Scott E. Mollen
Scott E. Mollen ()

Co-Op’s Board of Directors’ Termination of Proprietary Lease Upheld—Business Judgment Rule—Co-Op Boards Are Not Required to Inform Shareholders That They Have a Right to Have Counsel Present at a Board Meeting—Proprietary Lease Terminated Based on Objectionable Conduct—RPAPL 711 “‘Competent Evidence’ Standard is Satisfied by Utilization of the Business Judgment Rule”

A cooperative corporation (co-op) had commenced a holdover proceeding against the respondents and undertenants pursuant to a board of directors (board) decision “which terminated respondents’ proprietary lease” (lease) based upon “objectionable conduct.” The co-op alleged that since 2005 “occupants and guests of [the premises] have engaged in…objectionable conduct including but not limited to violation of both the House Rules and [lease],” and “have created a nuisance by repeated conduct after numerous letter[s], creating an unhealthy and unsafe environment for the other residents….”

The trial focused on whether the board’s decision to terminate the respondents’ tenancy should be “granted deference under the business judgment rule.” The co-op presented six witnesses at trial. The respondents produced no witnesses. Evidence included “the House Rules, the [lease], By-Laws, the Notice of Board Meeting (notice), the…transcript of the Board Meeting and numerous letters from the Board to respondents concerning objectionable conduct.”

The co-op had served a notice dated Feb. 16, 2010 on the respondents. The notice alleged, inter alia, substantial violations of the house rules, lease and applicable law and requested that respondents attend a board meeting to be held on March 24, 2010. The notice stated that the board will “address and allow you to respond to the objectionable conduct….”

The notice listed 744 incidents, with dates and times, and included references to “urinating and defecating in the hallways and elevators; loitering and smoking; illegal drug sales in and around the Building; and sexual activity in the stairwells.” The notice also noted that many incidents had been recorded and the respondents could view the security footage recordings prior to the March 24, 2010 meeting. The notice further explained that after the respondents have responded at the meeting, the board will vote on whether the tenancy is desirable, whether the tenancy is objectionable, whether such conduct constitutes a nuisance and whether to terminate the tenancy and lease.

The board, the subject respondent and the co-op’s counsel attended the March 24, 2010 meeting. The respondent had acknowledged receipt of numerous letters from the board relating to objectionable conduct and the notice. Moreover, the subject respondent had read the notice and discussed it with her brother.

A co-op witness testified that following the meeting, the board voted unanimously to terminate the lease and then served a notice of termination. When the respondents and undertenants failed to vacate the premises, the notice of petition and petition had been served. Another co-op witness described the camera system in the building. Additionally, a property manager testified that she had mailed approximately 20-40 letters to the respondents with respect to “incidents of objectionable conduct.” This witness testified that the subject respondent had advised her that “she was unable to control the persons living in her apartment.” Another co-op witness described complaints that had been made by neighbors and residents about the objectionable conduct.

The court explained that Levandusky v. One Fifth Ave, 75 NY2d 530 (1990) held that the standard of judicial review with respect to shareholder challenges of cooperative board of directors’ decisions would be the “business judgment rule” and board decisions should be upheld if a board acted “for the purposes of the cooperative,” “within the scope of its authority,” and “in good faith.” Judicial precedent further held that a proprietary lease could be terminated by a shareholder vote pursuant to a proprietary lease that authorized the termination of the tenancy based on objectionable conduct.

The court explained that “[i]n a typical residential holdover, RPAPL provides for judicial review of ‘competent evidence’ to substantiate that the tenant’s alleged conduct is objectionable. In cooperatives, the ‘competent evidence’ that is the basis for the shareholder vote will be reviewed under the more deferential ‘business judgment rule.’”

Thus, courts are to defer to “the shareholders’ vote and findings as ‘competent evidence’ of the tenant’s objectionable conduct,” i.e., “the RPAPL 711 ‘competent evidence’ standard [with respect to objectionable conduct cases] is satisfied by the utilization of the ‘business judgment rule.’” Judicial precedent also held that “a [co-op's] board of directors alone may terminate the tenancy of a shareholder-tenant based on ‘objectionable conduct’ and without a shareholder vote” if so authorized by the organizational documents.

The court found that the subject board’s actions “were well within the scope of authority, legitimately furthered the corporate purpose and were made in good faith.” The court noted the number of incidents, the fact that the incidents had been brought to the attention of the respondents in the course of several years, that the co-op had sent proper notices and provided the respondents with an opportunity to respond to the allegations. The subject respondent had declined to confront complaining witnesses and had failed to offer contradictory testimony to refute the video evidence. Moreover, the respondent had admitted that she could not ensure that the alleged wrongful conduct “would abate in the future.” The court concluded that:

The Board’s actions not only furthered a legitimate corporate purpose but constitutes a fundamental responsibility to its shareholders and residents. The Board’s actions furthered the best interest of all shareholders and their families and friends by promoting a healthy, clean and safe environment in the subject building. The Board’s failure to act in the face of these allegations would amount to an abdication of its responsibilities and duties to all the shareholders. Respondents have not raised any allegation that the Board’s actions were biased, fraudulent, discriminatory or engaged in favoritism. Rather, it appears from a review of the record that the Board’s actions were deliberate, thoughtful and accommodating.

The respondents had argued that they were denied due process because the notice did not advise the respondents that “they could have counsel present at the Board Meeting.” The court explained that “[t]here is no case law that requires a cooperative board to place such language in a Notice for a Board Meeting” and “there is no right to counsel in a non-criminal matter.”

The court further found that the board had followed the procedures prescribed by the house rules, the by-laws, the lease and the respondents had been afforded “due process.” They were aware of the complaints “for a lengthy period of time,” “[t]hey knew the purpose of the board meeting and the specific allegations” and “they had more than forty days to review and prepare an adequate defense with or without counsel.” Thus, the board had acted “in good faith, within the scope of its authority and for a legitimate corporate purpose, thus satisfying the business judgment rule to which deference should be given by this Court.” Accordingly, the court awarded the petitioner final judgment of possession.

1855 7 Ave. Housing Dev. Fund v. Wigfall, 81069/10, NYLJ 1202647519406, at *1 (Civ., NY, Decided Feb. 20, 2014), Elsner, J.

Commercial Landlord-Tenant—Tenant Entitled to 50 percent Rent Abatement Because “Opening Conditions” Had Not Occurred—Although Landlord May View Court’s Decision As “Harsh,” Courts Will Not Rewrite Clear Unambiguous Terms That Are Negotiated by Sophisticated Commercial Parties

A landlord commenced a summary non-payment proceeding against a shoe store (tenant). The issue involved a lease clause which granted the Tenant “a 50 percent rent abatement until two other commercial spaces in the building become occupied by DSW and Walgreens, or the expiration of one year, whichever occurs first.” The landlord asserted that the condition which triggered the full rent obligation had occurred once DSW and Party City, as a sublessee of Walgreens, opened in the two subject spaces. The tenant countered that it was not obligated to pay full rent since Walgreens had never opened the store, as required by the lease. Each party sought summary judgment.

The lease contained an “Opening Conditions” (OC) provision which stated:

Notwithstanding anything to the contrary contained in the [l]ease, if the Commencement Date occurs prior to both DSW and Walgreens being open and operating in the Building [OC], [the respondent's] Minimum Rent shall be reduced by 50 percent until the earlier of (i) the date the [OC] are fully satisfied, or (ii) the passage of one year from the Commencement Date.

The lease also contained a merger integration provision.

In April 2010, Duane Reade leased a store in the building. Duane Reade had become a subsidiary of Walgreens. On Feb. 23, 2012, Duane Reade sublet its space to Party City. The landlord had consented to the sublease. Party City thereafter opened on May 12, 2012. DSW had opened on March 1, 2012. The tenant had continued to pay only 50 percent of the rent pursuant to its lease which had commenced on Feb. 1, 2012.

On July 23, 2012, the landlord served the tenant with a 10-day rent demand which included the unpaid 50 percent of the rent for the period following Party City’s opening on May 12, 2012. The tenant argued that pursuant to “the clear and unequivocal terms of the lease,” full rent was not due until DSW and Walgreens were “open and operating in the Building” and that had not occurred. The landlord argued that “since ‘Duane Reade/Walgreens’ had the right to sublease to Party City, the provision in the…lease that ‘DSW and Walgreens be open and operating in the Building’ may be interpreted as ‘DSW and Walgreens, assigns, successors, etc.’”

The landlord alleged that the Tenant had drafted the lease and “had expressed concerns during negotiations about the building being ‘dark,’ i.e., without other open stores.” The landlord claimed that he therefore agreed “to add the ['OC'] clause.” The landlord asserted that the tenant was not concerned about who the other tenants were, but that the spaces be occupied. The landlord alleged that it had advised the tenant that the landlord had already executed leases with DSW and Duane Reade/Walgreens. The landlord conceded that “as of the lease commencement date, neither DSW nor Walgreens was ‘open and operating’…, so that the [tenant] was required to pay only 50 percent of the monthly rental….” However, the landlord argued that “once Party City opened in the Walgreens space, that space was no longer ‘dark,’ and the [OC] had been met, thereby triggering the [tenant's] obligation to pay full rent.”

A broker witness asserted that the tenant had not been concerned about the type of store that opened in the adjacent spaces, but rather that the building not be left “dark.” The broker cited her “transaction trail,” which was “a self-created document containing what she purport[ed] [were] all of the terms of the parties’ final agreement.” The broker stated that such document contained no reference to the OC, but only “a covenant by the [landlord] not to lease any adjacent space to an amusement arcade, adult bookstore or movie theater.”

The court granted the tenant’s motion for summary judgment and denied the landlord’s cross-motion. The court cited the following rules of contract construction:

a written lease “agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”…. “Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide”…. “[I]f the agreement on its face is reasonably susceptible of only one meaning, a court is not free to alter the contract to reflect its personal notions of fairness and equity”…, even if this results in an economically harsh result to one of the parties….

A contract is unambiguous if the language it uses has a “definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion”…. Ambiguity is determined by looking within the four corners of the document and not to outside sources…. Thus, the “[m]ere assertion by one that contract language means something to him, where it is otherwise clear, unequivocal and understandable when read in connection with the whole contract, is not in and of itself enough to raise a triable issue of fact”….

The court found that the lease language and particularly, the OC, “is clear and unambiguous in providing that the [tenant] need only pay 50 percent of the rent until both DSW and Walgreens opened up.” There was “no need to resort to the parol or extrinsic evidence proffered by the parties….” The court reasoned that the parties were “sophisticated business people” and therefore, if “they intended for the [tenant] to pay its full monthly rent if a tenant other than Walgreens occupied the building, they could easily have included such a provision in the lease.”

The court further noted that the rule that a contract should be construed strictly against the drafter, is “a rule of construction that should be employed only as a last resort” and the parties had provided that the lease constituted their “entire agreement.” The court declined to “rewrite the plain language of the lease that was negotiated between sophisticated business entities.”

The court acknowledged that the landlord may view the court’s decision as “economically harsh,” but explained that “parties are free to make their own contracts, and courts do not serve as business arbiters between parties in approximately equal stances.” Thus, the court held that “the [tenant] was obligated to pay only 50 percent of the rent at least through the date of the petition since a Walgreen’s did not open.”

34th Street Penn Asso, v. Payless Shoesource, 12N075998, NYLJ 1202645802507, at *1 (Civ., NY, Decided Feb. 25, 2014), Bannon, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.