A Co-op Kills a Lease

In a case of first impression in New Jersey, Spiegelman v. 2100 Linwood Avenue Owners Inc., 2100 Linwood Avenue Owners Inc. v. Spiegelman, a co-op successfully terminated the proprietary lease of a lessee and obtained a judgment forfeiting the shareholder's shares back to the corporation. The appellate division recently affirmed the trial court's orders. Boards should become familiar with these cases in order to fully appreciate all options available when being confronted with a shareholder who repeatedly violates the house rules and/or the proprietary lease.

In this case, the shareholder had surreptitiously sublet his apartment to several different people over the course of several years in violation of the house rules. Subsequently, the shareholder contacted the management office to seek permission to sublet his apartment, while requesting permission to bypass the application process and the associated fees. The board rejected the shareholder's request and the shareholder initiated a suit claiming that the board's actions were unreasonable.

During the course of the trial, the cooperative sought to amend its pleading to include a claim for a termination of the lease and a forfeiture of the shares. The motion was deemed to have been made and the court determined that if the cooperative wished to bring a separate action, it could do so within 60 days of the termination of the trial. At the trial's conclusion, the court found the shareholder was in default of his obligations under the proprietary lease. Furthermore, the court found the board's actions to have been reasonable and, accordingly, dismissed the shareholder's complaint. It awarded attorneys' fees to the cooperative, under the terms of the proprietary lease.

In the subsequent action, the co-op sought a termination of the lease and a forfeiture of the shares based on the multiple defaults of the shareholder. After the discovery period had expired, the shareholder moved for summary judgment and the cooperative cross-moved for summary judgment. Upon reviewing the papers and having heard arguments of counsel, the court denied the shareholder's motion and granted the cooperative's cross-motion for summary judgment and awarded attorneys' fees to the cooperative.

With regard to the first action, which was on appeal before the judge denied the shareholder's motion for reconsideration in the second action, the appellate division said that it was affirming the trial judge's opinion substantially for the reasons set forth by the trial judge. It specifically cited the language of the trial judge, which found the shareholder to be in default of his obligations under the proprietary lease. In denying the motion for reconsideration, the motion judge in the second case partially relied on the appellate division's affirmation of the trial judge's determination in the first action.

The shareholder then sought certification from the state supreme court. While that court denied certification on the grounds sought by the shareholder, on its own motion, it remanded to the appellate division that aspect of the case, which awarded attorneys' fees and indicated that the appellate division, in its discretion, could consolidate this remand with the appeal of the second action that the shareholder had taken to the appellate division. Thereafter, the appeals were consolidated and the appellate division heard argument.

In a timely decision, the appellate division affirmed once again the trial judge and the motion judges and indicated that the law does not prohibit associations from requiring tenants to comply with properly adopted rules of the association and that the shareholder in this matter failed to comply with those rules. The shareholder understood that the association required shareholders to complete standard applications and pay established fees. He failed to comply with the formal application procedure, thereby breaching the lease. The appellate division noted that the statute makes it clear that unreasonable restrictions are contrary to the public policy of the state, but that where the restrictions are not unreasonable, they are enforceable. The statute does not prohibit all restrictions on cooperative rentals.

The appellate division noted that the shareholder brought his problems on himself because he failed to follow the established procedure and went ahead with subleasing his unit anyway. He then brought suit against the cooperative and forced the cooperative to incur attorneys' fees. Under the terms of the proprietary lease, the cooperative was entitled to reimbursement for those fees. While the statute intended to remove restraints from the cooperative shareholder's ability to sublease, the statute does not serve to alleviate the shareholder's obligations to comply with established procedures. The appellate division specifically held that both the trial judge and the motion judge correctly found that the shareholder breached the proprietary lease.

The appellate division further affirmed the termination of the proprietary lease and the forfeiture of the shares based upon the provision in the proprietary lease that sets forth the lessor's rights after a lessee's default. The court determined that once the proprietary lease is terminated as a result of a shareholder's default, the shareholder must surrender his shares to the association.

In affirming the motion judge's award of attorneys' fees, the court relied on the Mulligan v. Panther Valley Property Association, wherein it quoted the court as follows: "If the community, however, is compelled to shoulder higher legal expenses because of the intransigence of a small number, we cannot consider it unfair or unreasonable for the association to seek to lessen the burden upon its other members by seeking to have the uncooperative member contribute to the attorneys' fees required to vindicate the association's rights." Accordingly, the appellate division found that the more appropriate remedy was to require the shareholder to be responsible for the attorneys' fees and disbursements incurred as a result of the shareholder's action. Attorneys' fees were also awarded on the first appeal, and the cooperative was invited to apply for attorneys' fees with regard to the second appeal.

In the final analysis, this is a remedy that boards and their counsel could consider in the appropriate circumstances.

Lawrence H. Wertheim is a partner in the law firm of Greenbaum, Rowe, Smith, Ravin, Davis & Himmel, with offices located in Woodbridge and Roseland, New Jersey, tried the 2100 Linwood Avenue Owners, Inc. v. Spiegelman case and argued the various motions and appeals in these cases, which were ultimately consolidated on appeal.