The Commercial Sublet Fee Quagmire

The Commercial Sublet Fee Quagmire

May a co-op board charge sublet fees to a commercial tenant-shareholder based upon broad language in the proprietary lease and a board (rather than shareholder) amendment to the bylaws? That was the issue in Thomas Campaniello v. Greene Street Holding Corp. and the Board of Directors of Greene Street Holding Corp.

Background

Thomas Campaniello was a tenant-shareholder who owned the shares allocated to a commercial unit at Greene Street, a cooperative housing corporation that owns the property at 136 Greene Street in Manhattan. Campaniello sought an injunction (commonly known as a Yellowstone injunction) to enjoin Greene Street from evicting him. Greene Street’s board of directors is elected by the shareholders of Greene Street to manage and operate the building.

The parties entered into a written lease agreement in 2006. Campaniello was provided a copy of the proprietary lease and bylaws of the cooperative when he became a shareholder.

The Sublease

Campaniello claimed that he sought to sublease the commercial unit in 2010, at a monthly rental of $60,000, and that Greene Street refused to consent to the sublet unless he paid an “exorbitant sublet fee.” Both the lease and the bylaws set forth the conditions under which shareholders could sublet. Greene Street claimed that it was permitted to implement a monthly sublet fee of 10 percent of the rent payable under the sublease based on an amendment to the bylaws that had been adopted by the board.

Campaniello asserted that he was forced to sign a written agreement consenting to pay the sublet fee as well as $3,000 for Greene Street’s legal fees, and that he was told that if he did not sign, he would have been denied permission to sublet.

Notwithstanding having signed the written agreement, Campaniello withheld the sublet fees for two reasons: the lease did not authorize the fees and there were water leaks in the commercial unit that had not been repaired.

Eviction Notices

Greene Street served a notice to cure, dated October 28, 2011, which asserted that Campaniello breached the proprietary lease by subletting the commercial unit without paying the required sublet fee, i.e., 10 percent of the monthly rent. The notice stated that if the monies were not paid within 30 days, Greene Street would terminate the lease. On November 22, 2011, Campaniello began this action and sought (a) a declaration from the court that the amendment to the bylaws by the board, which purported to allow for a sublet fee, was not authorized by law or corporate documents and was therefore unenforceable; (b) a declaration from the court that the proprietary lease did not contain a sublet fee provision; and (c) an order enjoining the co-op from collecting a sublet fee from Campaniello. Finally, the complaint sought an order requiring Greene Street to make repairs to cure the leaks in Campaniello’s unit.

Presumably because Campaniello is a commercial tenant, he also sought a Yellowstone injunction, i.e., an order that asks the court and would prevent Greene Street from terminating his lease before Campaniello had time to cure the default.

Campaniello was granted an order temporarily restraining Greene Street from evicting him. Greene Street moved for summary judgment to dismiss those portions of the complaint that sought an order declaring the sublet fee as improper.

The court noted that a grant of summary judgment is a drastic remedy to be granted only if there are no triable issues of fact. The party moving for summary judgment must demonstrate an entitlement to judgment by showing sufficient evidence in admissible form and the absence of material issues of fact. Assuming Greene Street was able to make such a showing, the burden would shift to Campaniello to produce proof in admissible form sufficient to establish the existence of material facts.

The court noted that its role in deciding a motion for summary judgment is limited to determining if triable issues of fact exist, not to determine the merits of any claims. In addition, the court is required to view the evidence in a light most favorable to the non-moving party. If there is any doubt as to whether to grant summary judgment, the motion must be denied.

The Documents

The court analyzed the relevant documents. Under the terms of the proprietary lease, a commercial shareholder such as Campaniello had the right to sublet his unit after obtaining the consent of the board, which “shall not be unreasonably withheld.” The lease also provided that a consent to subletting “may be subject to such conditions” as the board “shall impose.”

The original bylaws had provided that upon a sublet, the board had the authority to fix and assess a “reasonable fee to cover actual expenses and attorneys’ fees” in connection with the sublet. Greene Street contended that the board of directors met in 1979 and voted to impose a sublet fee as an amendment to the bylaws.

The vote was distributed to shareholders. Greene Street asserted this was in accordance with the bylaws, which stated that they could be amended by the shareholders or the board, but added that the board “may not repeal a bylaw amendment adopted by the shareholders.”

Campaniello did not dispute that, since 1980, the co-op had collected a sublet fee from all shareholders who sublet, including those who owned commercial units.

The Holding

The court determined that the broad language in the proprietary lease – “any consent to subletting may be subject to such conditions” as the board “may impose” – gave the board the right to charge sublet fees even without the consent of the shareholders. Further, given that the proprietary lease permitted the board to amend the bylaws without seeking shareholder approval, the bylaw amendment had been properly adopted. Although Campaniello argued that it appeared that the notice of meeting for the 1979 meeting had been lost, so there was no evidence that the 1979 meeting was properly noticed (i.e., no evidence that the amendment to the bylaw was set forth in the notice of that meeting), the court noted that Greene Street introduced affidavits of three people who attested that they received the notice of the 1979 meeting, and that the notice set forth the sum and substance of the then-proposed bylaw amendment. Further, the court acknowledged that Greene Street had demonstrated that it uniformly imposed the sublet fee for the past 32 years. Accordingly, the action was dismissed and Greene Street was permitted to pursue its remedies in landlord-tenant court.

The Takeaway

In many co-ops, the commercial space is owned by the co-op and leased to a tenant, whether through a “sweetheart” lease to the sponsor or an arm’s length lease to a tenant. In those situations, the commercial occupant is only a tenant, and the lease forms the agreement between the parties. In arm’s length transactions, those leases are negotiated and the terms of any sublet would be contained in the commercial lease. In this situation, the commercial units were owned by shareholders of the co-op, so that the agreements between the parties were the same as the agreements between the co-op and its residential shareholders – the proprietary lease and bylaws.

This case reminds us that it is important for the managing agent to maintain accurate and complete records of meetings and, in particular, votes by the board or shareholders. In order for a board to amend bylaws, the terms of the amendment should be set forth in the notice of meeting. Because the board (or agent) did not have a copy of the notice of meeting in this instance, the shareholder was able to argue that the meeting was not properly announced.

Here, the board was able to locate persons who had served as board members more than 30 years ago, and those persons were able to recall the sum and substance of the notice of meeting on this issue. Without their affidavits, we do not know how the court would have resolved this issue – although there appeared to be evidence that the shareholders were advised of the bylaw amendment. Additionally, this case underscores the importance of uniformly implementing lease and bylaw provisions, as the court noted that the sublet fee had been charged to all shareholders – residential and commercial – for more than 30 years.

ATTORNEYS

For Plaintiff
Horing, Welikson & Rosen

For Defendant
Braverman Greenspun