Richard Siegler and Eva Talel
Richard Siegler and Eva Talel ()

A difficult issue for boards can be how to best respond to apartment owner violations of occupancy provisions in co-op leases and condominium bylaws. This column addresses one such violation: nonresidential use of a residential apartment. Such violations manifest themselves in different ways and to varying degrees. They may be seemingly innocuous, insignificant and transient, or be more permanent, pervasive and obtrusive. The non-residential use may, or may not, impair or interfere with the enjoyment and use of their apartments by other owners.

In seeking to maintain peaceful coexistence among occupants, boards may be faced with the dilemma of how swift or measured their responses to such violations should be. Owners are clearly required to comply with lease and bylaw provisions prohibiting nonresidential use, and courts will enforce such provisions.1 However, for a board trying to maintain a harmonious environment, a more apt response may appear to be a muted one or none at all, especially when the owner community is indifferent to such non-residential use. Under such circumstances, with seemingly no detrimental effects, boards may turn a blind eye and allow such violations to go unabated, sometimes for extended periods of time.

At the same time, while purposeful assent or complacent deference may seem pragmatic, a hidden danger may be percolating, notwithstanding safeguard provisions designed to prevent such danger.2 Specifically, proprietary leases frequently contain a nonwaiver provision, i.e., that board failure to enforce a lease provision does not constitute a waiver of the right to enforce it at a later date. Condominium bylaws may also contain a no-waiver provision similar to those in co-ops. Additionally, nonresidential use of a co-op or condominium apartment may violate applicable zoning laws with which owners are obligated to comply by virtue of “compliance with laws” provisions, which are typical in proprietary leases and condominium bylaws. However, although such nonwaiver provisions appear to be absolute on their face, a board may nonetheless be at risk of being deemed to have waived its right to enforce a lease provision, resulting in unintended deleterious consequences.

This column analyzes relevant case law and provides recommendations that boards and managers may wish to consider adopting so as to mitigate the risk of waiving the right to enforce use and occupancy provisions prohibiting nonresidential use of an apartment.

The Business Judgment Rule

Almost a quarter of a century ago, the seminal case of Levandusky v. One Fifth Ave. Apartment Corp.3 was decided, its ruling more recently reaffirmed by the New York Court of Appeals in 40 W. 67th St. Corp. v. Pullman.4 These cases mandate that board decisions made in good faith and in accordance with appropriate procedures be treated with judicial deference under the business judgment rule. While it is therefore generally quite difficult for board decisions to be overturned, the business judgment rule is not outcome determinative. Where a board actually makes a decision not to act, that decision is likely protected by the rule. However, the business judgment rule does not protect board “omissions,” where directors passively do nothing.5 Therefore, boards attempting to enforce nonresidential usage restrictions after extended periods of board inaction—which are met with owner challenges based on alleged waiver—should not rely on the business judgment rule to protect their inaction from judicial scrutiny of the waiver issue.

Violation of Zoning Laws

In 1050 Tenants Corp. v. Lapidus,6 the apartment owners installed an air conditioning unit which repeatedly leaked into the apartment below. More than six years later, the board sued to have the unit removed. The owners argued that the six-year statute of limitations had run. The Appellate Division, First Department, reversing the lower court, held that where conduct only implicates a contractual lease violation, the statute of limitations defense might be appropriate. However, where, as in Lapidus, the lease required the owner to comply with law and the owner’s conduct violated the law and caused ongoing damage to other apartments, the statute of limitations was inapplicable. The owner’s conduct constituted a continuing and recurring wrong so that a new cause of action accrued each day. Importantly, the court also held that no predicate violation need have been issued by law/code enforcement authorities. The court itself could determine that the owner’s conduct violated law and/or code provisions.

Therefore, it would appear that if an apartment is located in an area zoned to exclude nonresidential use and the proprietary lease or condominium bylaws require the owner to comply with applicable law, board non-enforcement (even for an extended period) should not preclude it from enforcing a compliance with law provision at a later date, based on the owner’s failure to comply with zoning laws.

However, in 111 on 11 Realty Corp. v. Norton,7 a rental landlord leased premises to a tenant under a commercial lease; the applicable zoning was for manufacturing uses. The tenant converted the space to residential use, which violated the Zoning Resolution of the City of New York. A subsequent purchaser of the building sought to evict the tenant at the end of the lease term, arguing also that the tenant’s residential use was illegal. The tenant argued that the landlord was fully aware of and had consented to his residential use and he was therefore entitled to be treated as a rent-stabilized tenant and could not be evicted. As to residential use, the Supreme Court, Kings County, held that the Zoning Resolution was not a bar to rent regulation, finding that the tenant expended substantial sums to convert the space to residential use with the knowledge, consent and assistance of the landlord in the creation of the illegality that was the basis for the eviction.

The Appellate Term, Second Department, reversed and directed judgment for the landlord, holding that credible testimony established that the landlord was unaware of tenant’s residential use, the superintendent’s participation in conversion of the space to residential use could not be imputed to the landlord, and the tenant concealed his residential use of the premises. The appellate court did not expressly address whether the tenant’s violation of the Zoning Resolution warranted eviction. However, one could reasonably argue that implicitly, the appellate decision stands for the proposition that in the absence of being complicit in creating the illegal condition, an illegal use under the Zoning Resolution by an apartment owner warrants landlord/board enforcement of a “compliance with laws” proprietary lease or condominium bylaw provision to compel discontinuance of that use and, in co-ops, termination of the lease.

Waiver

In Excel Graphics Techs., Inc. v. CFG/AGSCB 75 Ninth Ave., LLC.,8 a commercial tenant contended that the landlord waived the right to require landlord consent to subletting because the landlord collected rent while allegedly knowing of the subtenancies and that the subtenants were listed on the building’s directory. Relying on the Court of Appeals’ decision in Jefpaul Garage Corp. v. Presbyterian Hosp. in N.Y.,9 the Appellate Division, First Department, held that the explicit nonwaiver provision in the lease precluded there being a waiver. Similarly, in Horwitz v. 1025 Fifth Ave., Inc.,10 the First Department held that a co-op board could require an apartment owner to remove an awning notwithstanding that the awning had been installed some 50 years prior to the adoption of the House Rule prohibiting awnings; the board’s rights were preserved by the proprietary lease’s nonwaiver provision.

However, in 255 Fieldston Buyers Corp. v. Michaels,11 the Appellate Term, First Department, upheld denial of summary judgment to a landlord because of questions of fact as to whether the board waived enforcement of a House Rule prohibiting installation of washing machines in apartments. The court found that the nonwaiver clause did not, in and of itself, preclude a finding of waiver. Because the owners maintained a washing machine in their apartment for over 10 years, the board’s intent to waive was a question of fact, notwithstanding the explicit nonwaiver clause.

Similarly, in Dice v. Inwood Hills Condo.,12 the Appellate Division, Second Department, held that the nonwaiver clause in a condominium’s bylaws did not preclude the condominium board’s alleged conduct—failure to enforce a no-pet rule and making representations to the plaintiff owner that the rule was not enforced—from constituting a waiver of the right to enforce the no-pet rule which was part of the condominium’s Rules and Regulations section of its bylaws.

Taken together, these cases suggest that while nonwaiver clauses are generally upheld, they are not an absolute bar to the formation of a waiver. A court’s determination that board action or inaction constitute a waiver, irrespective of a nonwaiver clause, will turn on the specific facts of the case and a nonwaiver clause is one factor that a court considers. In Excel Graphics, for example,13 the court held that the landlord’s acceptance of rent from the tenant while allegedly impermissible subtenants were listed on the building directory was insufficient to constitute a waiver of the landlord’s right to terminate the lease, in light of the clear nonwaiver provision and the lease restriction prohibiting subletting without landlord consent.

In Simon & Son Upholstery, Inc. v. 601 West Assocs., LLC,14 the lessee used a commercial space as a photography studio, not for manufacturing upholstery/furniture, the permitted use provided for in the lease. The First Department held that because the landlord was fully aware of the tenant’s photography studio use, had approved the renovations enabling the tenant to construct it, and included pictures of the studio in a sales brochure, a waiver was formed notwithstanding the clear nonwaiver provision contained in the lease.15

Lastly, apartment owner reliance is an important factor in a court’s waiver analysis. In Kiam v. Park & 66th Corp.,16 the co-op board knew that the tenant was constructing an unauthorized sunroom and took no action to challenge its existence for 35 years. The First Department held that the board’s knowing inaction warranted a finding that the board waived the proprietary lease requirement for written approval of structural alterations. Importantly, there was also evidence that the board did initially approve the sunroom and that the tenant had made a substantial investment in reliance on the board’s inaction.

Recommendations

All proprietary leases and condominium bylaws should contain unambiguous nonwaiver provisions and leases and bylaws should require apartment owners to comply with all applicable laws, codes and ordinances.

Nonresidential use by owners can sometimes be insignificant at the outset, but become progressively worse. A board that ignores such initial misuse may fail to perceive and appreciate the detrimental extent of the escalating misuse, especially if its level rises incrementally, and thereby jeopardizes its rights. Should a board choose to initially ignore the nonresidential use and only seek to redress it when the misuse is more entrenched, the board is almost certain to encounter waiver challenges from the owner—challenges that would be unavailable had the board sought to immediately redress the misuse.

Boards and managers should therefore be diligent in their oversight and consistent in their enforcement. Boards should choose to act; they should not be passive and allow an owner, even for what may appear to be a relatively brief period of time, to use an apartment for nonresidential purposes. Boards should act in accordance with the procedures set forth in the co-op or condominium controlling documents. If and when an owner starts using the premises in a prohibited manner, the board should promptly serve the appropriate notices and, working with counsel, carry out whatever steps are necessary to ensure that the misuse is halted. In co-ops, such steps may ultimately conclude in termination of the lease. In condominiums, an injunction may be required in order to enjoin the prohibited use. Otherwise, boards risk being precluded from enforcing the building’s apartment use restrictions because they may be deemed to have waived their rights to do so.

Richard Siegler is of counsel to Stroock & Stroock & Lavan. Eva Talel is a partner at Stroock, and is an adjunct professor at New York Law School. Joseph Kornbluh, an associate at Stroock, and Margaret Jones, a reference librarian at the firm, assisted in the preparation of this column. Stroock is counsel to the Real Estate Board of New York.

Endnotes:

1. See, e.g., Sirianni v. Rafaloff, 284 A.D.2d 447 (2d Dept. 2001), in which a co-op apartment owner’s commercial use of a residential apartment was clear grounds for termination of his proprietary lease. It should be noted that certain limited and incidental nonresidential uses are permitted in residential areas by the N.Y.C. Zoning Resolution, §12-10—a permissible “home occupation” or “accessory use,” as defined in the Resolution. However, residential occupancy must be the primary occupancy. Further, even as to such legally permitted incidental uses, proprietary leases and condominium bylaws may prohibit them.

2. See, Siegler and Talel, “Cooperatives and Condominiums; Non-Residential Occupancy,” NYLJ, Sept. 3, 2003, at 3.

3. 75 N.Y.2d 530 (1990).

4. 100 N.Y.2d 147 (2003). See also Siegler and Talel, “‘Levandusky’ at 21: Board Protection Continues,” NYLJ, May 4, 2011, at 3.

5. 3A Fletcher Cyc. Corp. §1036 (Cum. Supp. 2013-2014). See, generally, Siegler and Talel, “Cooperatives and Condominiums; When Boards Determine Not to Act,” NYLJ, May 7, 2008, at 3.

6. 289 A.D.2d 145 (1st Dept. 2001).

7. 189 Misc.2d 389 (Sup. Ct. Kings Co. 2001). (http://www.nyc.gov/html/dcp/html/zone/zonetext.shtml (last updated Feb. 4, 2014))

8. 1 A.D.3d 65 (1st Dept. 2003).

9. 61 N.Y.2d 442 (1984).

10. 7 A.D.3d 461 (1st Dept. 2004).

11. 196 Misc.2d 105 (N.Y. App. Term, 1st Dept. 2003).

12. 237 A.D.2d 403 (2d Dept. 1997).

13. 61 N.Y.2d 442.

14. 268 A.D.2d 359 (1st Dept. 2000).

15. See Nejat v. Axiotis, 2010 N.Y. Slip Op. 37738531 (U) (Sup. Ct. N.Y. County), aff’d, 90 A.D. 3d 530 (1st Dept. 2011).

16. 66 A.D.3d 415 (1st Dept. 2009).