A proprietary lease is a document that spells out the rights of unit owners in a cooperative apartment building. Co-ops are a common feature of New York real estate. Unlike a traditional condominium, where owners buy and sell individual apartments outright, a co-op is a corporation that owns the entire property and sells shares to the unit owners. The proprietary lease secures the co-op shareholder's right to occupy a given unit. Such leases are often subject to several restrictions, including requiring approval from the co-op's board before selling or transferring a unit to someone else.
Divided Appeals Court Finds Co-Op Board's Denial “Unreasonable”
Litigation is not uncommon between co-op boards and shareholders. For example, a Manhattan appeals court recently held a co-op board violated its proprietary lease when it refused to transfer an apartment to the sons of the deceased leaseholder. The litigation turned on whether or not the co-op board had a “reasonable” basis for its denial.
The mother and father had purchased the apartment when their building initially went co-op in the 1980s. One of the sons moved into the apartment, with his family, in 2004. The mother died in 2010, several years after the father. Upon the mother's death, both of her sons inherited her shares in the co-op. The sons then petitioned the co-op board to transfer the proprietary lease to them.
The board denied the request. The co-op's treasurer later explained that one of the sons did not meet the board's “requirement of financial responsibility.” Additionally, the treasurer said the board was concerned that allowing both sons, and their families, to reside in the apartment would lead to overcrowding. And even though only one son planned to actually live in the unit, the treasurer said the board also objected to that arrangement, since it disfavored “absentee” owners.
The sons challenged the co-op's decision in court. A Manhattan Supreme Court judge sided with the sons and ordered the co-op to allow the apartment's transfer. On appeal, a divided panel of the Appellate Division, First Department, upheld the Supreme Court's decision. The majority noted that while a co-op board is normally free to deny consent to transfer a unit for any reason (aside from illegal discrimination), in this case the proprietary lease imposed an additional restriction, namely that the board would not “unreasonably” withhold consent to transfer the apartment to a “financially responsible member” member of the original leaseholder's family, i.e. the sons.
Here, the board argued only one of the sons was financially responsible. But even accepting that as true, the First Department said that both sons were “jointly and severally liable for any financial obligations pertaining to the apartment.” In other words, as long as one son was “financially responsible,” there was “little financial risk to the coop community,” and it was therefore unreasonable for the board to withhold its consent to the transfer. The appeals court also rejected the board's seemingly contradictory arguments that the unit would be overcrowded if both families lived there, yet also objecting to the fact that only family actually planned to live in the apartment.