BY ROBERT GRANT,
MIDBORO MANAGEMENT
In 1980 the U.S. Congress adopted the Condominium and Cooperative Conversion Protection and Abuse Relief Act. Essentially, this act enabled cooperative shareholders and condominium unit owners an opportunity to address abuses, such as a self-dealing "sweetheart lease" that sponsors assigned to themselves at below market rent, typically for long terms, with additional long term renewal clauses. The law specifically gives the apartment owners a two-year window of opportunity to file their claim, based on two conditions: a) the sponsor still maintains some effective control over the property, and b) the sponsor owns 25% or less of the co-op shares or condo percentage of unit ownership. Since many buildings converted by the early 1980’s, it would seem that the two-year window expired years ago. Not true!
There have been a number of federal cases in which the courts have ruled that the sponsor still exercises some measure of control, even if he doesn’t have a majority of seats on the board. Examples of control would include veto power over changing the articles of incorporation, the by laws or the proprietary lease. Sometimes veto power over certain spending limits has been deemed "control". In recent years the courts have broadened the definition of control.
The Act itself has limited cooperatives and condominiums to sue over sweetheart leases dealing with space that, in its current capacity, would be viewed as an integral part of, and benefit to, the property. The prime examples are garages and laundry or dry cleaning facilities. Retail space has typically been excluded, despite co-op arguments that if they could terminate the lease, they would use the space for an essential service to the co-op.
Today, more co-ops and condos are adding recreational facilities, and there haven’t been test cases on swimming pools (or health clubs) under the new broadened definitions.
There has also been a major new development in this little known field. On May 17, 2000 the United States Court of Appeals for the Second Circuit affirmed a decision by the United States District Court for the Southern District of New York (Darnet Realty Associates v. 136 East 56th Street Owners, Inc.).
In this case, attorneys Ted Poritz and Alyson Weiss of the firm Richards & O’Neil LLP, who represented the co-op, prevailed in both courts. They successfully argued that the new holder of unsold shares was not the true successor-in-interest to the sponsor, because there was a lack of "unity of purpose." In fact, the new holder of unsold shares had voted against the original sponsor, and joined with the resident board members, in voting to terminate the garage lease held by the original sponsor (Darnet). Based on this, the sale of the sponsors’ units to the new holder of unsold shares was deemed to bring the sponsor below the threshold of 25% ownership. This allowed the co-op to claim that the two-year window had begun. If the sponsor retains more than 25% of the units or shares, and continues to rent those units, then the two-year window is not yet open for the co-op to file a claim to terminate the lease. Thus, the co-op not only was allowed to terminate the lease, but was awarded legal fees!
Walter Goldsmth, Esq. of the firm Friedman, Kraus & Zlotolow, has won a number of cases under this federal law, has written articles and summaries to the various cases in this field, and even has spoken at industry seminars. Unfortunately, the New York real estate community in general seems unaware of the recent decisions in favor of cooperatives and condominiums.
Perhaps this is due to the cases being argued in federal courts rather than the New York State court system, which is more closely watched and reported on. Unfortunately, it may also be due to attorneys or managing agents having conflicting ties to developers or sponsors that causes them not to bring this to the attention of the boards of the buildings they work for. Attorneys representing co-ops and condos who are aware of this Act may feel incorrectly that the two year window for a claim to terminate a lease has long since expired, or may not know how the concept of "sponsor control" has expanded.
Whatever the reasons, it is important for real estate professionals and boards of co-ops and condos throughout the tri-state area to learn of this recent case (Darnet) and other federal cases. These are times when properties, especially based on Local Law 11 façade reports, are spending hundreds of thousands of dollars on repairs and improvements. With high interest rates, co-ops are not rushing to refinance their underlying mortgages or borrow lines of credit to pay for these projects. Even without these projects, heating fuel price increases and 45% projected electric price increases, along with the typical 5% increase in annual real estate taxes are going to significantly impact budgets in many properties in the year 2001. Successfully terminating sweetheart leases would bring enormous financial benefit to any cooperative or condominium.
Robert Grant is director of management for Midboro
Management, 1926 Broadway, NYC, 212-877-8500, email rgrant@midboro.com
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