A Just Assessment

May a co-op impose a shareholder assessment if the sole purpose is to enable it to collect more rent from a commercial tenant? The answer was "yes" in Citipark II Associates, Ltd. and 44 West 62nd Garage LLC., v. Lincoln Plaza Tenants Corp., where the garage tenant sought to have the assessment invalidated in order to have its rent reduced.

In this action, the co-op defendant moved for partial summary judgment dismissing the second cause of action in the complaint. Plaintiffs, the garage tenants, cross-moved for summary judgment. This was a landlord-tenant dispute in which plaintiffs, as tenants, sought recovery of alleged rent overcharges.

On January 1, 1979, Lincoln Plaza Tower Associates, as lessor, and Linc-Park Garage Corp., as lessee, entered into a lease agreement (lease) for garage space located in the co-op's building at 44 West 62nd Street. Lincoln Plaza Tower Associates subsequently assigned its rights as lessor to the defendant. On March l, 1985, defendant and Linc-Park Garage Corp. entered into a written agreement, which modified the 1979 lease. On October 19, 1988, the lease as modified was assigned to plaintiff Citipark II Associates. In May 2000, Citipark assigned its rights to plaintiff 44 West 62nd Garage LLC.

From December 1, 1988 through January 31, 1999, Citipark made the monthly payments specified in the lease. Beginning February 1, 1999, the amounts of the required monthly lease payments were not specified. Paragraph 2(f) of the modification provided as follows: "For the period commencing February 1, 1999 until the Expiration Date (as hereinafter defined in paragraph 3 hereof), the annual rental under the lease paid in monthly installments shall be the fair market rental value of each one of the years during such period."

The modification went on to set forth the procedure to be followed by the parties for determining the fair market rental value. In the event of a dispute, each side would appoint an appraiser who would, in case they did not agree, appoint a third, disinterested appraiser, whose decision would be binding and nonappealable by the parties.

The parties and their appraisers could not agree on the fair market value, which should be assigned to the premises beginning February 1, 1999. Jerome Block was appointed as the disinterested appraiser. On April 12, 2000, Block rendered his decision, concluding that the fair market rental value for the garage as of February 1, 1999 was $410,000.00 per annum, increasing at two percent per annum for each year of the remaining lease term through the expiration date of January 31, 2009.

The defendant is a cooperative housing corporation. Section 216 of the Internal Revenue Code (IRC) authorizes the shareholders of a qualified cooperative housing corporation to deduct their proportionate share of real estate taxes and interest, which the co-op paid in a given year only if at least 80 percent of the co-op's gross income for such year is derived from its tenant-shareholders. Neither plaintiff was a shareholder.

Paragraph 11 of the modification of lease provided as follows:

"Notwithstanding any provision of this Agreement to the contrary, in the event that, with respect to any taxable year of Landlord, the rent, additional rent and other payments made by the Tenant to the Landlord would aggregate an amount, which, when added to all other income of Landlord for its then taxable year not qualifying as derived from 'Tenant-Stockholder' under Section 216 of the Internal Revenue Code of 1954, as amended (the 'Code'), exceeds the Maximum Rent Limit, then the rent, additional rent and other payments paid with respect to such taxable year of Landlord shall not exceed the Maximum Rent Limit. Immediately following a determination that there has been an amount paid in excess of the Maximum Rent Limit, Landlord shall pay to Tenant such amount. For the purposes of the foregoing, the 'Maximum Rent Limit' shall mean the maximum amount which the Landlord may receive from anyone who is not a Tenant-Stockholder, without disqualifying the Landlord from being treated as a Cooperative Housing Corporation as defined in Section 216(b)(1)(D) of the Code and the regulations thereunder, as such requirement may be from time to time amended."

Based on the provision, if at the end of a given year, the co-op's income from non-shareholder sources actually exceeded 20 percent of its total income, a refund would be made to plaintiff in an amount necessary to bring defendant into compliance with Section 216.

The co-op was concerned that the prospective rent increase to be paid by Citipark might jeopardize its compliance with the IRC. The co-op began negotiating with Citipark by agreeing on a number that would limit the amount of the increase. No settlement was reached by the parties.

The co-op proceeded to increase the income it received from its shareholders. It imposed an assessment in 1999, in anticipation of the garage rental being increased by Block's appraisal award, and again in the year 2000 after the award was received. As set forth in the co-op's financial statements, the special assessments totaled $284,249 in 1999 and $375,753 in 2000. As determined from the comparative statement of operations of defendant for the twelve months ending December 31, 1999 and December 31, 2000, the co-op's income from its shareholders constituted 80.12 percent of its total income in the year 1999 and 80.45 percent in the year 2000. It was asserted by the co-op that the funds raised through these assessments were used for repairs and renovations throughout the building.

Plaintiffs began this action, claiming that the co-op's act of making assessments was a violation of the lease as modified and Section 216 of the IRC. They claimed that there was no need for increased maintenance charges and that the co-op should have simply refunded that portion of the garage rent that exceeded the maximum limit under the lease modification.

The co-op moved for summary judgment with respect to the second cause of action in the complaint. The basis of that cause of action was that the co-op was prevented as a matter of law from assessing its shareholders merely in order to bring itself in compliance with Section 216 of the IRC. The co-op contended that there was no law preventing it from assessing its shareholders and the terms of the lease modification did not rule out the imposition of an assessment. According to the co-op, its board of directors was fully vested with the discretionary authority to decide whether such assessments would be treated as ordinary income, as they were here, or as a capital contribution.

Plaintiffs cross-moved for summary judgment and for an order immediately referring this motion to the trial court. They cited the illness of Irwin Floss, a principal of Citipark, and submitted the affidavit of an accountant, Robert Hanson and the affirmation of plaintiffs' counsel. In effect, the evidence submitted stated that the lease was unambiguous in that it required the co-op to make a refund to plaintiffs. It was asserted by plaintiffs that the assessments made by the co-op were not ordinary income but capital contributions.

In reply, the co-op requested that the court disregard Hanson's affidavit because plaintiffs failed to identify him as an expert witness in response to the appropriate discovery requests. The co-op also asserted that the affirmation of plaintiffs' counsel failed to produce any legal authority in support of the theory that defendant was not permitted, as a matter of law, to assess its shareholders in order to avoid refunding rent to plaintiffs.

To grant summary judgment, the court said that the proponent must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case. When a party has made a prima facie showing to entitle it to summary judgment, it is incumbent upon the opposing party to show by evidence, any facts that the defense is real and can be established on a trial.

A contract must be interpreted in conjunction with the intent of the parties, said the court. When interpreting a contract, the court must give words and phrases contained in them their ordinary, plain meaning. When parties set down their agreement in a clear, complete document, their writing as a rule should be enforced according to its terms. Where the language of a contract is susceptible to varying but reasonable interpretations, the parties may submit extrinsic evidence as an aid to construction, and the resolution of the ambiguity is for the trier of fact.

In the present case, the lease modification contained no explanation as to how the maximum rent limit was to be reached. The parties had presented no evidence that the matter was ever discussed before the lease modifications were implemented, so that there was no extrinsic evidence as to any intent.

The court was unaware of any case law on the subject and so it appeared that the co-op was free to make any assessments as it felt necessary with respect to its shareholders-tenants, for whatever reasons. While plaintiffs disputed that the assessments were based on maintenance charges, in the court's view they failed to meet their burden to offer evidentiary proof that such charges were not necessary. Therefore, the court said that the co-op had met its burden on summary judgment and was entitled to partial summary judgment dismissing the second cause of action.

Comment: The case resulted from the requirements of Section 216 of the Internal Revenue Code, which provides substantial tax benefits for co-op shareholders. In order to get these benefits, in each year the co-op must derive more than 80 percent of its gross income from shareholders, the so called 80/20 test. Here, the co-op assessed its shareholders in order to collect more rent from the garage tenant without jeopardizing its tax benefits. The garage tenant objected, arguing that the assessment was improper. The court disagreed and said that the co-op was not restricted from doing so, since the garage lease did not preclude this action.