Sell – Or Else

The case of 511 West 232nd Owners Corp. v. Jennifer Realty Co. was the blockbuster decision of 2002. Every real estate attorney had an opinion on both the appellate division decision in the fall of 2001 and the ultimate court of appeals decision of May 2002. Some lawyers actually read the decisions.

The facts of Jennifer were typical of late 1980s conversions. In 1988, Jennifer Realty had sponsored a conversion to cooperative ownership of the 66-apartment building at 511 West 232nd Street in Riverdale, New York. Despite the building having many vacancies, the sponsor stopped selling apartments in 1990. The cooperative corporation finally sued Jennifer for failing to sell any of the remaining 40 apartments, whichJennifer still held 12 years after the conversion.

The trial court had dismissed the co-op’s claim for breach of contract, finding that the offering plan contained no promise by the sponsor to sell unsold shares within any particular time frame. The appellate division, first department, unanimously reversed the trial court’s decision and expressly found that the sponsor’s offering plan included an implied promise to sell all unsold units within a reasonable time.

The court of appeals then reviewed the facts and the status of the case. It found that the sponsor had sold no apartments for 12 years; that the sponsor still owned 62 percent of the shares; and that the sponsor had failed to file amendments to the offering plan for several years and, therefore, was legally prohibited from even marketing the shares. By a unanimous decision, the appeals court found that the cooperative corporation had stated a cause of action for breach of contract.

The court then recited, in detail, the specific allegations in the co-op’s complaint. It found a contract between the sponsor and the cooperative corporation and an implied covenant of good faith and fair dealing, noting: “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” The court concluded that a sponsor of a cooperative conversion “must meet high standards of fair dealing and good faith towards tenants.”

Why has a case involving a sponsor’s refusal to sell cooperative apartments in a boom market become a landmark?

The decision, and the sponsor’s conduct in the case, directly affected individual shareholder lives in dramatic ways, which Levandusky (the business judgment rule), Zimiler v. Hotels des Artistes (subletting), and Fe Bland (flip taxes) have not. Shareholders living in buildings in which the sponsors owned the majority of the apartments and make no attempt to sell the apartments have learned that they cannot hold onto their own apartments. When they do that, the other co-op owners cannot get new bank loans and are forced to live in what is still a rental building, which is still managed and controlled by the old landlord. Worse, there are hundreds of buildings in which sponsor conduct is similar to that employed in Jennifer.

The tenant-shareholders whose financial investments – and sometimes their lives – have been ruined number in the thousands. The legislature, and the regulatory agency in charge of conversions, had allowed this questionable sponsor practice for over a decade. There was no evidence that these sponsors would ever again offer the “unsold” apartments for sale. These sponsors preferred to rent the apartments and reap huge profits since the unsold cooperative apartments were no longer subject to rent regulations.

Jennifer conclusively established that tenant-shareholders and cooperative corporations had recourse in the courts because the sponsors refused to complete their offering plan obligations. That was a breach of contract. In short, the cooperatives had a cause of action and a method to remedy their problems.

On a more abstract level, Jennifer also afforded the highest court in New York with the opportunity to remind sponsors that they owed a special duty to the tenant-shareholders of fair dealing and good faith. This duty extends beyond the duty to sell apartments. Finally, the decision caused the office of the attorney general to prepare new regulations to deal with this issue in new offering plans.