NAM PERSPECTIVE

September, 2014

THE BUSINESS JUDGEMENT RULE VS. THE PROPRIETARY LEASE - A LOOK AT KAPLAN V. PARK SOUTH TENANTS CORP.

By: Robert I. Cantor, Esq.

Robert Cantor, Esq. In a decision issued this past March in the case of Kaplan v. Park South Tenants Corp., 2014 WL 1092445 (N.Y. Sup.), Justice Arthur F. Engoron issued a preliminary injunction which permitted a cooperative tenant/shareholder (plaintiff) to perform certain renovations even though the co-op board had not approved his renovation application. The Court ruled that the board’s decision-making process was controlled by the “approval not to be unreasonably withheld” standard in the proprietary lease’s alteration provision rather than the business rule.

Under this standard, a court must determine whether the board’s determination was “legitimately related to the welfare of the corporation.” Although this issue is often fact-specific and thus not usually decided on papers, here the Court ruled that plaintiff’s submissions were sufficiently persuasive as to warrant the issuance of the injunctive relief.

The plaintiff sought (a) to install an exterior air conditioning system by placing three condenser units on the terrace to which he had exclusive-use and by opening a 2 inch hole in an exterior wall to connect the units to the system’s interior components; and (b) to relocate a telephone conduit from the center of his bathroom to a wall.

The Court reviewed the relevant facts against two provisions of the co-op’s organizational documents. First, as is the case with most proprietary leases, this lease stated that the board could not unreasonably withhold consent for a proposed alteration. And second, a house rule, enacted after damages had been caused by previous shareholders’ placement of heavy objects on their terraces, stated that only designated tables, chairs and planters would be permitted on terraces.

Plaintiff’s supporting factual claims, inter alia, were: that plaintiff is 73 years old suffering from cardiovascular conditions which require him to live in an adequately cooled residence; that installing an a/c system inside of his apartment would not produce sufficiently cooled conditions; that the three condenser units were very small and practically soundless; and that the board had previously permitted a different shareholder to place her a/c unit on plaintiff’s terrace.

First, the board had objected to the proposed alteration regarding the a/c units based on the house rule provision referred to above and the argument that allowing this plaintiff to install the condenser units would set a bad precedent for subsequent applications, which argument ignored the fact that the board had previously allowed a third party to place an a/c unit on the plaintiff’s terrace. Second, the board relied on its architect’s opinion that piercing the building’s exterior wall was bad practice which could lead to water penetration. Lastly, regarding its decision not to permit a relocation of the telephone conduit, the board relied on a board member’s affidavit stating that the conduit was original to the building, operates with fragile wires that were nearly 50-years-old and that previous efforts at moving this conduit in other units had created loss of service for all tenants on the line for periods ranging from weeks to months.

In its discussion, the Court noted that because the phrase “not to be unreasonably withheld” is in the lease’s alteration provision, the board’s decision was not protected by the business judgment rule. The decision cited two First Department decisions, both issued in 2000: Rosenthal v. One Hudson Park, Inc., 269 AD2d 144, 701 NYS2d 899 and Seven Park Ave. Corp. v. Green, 277 AD2d 123, 715 NYS2d 697. In Rosenthal, plaintiffs were denied permission to build additions on the roof areas to which they held exclusive rights. The Court, in relevant part, affirmed dismissal of the board’s business judgment rule defense based on the same lease provision as exists at bar. Similarly in Seven Park Ave., the board denied the tenant’s application to install a half bath in his apartment and the Court again noted that the business judgment rule was inapplicable.

In the instant case, in addition to ruling that the business judgment rule standard did not apply, the Court also ruled that the clause “not to be unreasonably withheld” trumped the house rule which, by listing only three items it would ever permit to be installed, eliminated the board’s responsibility to review the reasonableness of each particular alteration.

The two Appellate Division decisions cited in the decision both ruled that, under the relevant material facts, triable issues existed. However, in the case at bar, the Court decided otherwise, stating that the only meaningful issue was whether the board’s turn-down was reasonable.

The Decision brushed aside the Co-op’s reliance on the violation of the house rule. The Court said that the house rule allows for “one size fits all” determinations without the board actually analyzing the specifics of each proposed alteration. The Court also disregarded the Co-op’s arguments regarding the inadvisability of moving the bathroom conduit, since the board member affiant did not claim any engineering expertise.

The Decision evidenced the Court’s displeasure with the Co-op’s arguments, i.e.., “In their oversized, redundant and largely unauthorized ‘reply’ papers, defendants continue to maintain that in evaluating plaintiffs’ proposal for an exterior A&C system, they had to go no further than determine that it violated the House Rules.”

Plaintiff’s papers, on the other hand, contained affidavits from an air conditioning expert and an engineering consulting firm, and a doctor’s note attesting to plaintiff’s serious medical conditions. It should be noted that the Co-op had submitted an affidavit from its architect stating that the proposal violated the Co-op’s “requirements” in that it called for piercing the building’s external walls. The Court did not credit this professional’s affidavit and rather was evidently convinced by plaintiff’s affidavit which stated that the opening would be very small and that the exterior wall adjacent to plaintiff’s terrace already contained many similar piercings.

In summing up, the Court stated that it appeared that the Co-op’s main motivation in refusing permission and in defending the case was “the usual ‘But what if everyone else asks to do the same thing?’ ” The Court’s response was that, if this were to happen, then the board “should do its duty to evaluate all requests objectively and fairly.”

The takeaway is that “bright line” reasons for renovation turn-downs do not exist when a board’s consent may not be unreasonably withheld. A board cannot merely rely on the argument that its decisions were reasonable, “based on concern for a possible adverse impact on the building’s plumbing infrastructure, longstanding board policy and a reluctance to set a precedent for similar applications.” For triable,issues of fact to exist, a co-op’s papers supporting a turn-down must present specific reasons upon affidavits from properly credentialed professionals. Otherwise, when a plaintiff’s papers present compelling facts supporting the reasonableness of the proposed alteration, a co-op may very well not prevail.

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Robert I. Cantor, Esq., member of member of NAM’s (National Arbitration and Mediation) Hearing Officer Panel. He is available to hear arbitrations and mediations throughout the New York Metro area. Mr. Cantor, is a commercial litigation specialist, and is the founding partner of Cantor, Epstein & Mazzola, LLP.

Click here to view Robert Cantor's resume.

For any questions or comments, please contact Ms. Silvey via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.

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