The Co-op: A Breach of Contract

The New York State Court of Appeals, in a decision dated June 11, 2002, upheld the complaint brought by 511 W. 232nd Owners Corp., a Riverdale cooperative, and several of its shareholders, against the sponsor of the cooperative conversion, Jennifer Realty, and its partners, for breach of contract resulting from the sponsor's failure to fulfill its offering plan promises by refusing to sell apartments for a ten-year period.

The unanimous decision held, in part: "By spelling out the basis for their claim that the sponsor failed to exercise good faith and deal fairly in fulfilling the terms and promises contemplated by the Offering Plan, plaintiffs pleaded a valid cause of action for breach of contract."

The cooperative had claimed that the sponsor undertook a duty in good faith to sell in a timely fashion as many shares in the building as necessary to create a fully viable cooperative. The sponsor breached its duty by retaining 41 of a total of 66 apartments (or 62 percent of the total) offered to the public for sale under the offering plan. Although the plan was declared effective in 1988, from 1990 until the present, the sponsor refused to sell apartments and instead rented many at market rents, which were far above maintenance charges for the apartments.

Because of the high concentration of sponsor-owned apartments, individual tenants who were original purchasers at the 511 West 232nd Street building could not sell their apartments, because banks would not offer financing to prospective purchasers. The cooperative suffered by having a transient tenancy in sponsor apartments, excessive wear and tear and damage to its building, higher costs of underlying mortgage financing, higher maintenance payments, and fewer shareholders available to sit on the board of directors. The fundamental objective of the offering plan — to convert the building to a viable cooperative — was breached by the sponsor, as the building was mainly a rental building for the sponsor's benefit.

The court's decision reminds sponsors that they must meet "high standards of fair dealing and good faith towards tenants" because "purchasing tenants and sponsors do not deal as equals." Any sponsor that believes that it may withhold apartments from the market, when to do so would prevent cooperative apartment owners from receiving the benefits of cooperative ownership, must reconsider its position in light of the court decision. Sponsors who hold more than a majority of units in buildings that have been converted to cooperative ownership will be faced with similar suits seeking to compel the sponsors to sell the unsold apartments within a reasonable time to accomplish the goals of the cooperative offering plan and create a viable cooperative.

In addition, the decision gives the green light to the attorney general of the state of New York to investigate sponsors who are wrongfully withholding apartments from the marketplace and failing to fulfill their offering plan obligations. Any sponsor that files an amendment to an existing plan is restating the terms of the offering plan and should abide by its offer to sell apartments to the public.

This decision should enlarge the market for apartments in New York City as leases for "unsold" apartments end or as tenants who rent from sponsors vacate their apartments. In addition, shareholders of cooperative apartment buildings that are presently dominated by sponsors owning a majority of apartments now have hope that their buildings will change over time to be a community of owner-occupant shareholders who will manage their buildings for the benefit of the resident-owners.

David L. Berkey is a partner in Gallet Dreyer & Berkey, which represented the cooperative corporation and individual plaintiffs in the Jennifer Realty case.