Bed, Breakfast & the Lease

May a co-op shareholder claiming to be a holder of unsold shares permit a
“bed and breakfast” operation to be conducted in a residential co-op? The
court ruled “no” in Merioz v. Addison Hall Owners Corp. The case involved a
motion for contempt against a co-op and the co-op’s cross-motion for summary
judgment to dismiss the complaint.
Plaintiffs Gilad Merioz and William Brock acquired the shares for apartment
1404 at the co-op’s building at 457 West 57th Street on September 5, 1996.
The two claimed that the contract stated at Paragraph 41 that “the sellers
represent that they are the holder of unsold shares as defined in the
offering plan.” Mary Delagy of defendant Kreisel Management Company, the
co-op’s managing agent, informed the plaintiffs’ counsel that the pair
needed board approval before the transfer of shares. Counsel stated that,
in August 1996, Delagy confirmed that the shares were “unsold shares” and
the closing took place without approval.
On January 28, 1997, Merioz acquired the shares of Apartment 1611. In a
letter dated December 16, 1996, counsel had sought and received assurance
that the 1611 shares were considered “unsold.”
The co-op and Kreisel alleged that the plaintiffs had been using their
apartments as a bed-and-breakfast operation through a company called A
Hospitality Company. Plaintiffs claimed that the “subtenant” of both
premises was to use the apartment for short-term residential occupancy of
corporate clients; that the co-op and Kreisel wrongfully refused to allow
guests access to the apartments.
On August 13, 1997, the court granted a preliminary injunction to plaintiffs
pending the determination of the action, upon their posting of a $5,000
bond, “enjoining and restraining [the co-op and Kreisel]…from interfering
with the use and occupancy of, and access to the apartments 1404 and 1611 at
457 West 57th Street, New York, N.Y., by any persons acting by or through
plaintiffs so long as such use occupancy and access is for residential
purposes only.”
Merioz stated in her affidavit that, on April 16, 1998, the doorman refused
to accept mail she was attempting to have delivered to other shareholders in
the building. She said she was told that the doorman was not permitted to
accept packages or mail from her without board approval; that on June 22,
1998, the doorman was notified that a “new subtenant” for 1611 would arrive
later that night, but that she was told by the doorman she had to personally
escort the subtenant to the apartment; that on June 26, 1998, a doorman told
her the managing agent would refuse to allow mail to subtenants or occupants
of 1611 and would return mail to the sender.
When Merioz complained to board president Barbara Langerberger, she was
allegedly told that the board was powerless to direct the actions of the
managing agent which controlled the doormen.
In their cross-motion for summary judgment, the co-op and Kreisel argued
that plaintiffs were not holders of unsold shares under recent court
holdings, and that thus, their sublets were improper; that, under the
proprietary lease, board approval is required and no sublet for under a year
is permitted.
The co-op and Kreisel further argued that the share status issue
notwithstanding, the plaintiffs were not complying with the house rules,
proprietary lease, or occupancy requirements which limited the use of the
apartments to residential purposes.
With regard to the contempt motion, Douglas Miller, the Addison
superintendent, denied any interference with the plaintiffs’ use of the
premises, and complained that the building was rarely notified of the
identity of the many occupants or the dates of their stay. Nonetheless, he
asserted that they had been allowed access.
Concerning the specifics of the contempt claims, Miller stated that the
mailing of which Merioz complained was not accepted because it was a mass
mailing to non-resident shareholders who did not have mail slots. The mail
was returned to the post office.
With regard to the mail destined to the subtenants, Miller stated that it
was building policy not to accept mail for unknown individuals; that
plaintiffs had never notified the building of the identity of the occupants;
that the building had never been authorized or instructed to accept mail on
their behalf. Miller stated that the building is willing to accommodate
plaintiffs it they so authorized the staff, and if they identified the
occupants and the length of their stays.
Miller stated that he checked with the staff regarding the late arriving
guest; that no one was aware of the plaintiff’s call, but that the new
occupant arrived at 1:40 AM and was permitted entry. Under the
circumstances, the court did not find that the co-op and Kreisel had
violated the court’s order and thus denied the motion for contempt.
Turning to the motion for summary judgment by the co-op and Kreisel, the
court said that recent appellate law makes clear that as a matter of law,
the plaintiffs cannot be deemed holders of unsold shares. As explained in a
prior case cited by the court, in order to be deemed the holder of unsold
shares, the shareholder must have been designated by the sponsor, must have
fulfilled registration requirements of the attorney general, must have
maintenance payments guaranteed by the sponsor, and must be the lessor, not
the lessee.
Therefore, the plaintiffs, who had not fulfilled any of the above
requirements, were not holders of unsold shares. Moreover, the court agreed
with the co-op and Kreisel that, even if they were so deemed, the use to
which they had put the premises violated the house rules and proprietary
lease provision requiring that the units be used for residential use only.
David Dreyfus, Addison’s managing agent, argued that the proprietary lease
designated the building a “first-class apartment building” to be used as a
“private dwelling…and for such other purposes as permitted under zoning laws
and are otherwise legal.” Dreyfus averred that use of the apartments as a
hotel/bed-and-breakfast violated the building’s certificate of occupancy
which provides for residential use only.
Notwithstanding the short-term residency of transient occupants, the court
concluded that a commercial business was being operated through the
subtenant, as evidenced by the materials contained in exhibits furnished by
the co-op and Kreisel which indicated that A Hospitality Company advertised
and booked the subject premises as an alternative to a hotel. This violated
the rules.
Under the law, the plaintiffs were not holders of unsold shares, despite
Kreisel’s mistake in the letter of December 16, 1996 stating that the shares
of Apartment 1611 were “unsold shares” which did not require board approval
for transfer. Even if the co-op and Kreisel might be said to have waived
their right to approve the initial transfer of shares, in the court’s view,
they did not waive their right to object to plaintiffs’ use of the premises
for any purposes in violation of the proprietary lease and the building’s
certificate of occupancy use requirements.
Under the circumstances, the court granted summary judgment dismissing the
plaintiffs’ complaint which sought permanently to enjoin the defendants from
interfering with Merioz’s sublets, and $100,000 in damages for interfering
with Merioz’s economic advantage. The court dissolved all stays and said
that the co-op and Kreisel could pursue any remedies afforded them by law or
under the proprietary lease.
This case is significant for two reasons. First, it clarifies the
definition of a holder of unsold shares and expands it beyond that normally
found in the typical proprietary lease to include the requirements imposed
upon a holder of unsold shares by the New York State Department of Law. This
may serve to reduce the number of persons claiming to be holders of unsold
shares. It also reaffirms that bed and breakfast transient occupancies are
not acceptable in a residential co-op since they constitute a commercial
business.