Who Pays for the Lawyers?

May a co-op charge a shareholder for costs it incurs in connection with a shareholder’s apartment alteration through the use of an alteration agreement? That was the question Batsidis v. Wallack Management Co. Inc., et al.

Defendant 225 East 57 Street Owners was a co-op corporation. Wallack Management Company, also a defendant, was its managing agent. Plaintiff Arthur Batsidis was a shareholder and proprietary lessee of Apartment 9C, although he did not live in the apartment.

Batsidis sought to renovate the kitchen and one of the bathrooms in the apartment, and to perform other, minor alteration work. He submitted a proposal for the work, which the co-op’s engineer reviewed and the co-op approved. Batsidis and the co-op entered into an alteration agreement which allowed the co-op to charge Batsidis for costs incurred by the co-op in connection with the renovation work.

Specifically, the agreement provides that “if the Corporation is required, or deems it wise, to seek legal, engineering, electrical, architectural or other advice relating to the work or this Alteration Agreement, at any time and from time to time prior to or after granting permission for the work to be performed, the Shareholder hereby agrees to reimburse on demand all fees and disbursements incurred by the Corporation with respect to the same, whether or not the Corporation grants permission for the performance of the work. The Shareholder agrees to reimburse the Corporation for all such expenses promptly upon receipt of the Corporation’s bill for the same, and if permission is granted, then all fees incurred prior to commencement of the work shall be reimbursed to the Corporation prior to such commencement.” The money to be paid by Batsidis was considered additional rent under the proprietary lease.

Batsidis began renovations. The building superintendent visited the apartment in response to a complaint of excessive noise and observed that severe cuts were made into a structural column, which damaged it. The super also noted that the work performed exceeded the scope of any work set forth in the renovation proposal. The super shut down the job, as he was allowed to under the alteration agreement, which provided that a breach of the alteration agreement permitted the co-op to suspend all work and prevent workers from entering the building and the apartment, and to revoke its permission for performance of the work.

Batsidis began this action, seeking damages for breach of contract. He also sought a mandatory injunction to compel the co-op to permit him to resume work. The co-op counterclaimed for attorneys’ fees and engineers’ fees, and claimed that Batsidis’s alterations were not undertaken in accordance with his proposal. According to the co-op, Batsidis was in default of his obligations under the alteration agreement and the proprietary lease.

Batsidis’s request for a preliminary injunction was settled by a stipulation, which was signed by the court. It was agreed that Batsidis would retain a licensed home improvement contractor and submit insurance documents to the co-op. The stipulation also provided that Batsidis’s electrical contracting firm would perform electrical work only and that invasive work would be performed in accordance with the requirements of the co-op’s engineer. The stipulation allowed Batsidis to resume work as soon as he complied with the stipulation. But the co-op would not permit Batsidis to begin work again until he paid the engineering and legal fees that the co-op had now incurred.

Batsidis made a motion requesting an order compelling the co-op to allow resumption of the renovations. Batsidis relied on the terms of the stipulation. The co-op argued that the stipulation was subject to the alteration agreement and contained no waiver of the co-op’s rights. The lower court agreed with the co-op and denied Batsidis’s motion. Batsidis appealed and the appellate court reversed.

Batsidis argued that the cost-shifting provision of the alteration agreement could only be applied where the co-op established that it was the prevailing party and that the expert or legal fees it sought to impose were reasonable. The appellate court rejected this argument and stated that nothing in law or policy supported limiting the provision in the alteration agreement or precluded its enforcement as written. The appellate court specifically stated that the provision was reasonable.

The appellate court discussed Batsidis’s reliance on case law that limits an entitlement to attorneys’ fees to the successful litigant. While the appellate court acknowledged the general rule, it noted that it did not apply here. The court explained that it was “not dealing with ‘a provision in an agreement allowing the recovery of attorneys’ fees that are incidents of litigation.’” The court noted that those provisions, including lease provisions for attorneys’ fees which resulted from the successful prosecution of tenant defaults (and the reciprocal entitlement created by Real Property Law Section 234) were strictly construed so as to further the “important public policy of ensuring that people are not dissuaded from seeking judicial redress of wrongs.”

A different policy concern applied here. The alteration agreement used by the co-op was based on a model form promulgated in 2000 by the Residential Management Council of the Real Estate Board of New York, in conjunction with the Committee on Cooperative and Condominium Law of the Association of the Bar of the City of New York.

The court explained that the purpose of the form agreement was to make sure that shareholders “renovate in such a way that ensures the safety and comfort of the residents, the financial interests of the co-op and the physical integrity of the building.”

The agreement unequivocally made the shareholder solely responsible for engineering and legal fees incurred by the co-op in connection with consideration and review of the proposed and actual work. It was intended to ensure that the co-op and other shareholders were not burdened with any expenses resulting from renovations to a shareholder’s individual apartment.

The court noted that such expenses may arise regardless of whether there was litigation or whether the proposed work was approved or performed. Causing the renovating shareholder to pay those costs was an appropriate means of allowing shareholders to perform renovations while protecting the co-op and its members from having to pay expenses incurred arising out of the renovations.

The appellate court found that limiting the cost-shifting contract provision to circumstances where the co-op was determined to be the prevailing party would be “senseless,” noting that there would likely not be a clear prevailing party, or even any litigation.

Nor should the co-op have been required to demonstrate the reasonableness of its fees. Such a provision would have largely eviscerated the purpose of the cost-shifting provision. The court explained that the co-op initially has the right to payment. However, if the co-op claimed an unjustifiable amount in fees, the shareholder would be entitled to challenge the fees in an action.

The appellate court unequivocally held that there was nothing improper about the contract provision which required Batsidis to pay the co-op’s actual costs relating to the renovation. In this case, however, the demand was made too late to be properly interposed as a condition to the resumption of the halted work.

Also, because the lower court signed the stipulation, it was the same as issuing an order granting Batsidis’s motion to the extent of directing that he be allowed to resume the renovation work upon his satisfaction of the conditions set by the co-op. The co-op could not undermine what was a court directive. Nevertheless, the appellate court emphasized that its ruling did not extinguish or interfere with the co-op’s right to collect the claimed fees in full, which it could do by beginning an action or charging it as additional rent (under the alteration agreement).

Comment: The shareholder and co-op entered into an alteration agreement that required the shareholder to pay all of the corporation’s costs associated with the shareholder’s proposed alteration. The appellate court recognized that the provision was intended to insure that other shareholders of the co-op were not required to pay charges directly attributable to a single shareholder’s renovations. Importantly, the court drew a distinction between the provisions of the alteration agreement and proprietary lease where the lease typically requires a shareholder to pay the co-op’s legal fees in the event of litigation between the co-op and a shareholder. In the case of the lease, the court explained, public policy considerations must be taken into account so that people are not dissuaded from seeking “judicial redress of wrongs.” This is not a concern when a shareholder and a co-op contract through an alteration agreement to require a shareholder to pay costs associated with issues directly related to a particular apartment.

Query whether a proprietary lease should be amended to specifically permit a co-op to charge back shareholders for professional fees incurred in connection with a specific apartment in the absence of litigation.

Attorneys:
For Plaintiff: Warren S. Hecht
For Defendants:
Axelrod, Fingerhut & Dennis