Unconditional Approval

A recent case, Arnold v. No 24 Gramercy Park Inc., is a reminder to co-op boards that once consent to an apartment alteration is granted, it cannot be withdrawn without subjecting the co-op to liability for breach of contract. The contract is the alteration agreement between the co-op and the altering shareholder.

In late 1997, Rome Arnold and his wife purchased the shares and proprietary lease allocated to Apartment 10A in a co-op located at 24 Gramercy Park in Manhattan. The defendant co-op owned the building. Non-party ETC Management Company, at all relevant times, managed the building.

Prior to purchasing the apartment, Arnold and his wife informed the co-op’s board of directors that, if they were accepted into the co-op, they would wish to perform substantial renovations in the apartment, including the installation of a central air conditioning unit. Arnold retained an architect, David Hottenroth, who, on January 15, 1998, sent a copy of the plans and specifications that he had drawn up to Marie Costello, the appropriate employee of ETC. Costello, acting as liaison, forwarded those documents to the co-op’s architect Elliott Glass, and to the then-president of the board, Alexandra Howard.

Over the course of the next several weeks, the two architects exchanged comments through Costello. By letter, dated February 2, 1998, Glass complained that the construction plans for the installation of the condensers were overly schematic and failed to place them in their vertical context. Hottenroth then submitted an additional sketch showing the relationship among the proposed condenser units, the 11th floor ceiling, and the 12th floor structural slab.

On March 5, 1998, Howard signed, on behalf of the board, the various New York City Department of Buildings (DOB) and Landmarks Preservation Commission forms that Hottenroth had submitted to her. Subsequently, on May 5, 1998, Costello signed a written alteration agreement on behalf of the board. At the bottom of the agreement, just above Costello’s signature, was the phrase “Permission Granted.” At her deposition, Costello testified that her understanding, at the time that she signed the agreement, was that the board had approved Arnold’s renovation proposal.

Arnold thereupon requested and received from the board a start date for the planned construction, and scheduled that date with his contractor. However, by letter, dated May 10, 1998, which Howard sent directly to Hottenroth, Howard requested that Arnold delay the scheduled demolition in the apartment, in part, in order to change the plans so as to provide access from Arnold’s proposed kitchen to the service elevator. It had been walled-up by the previous tenant.

That matter was resolved, and, in late May 1998, construction in the apartment began. On June 24, 1998, however, Howard ordered Arnold’s contractor to halt work on the central air conditioning and ventilation system. The following day, a meeting was held in the apartment. Howard attended, together with her personal architect. Costello testified at her deposition that, as far as she could recall, the only subject that had been discussed at that meeting was the noise and vibration that the air conditioning system would produce.

The following day, Glass wrote to Howard, recommending that Arnold be required to have the crawl space above the ceiling of the apartment inspected by a licensed asbestos inspector, and that Arnold be required to remove and reinstall any of the system ductwork, if the co-op needed access to the space and Arnold’s equipment was in the way. Arnold agreed to comply with these new conditions.

Nonetheless, at a formal meeting of the board, on June 29, 1998, a meeting which Howard’s husband – who was not a board member – attended, the board unanimously voted to block Arnold’s construction of the air conditioning system, on the ground that “for numerous and varied considerations, the crawl space should be left unencumbered by the Arnolds’ central air conditioning units and ductwork.”

The board extended, by one month, the 180-day deadline that the agreement had set forth for the completion of all construction. By letter, dated June 30, 1998, Arnold and his wife requested the board to reconsider its decision.

Among other things, the letter pointed out that the board had approved the installation several months earlier, and that considerable construction work had already been performed based on that approval. Soon thereafter, non-party Barry Rice, an architect, who was, at that time, a member of the board, approached Arnold. Rice suggested to Arnold that he agree to pay for several projects that would benefit the building, and that he offer to pay the co-op for his use of the crawl space.

By letter, dated July 8, 1998, and hand-delivered to the board, Arnold agreed to all of Rice’s suggestions. At their depositions, Howard confirmed that she had asked Rice to approach Arnold with regard to the additional work, and Rice confirmed that Arnold’s July 8th letter incorporated the suggestions that Rice had made.

Two days later, on July 10th, Howard left a message on Arnold’s voice mail, stating that he needed to revise substantially his plans for the air conditioning system, and that she wanted him to do so prior to the next board meeting, scheduled for July 15th. Howard also stated that, thereafter, the board would not be meeting for several months. At about this time, as Howard acknowledged at her deposition, she requested that Glass write a letter, in time for the board’s July 15th meeting, that would support a rejection of Arnold’s plans:

Q. “Did you advise Mr. Glass what you believed the decision of the board was going to be?”
A. “Yes, I did.”
Q. “And what did you tell him?”
A. “I did tell him that I thought the board was opposed to the project.”
Q. “Did you ask Mr. Glass, in words or in substance, to write you a letter that would lend support for the board’s decision to reject the Arnolds’ request?”
A. “I think I did.”

In a June 26, 1998 letter to the board, Glass had noted that Arnold had offered to remove and reinstall any ductwork, as might be necessary, in order to allow access to utility pipes, and recommended only that the crawl space be reinspected by a licensed asbestos inspector to confirm that no abatement was required. Now, however, for the first time, Glass faulted the additional sketch plan of the proposed work, that Hottenroth had provided in February 1998, and recommended that no ductwork be permitted to be built in the crawl space, or that the amount of the proposed ductwork be reduced by 50 percent, with the concomitant removal of one of the condensers.

On July 15th, the board met and denied Arnold’s request for reconsideration. Rice testified at his deposition that he could not recall ever having seen Glass’s letter, dated July 15th, and that the only subject that he recalled being raised at the July 15th board meeting was that allowing Arnold to use the crawl space would set a precedent for such use. By letter, dated July 15, 1998, Howard informed Arnold: “The board again decided against your proposal … the problems that have arisen have become even more complex and difficult to resolve … The board will not reopen this matter and asks that you remove your equipment from the crawl space and close up the ceiling.” The board did not further extend the time within which Arnold was required to finish all construction work in the apartment.

In this action, Arnold moved for partial summary judgment on his first cause of action, and on the issue of liability on the third and fourth causes of action. The first cause of action sought specific performance; the third alleged breach of the contract that Arnold sought to enforce; and the fourth sought an award of attorney’s fees.

The co-op did not argue that Howard was not authorized to sign the DOB and landmarks forms on behalf of the board, or that Costello was not authorized to sign the agreement on behalf of the board. Nor did the co-op argue that the board had rejected Arnold’s proposed construction plan on the ground that such construction would have violated any requirement imposed by law.

Rather, the co-op argued that its decision was insulated by the business judgment rule; that, under Arnold’s proprietary lease, the agreement was revocable at the board’s discretion; and that the agreement was expressly conditioned on further board approval. In addition, the co-op argued that the agreement was voidable on the ground of a mutual mistake, and that disputes over facts barred the grant of summary judgment.

The business judgment rule, which the Court of Appeals made applicable to decisions of boards of directors of co-op buildings in Levandusky v. One Fifth Avenue Apartment Corp. insulates from court review board decisions that have been made in good faith and for the common and general interest of the co-op. However, the court said that while such decisions may not be reviewed for reasonableness, if a co-op breaches a contract permitting a tenant to go forward with a renovation, it can be sued for that breach, just as it can be sued for breach of contract by suppliers or other parties with whom it may have contracted.

The court cited a prior case where it was held: “[W]hile it may be good business judgment to walk away from a contract, this is no defense to a breach of contract claim.” Accordingly, in the court’s view, the business judgment rule left the co-op unable to defend itself against Arnold’s contractual claims.

The court said that it need not discuss whether the business judgment rule would always bar an order specifically enforcing a renovation contract that a board had breached, because, here, such an order was unwarranted, in any event. The equitable remedy of specific performance was reserved for situations where, because of the unique nature of the subject matter of the particular contract, money damages would not adequately compensate the victim of the breach. Here, the court said that Arnold acknowledged that an alternative design, which would place the air conditioning equipment entirely within the confines of the apartment, was feasible, albeit at significant additional expense and inconvenience. An award of damages could compensate that expense and inconvenience, as well as the other expenses that Arnold claimed to have incurred as a result of the co-op’s improper interference with the installation of the air conditioning system.

Moreover, the co-op had submitted an affidavit from Donald Friedman, a structural engineer, who believed that the ceiling of Arnold’s apartment was intended to provide fire protection for the crawl space, and, accordingly, that fire dampers, or other means, would be needed to mitigate the fire hazard that would, otherwise, be posed by cutting through that ceiling.

In addition, Friedman questioned whether the proposed hanging of the air conditioner units from anchors set into the slab above the crawl space was structurally sound. While Friedman’s concerns were additional reasons for the court to deny Arnold specific performance of the agreement, they were not a defense to Arnold’s contractual claims. The court said that the co-op had not raised those concerns at any earlier time.

The portion of Arnold’s proprietary lease, upon which the co-op relied, provided that: “[t]he Lessor may from time to time establish such reasonable house rules as its Board of Directors may deem necessary for the management and control of the building, and may also from time to time alter, amend and repeal such rules …”

This provision appeared in the fourth section, labeled “House Rules,” of Article II of the lease. Article II set out the lessee’s covenants with the lessor. Alterations, however, were governed not by the house rules, but by the separate provisions of Section 8 of Article II labeled, appropriately, “Alterations.” That section said: “The Lessee shall not, without first obtaining the written consent of the Lessor, make in the apartment or on any roof appurtenant thereto, any structural alteration …”

This section did not provide for revocation of the written consent that it required. Moreover, if it did so provide, then any contract between the co-op and a tenant, setting out the terms of a planned renovation, would be illusory. Inasmuch as it was clear that the parties intended to be bound by the proprietary lease, the court said that it would not adopt an interpretation of it that would render it illusory.

The co-op’s argument that the agreement was conditioned on further board approval was based on a sheet of paper that followed the last page of the agreement. Under the ETC letterhead and the heading “Renovation Requirements,” a checklist of seven items appeared, all of which must be provided, stated, or obtained, before construction could begin. Under these numbered items, the following statements appeared: “Before board’s approval, the building’s architect will review the plans. Any fees will be incurred by the resident.”

There was no reference to the building’s architect in any of the seven items that the resident had to provide, which included the submission of plans and the required permits, as well as a signed copy of the agreement. The requirement that the building’s architect review the plans did not, in any way, suggest that such review was to follow execution of the agreement by the board. Rather, it informed the resident that, after the submission of the required renovation plans, and prior to the board’s approval, the building’s architect would review the plans.

That was precisely what happened here. Arnold submitted all the documents required, including the agreement that he had signed; Glass reviewed the plans; and, after Glass had been satisfied by Hottenroth’s revisions, Costello executed the agreement on behalf of the board.

To adopt the co-op’s argument – that further architectural review and further board approval were required after the board executed the agreement – would transform the permission for renovation that is expressly granted by the agreement into a trap. Residents who began construction, relying on the board’s permission to do so, would subsequently remain at risk of having to undo what they had done.

The co-op’s argument as to a mutual mistake rests on the facts that the crawl space, in which portions of Arnold’s air conditioning system were to be located, was not part of Arnold’s space but was common space that contained some of the building’s utility pipes; and that the crawl space was open and adjoined several apartments other than Arnold’s.

In an affidavit, Glass said that Hottenroth’s February 1998 sketch did not disclose these facts. However, Glass testified at his deposition that it was clear from the February 1998 sketch that portions of Arnold’s air conditioning system would be located above the ceiling of the apartment. Friedman stated that the 1998 drawings “clearly show the mechanical units being mounted above the 11th floor ceiling … [and] suggest that this space was never part of an individual apartment.”

Moreover, the utility pipes in the crawl space servicing the apartment, preceded Arnold’s tenancy, and Arnold did not propose to alter them. Glass did not deny that he understood precisely where Arnold’s equipment was to be located in relation to the apartment, the crawl space above the apartment, and the structural slab above the crawl space, and that he raised no objection on his own. Indeed, even after Glass learned that the board was bothered by the planned location of Arnold’s air conditioning system, he recommended very little. He suggested that Arnold agree to remove and reinstall such ductwork as would be in the way of work that might have to be done to the pipes in the crawl space above the apartment, and that Arnold have a licensed inspector confirm that asbestos abatement was not required in that space.

Joanna D’Angelo, a member of the board, swore in an affidavit that Arnold had never sought permission to use the common space above the ceiling of the apartment. In the court’s view, Hottenroth’s February 1998 architectural sketch clearly showed the proposed location of Arnold’s air conditioning units, above the ceiling of the apartment. D’Angelo did not state that she, or other board members, did not know that the crawl space was common area, or that it contained utility pipes. In fact, D’Angelo asserted that, in her view, “it was very clear” that the crawl space was common area.

“All of us on the board were led to believe that the new system would be installed within the apartment,” Howard said. “Other tenants in the building had put in a dropped ceiling and framed the ductwork within their own apartments to accommodate a central air conditioning system.” But Howard, who knew that Arnold was not installing a dropped ceiling below the existing ceiling (because the plans that he had submitted did not include such a project), and who knew that the previous tenants of the apartment had not installed a central air conditioning system, failed to explain who, or what, led the board to its alleged belief. The February 1998 sketch clearly indicated the “existing plaster ceiling 11th floor,” and did not indicate any other ceiling. In short, the court held that the co-op had failed to raise an issue of fact to be decided at trial as to whether there was a mutual mistake.

Nor had the co-op shown that a trial was required because there were genuine disputes as to material facts. The only issue, other than those already discussed above, as to which the co-op claimed that material facts were in dispute, was whether Arnold waived his rights under the agreement by subsequently making changes demanded by the board, notably, by reconfiguring his kitchen as to provide access to the service elevator.

However, the board had submitted no evidence that Glass, Costello, or any member of the board believed that Arnold knowingly agreed that he would also make any other changes that the board wished. Nonetheless, Arnold’s acquiescence to the board’s demand that he provide access to the service elevator from his kitchen raised an inference that, with regard to that matter, he had waived his rights under the agreement. Accordingly, the court granted Arnold’s motion only with regard to the board’s interference with Arnold’s installation of his central air conditioning system.

In sum, Arnold had shown that he and the co-op entered into a contract, which the co-op then breached. The co-op had failed to raise any issue of fact, to be decided at trial either as to the formation of the contract, or as to the breach thereof.

The court then noted that Real Property Law (RPL) Section 234 said: “Whenever a lease of residential property shall provide that in any action or summary proceeding the landlord may recover attorneys’ fees and/or expenses incurred as a result of the failure of the tenant to perform any covenant or agreement contained in such lease … there shall be implied in such lease a covenant by the landlord to pay to the tenant the reasonable attorneys’ fees and/or expenses incurred by the tenant as the result of the failure of the landlord to perform any covenant or agreement on its part to be performed under the lease.”

Arnold’s proprietary lease provided that, if Arnold defaulted thereunder, he would be liable to the co-op for the latter’s reasonable attorney’s fees, and the agreement provided that a failure on the part of Arnold to comply with any of the provisions thereof “shall be deemed a breach of the provisions of the Proprietary Lease.” Accordingly, under RPL Section 234, the court concluded that Arnold was entitled to recover attorney’s fees.

Finally, the court said that there was no merit to the co-op’s argument that, because there had been no deposition of Hottenroth, summary judgment would be premature. There was no dispute as to the fact that the February 1998 sketch showed the precise location at which the air conditioning units were to be installed.

The court ordered that Arnold’s motion for partial summary judgment as to liability on the third cause of action was granted to the extent that Arnold could recover his damages arising out of the co-op’s interference with his installation of his central air conditioning system. It was further ordered that Arnold’s motion for summary judgment as to an award of legal fees was granted.

Comment: The co-op had granted Arnold permission to alter his apartment and install a central air conditioning system. When the co-op board members had second thoughts about this installation, they acted as if the permission was conditional and revocable despite any evidence that this was the case. Levandusky was no defense for the board’s breach of contract liability. This was not a case where the business judgment rule could protect the board’s efforts to alter the consent. Perhaps most significantly, the decision here holds that the shareholder may recover his legal fees from the co-op because of a statutory provision in the Real Property Law for the benefit of tenants. This should give other co-op boards pause before trying to alter binding contracts with shareholders.

Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan, and a member of the Committee on Condominiums and Cooperatives of the Real Property Section of the New York State Bar Association. He is also an adjunct professor at New York Law School, where he teaches a course on cooperative and condominium law.