Another View

As most readers of this magazine know, in the typical housing cooperative, each block of corporate shares is associated with a particular apartment and the owner of those shares holds a proprietary lease from the cooperative corporation covering that apartment. Strictly speaking, there is nothing in the legal nature of a cooperative that prevents a tenant-shareholder from renting out his apartment rather than living in it himself. Thus, there may be housing cooperatives in which a majority of the residents are renters rather than owners.

Many people feel that such an arrangement should not be described as a "cooperative." That term, they feel, should be reserved for situations in which at least a majority of the apartments are occupied by their owners. However, the New York State Legislature does not share that view. The Martin Act (which is the state law that governs cooperative conversions) allows a housing cooperative to be set up, at the sponsor's election, either with 51 percent sales (under a so-called "eviction" plan) or with only 15 percent sales (under a so-called "non-eviction" plan), and both kinds of arrangements are called "cooperatives." Where a distinction is necessary, the first kind may conveniently be referred to as an "owner-occupied" cooperative and the second kind may conveniently be referred to as a "renter-occupied" cooperative.

For a variety of reasons, most tenant-shareholders who occupy their own apartments would prefer to live in an owner-occupied cooperative. Probably the most important of those reasons are (1) renters tend to be less careful about preserving the property and (2) some banks are unwilling to make loans where a cooperative has a large number of renter-occupants, and some will lend only on less favorable terms than are available to owner-occupied cooperatives.

In a case recently decided by the New York Court of Appeals — the state's highest court — a few buyers under a non-eviction plan apparently realized only after they had bought that they would not have all the advantages of an owner-occupied cooperative. Accordingly, they demanded that the sponsor partnership sell off, as they became vacant, the apartments that it had acquired in exchange for its building and had not already sold. Such sponsor apartments amounted to about 62 percent of the total number of apartments. The sponsor did not deny that it had stopped selling off vacated apartments when it made more economic sense to rent them out rather than to sell them, but, said the sponsor, (1) there was no rule of law that required it to disregard its own financial interest and sell its apartments when they became vacant and (2) it had never undertaken any contractual obligation to make such sales, other than a limited-in-time obligation that all agreed it had fulfilled.

Faced with the sponsor's refusal, the complaining tenant-shareholders and the cooperative corporation (which they controlled) started a lawsuit, asserting, among other claims, that the sponsor had in the plan documents impliedly (albeit not expressly) promised to sell its apartments as they became vacant and had broken that promise. The sponsor asked the court to dismiss that claim because, according to the sponsor, the documents made it clear that the sponsor had made no such implied promise. The court examined the documents supplied to it by both sides and, agreeing with the sponsor, dismissed the implied-promise claim.

The complaining parties appealed to a court known as the Appellate Division (which is an intermediate court between the original court and the Court of Appeals), and the Appellate Division took a view that was not the same as the view of either side. According to the Appellate Division, it made no difference what the documents said. Rather, said that court, in a very important and novel ruling issued last August, every sponsor who presents a cooperative plan — whether eviction or non-eviction — is, as a matter of law, deemed to have promised to sell off its apartments "within a reasonable time." Based on that ruling, the court reinstated the implied-promise claim that the lower court had dismissed and ordered the case back to the original court to determine whether or not the sponsor had broken that implied promise.

However, the sponsor then appealed to the Court of Appeals, which in a decision issued on June 11, took still another approach. The high court first decided that the documents submitted by the parties did not conclusively establish that there was no implied promise to sell, thereby disagreeing with the original judge. However, the Court of Appeals also repudiated the rule created by the Appellate Division under which the law would imply in every case a promise to sell "within a reasonable time." Rather, the Court of Appeals said that, if the case goes forward, long-established rules of law will apply, and the original court will have to examine all the evidence that the parties choose to submit and then determine under those rules, first, whether or not in this particular case a promise to sell can fairly be implied, second, if so, just what was impliedly promised, and, third, whether or not that implied promise (if there was one) was broken.

Joel E. Miller, an attorney in private practice, has previously objected to the appellate court ruling in the Jennifer Realty case on the basis that it attempted to create a new rule of law.