoining apartments who had performed alterations joining the two apartments together, allegedly damaging the structural integrity of the building. Among other things, the Cooperative sought court permission to enter the unit to perform emergency repairs and to use the tenant-shareholders' security deposit to pay for the repairs. The tenant-shareholders responded, among other things, that the terms of the proprietary lease and an escrow agreement were unenforceable because they were “unconscionable contracts,” which were “signed under duress” as a condition of acquiring the unit, and were “contracts of adhesion.”
The court rejected these defenses. The court noted that the proprietary lease signed by these defendants was identical to the one signed by every other tenant-shareholder in the Cooperative: “Every single contract with respect to a Cooperative Corporation is a non-negotiable form contract which every shareholder must sign,” the court observed. In fact, the court added, under Business Corporation Law § 501(c), it would be improper for the Cooperative to grant more favorable proprietary lease terms to one tenant-shareholder than another. Thus, the defendants could not establish that they had been targeted for unfair or disparate treatment.
As for the specific proprietary lease terms at issue, there was “nothing unusual” in the Cooperative's requiring its tenant-shareholders to provide a security deposit as a condition of allowing alterations, and it was “prudent” for the Cooperative to do so. The court did express some concern about the breadth of another lease provision, which authorized the Cooperative to forcibly enter defendants' unit at any time to make or facilitate repairs. However, the court found that it was unnecessary to analyze whether this authority should be limited to emergencies, because the Cooperative had not invoked this provision, and instead had moved for a court order granting it access to the unit for the emergency repairs.
The court observed that if defendants could establish unconscionability or duress “merely by demonstrating that they had to sign certain form contracts before alterations could take place, every single Proprietary Lease and Escrow Agreement in New York City could be set aside.” The court concluded that “[e]ssentially, Defendants, who have chosen to live in a cooperative, object to the very nature of a cooperative corporation.” It held that this was no basis for excusing them from abiding by the provisions of their proprietary lease or the escrow agreement they had signed. FORECLOSURE OF COOPERATIVE UNIT PUT ON HOLD; NOTICES DID NOT SATISFY STATUTORY REQUIREMENTS
Deficiencies in the form of a foreclosure notice served by the holder of a cooperative loan will give the tenant-shareholders more time to try to save their home. Stern-Obstfeld v. Bank of America, 2011 WL 71476, 2011 N.Y. Slip Op. 21007 (Sup. Ct. N.Y. Co. Jan. 4, 2011).
In this case, the plaintiff tenant-shareholders were unable to make their loan payments for a period of time because of a series of personal and financial hardships. The bank served a notice of foreclosure and then commenced a foreclosure action. The bank agreed to suspend the foreclosure while an application by plaintiffs to refinance the apartment was pending, but the application was denied and the foreclosure then resumed. Meanwhile, plaintiffs contended, their finances improved and they stated they would be able to resume monthly payments, although they were unable to make a lump-sum payment and cure the arrears. According to the court, the bank stated that “while it [was] “sympathetic to plaintiffs’ predicament, sympathy is not a defense to a foreclosure action, and that plaintiffs have not demonstrated the ability to cure the default.”
The court agreed with the bank that plaintiffs were not entitled to refinance their loan without the bank’s agreement. The court also rejected plaintiffs’ argument that a foreclosure sale of their cooperative unit would be commercially unreasonable under Article 9 of the Uniform Commercial Code (UCC) because the value of their cooperative shares allegedly exceeded the amount they owed.
However, the court enjoined the bank from proceeding with the foreclosure sale because the notices it sent to the tenant-shareholders before moving to foreclose did not satisfy the requirements of UCC § 9-611(f), which has been in effect since January 14, 2010. In the court's words, “[u]nder UCC 9-611(f), a secured party must send a specific type of notice to a homeowner 90 days prior to the sale or other disposition of cooperative shares held as collateral. The lender must also send the homeowner a notice 10 days prior to the disposition. The 90-day notice is very particular in its requirements, and provides information about counseling services and other matters that may assist cooperative apartment homeowners in obtaining help when faced with the potential loss of a home.” The required notice is similar to the one that must now be sent when a lender seeks to foreclose on real property under the Home Equity Theft Protection Act. Here, “the notices [did] not comply with UCC 9-611(f)’s requirements in terms of timing, the type-size or the information to be provided.” The court enjoined the bank from proceeding with the foreclosure until new notices were served.
PROPOSED LOCAL LAW WOULD REGULATE COOPERATIVE APPLICATION PROCESS Persons affiliated with cooperatives in New York City should be aware of a proposal currently being considered by the New York City Council that would enact a “Fair Cooperative Procedure Law” imposing new requirements governing board action on applications to purchase a unit. The proposal, Intro. No. 88, indicates that it is sponsored by 27 members of the 51-member council. If adopted, it would require boards to approve or disapprove applications within 45 days of submission, and require that a “written certification of non-discrimination” be provided, signed by all board members who participated in the decision, to all applicants who are disapproved. Failure to provide the certification upon request would lead to the application’s being deemed approved. A series of procedural requirements would also be imposed on the application process. Because of the additional burdens that these requirements would create, cooperative boards and others may wish to contact their City Council members and express opposition to the proposed legislation. |
