Co-op Non-Payments: What Proof Do You Need?

What does a cooperative need to prove when it sues a shareholder in landlord/tenant court for non-payment? These cases go to trial so rarely that people may not look at the proof the co-op must proffer. But in 300 East 85th Housing Corp. v. Dropkin, the court considered the co-op’s proofs and rendered a decision that is worth examining for several reasons.

The Lawsuit

The co-op began a summary proceeding in landlord/tenant court against the tenant-shareholders for non-payment of maintenance charges. The matter went to trial and the co-op submitted its case. The court focused on the maintenance (or rent) to be charged. The proprietary lease does not state the maintenance to be charged; rather, it states that the amount charged is equal to the proportionate share of cash requirements, as set by the board. The co-op introduced into evidence its rent ledger for the apartment, which showed money charged, paid, and what amounts remained due, measured back to May 2012, the last time there was a zero balance.

The court explained that, as a legal matter, a non-payment action “sounds in contract,” and acknowledged that, in a co-op, a shareholder was obliged to pay a proportionate share of the cost of maintaining common facilities.

The Proof and Ruling

In the court’s view, the problem was that the co-op not only had to demonstrate the existence of the contract (the proprietary lease, which it did), but also the terms of the contract. The co-op submitted the maintenance ledger and the minutes of a board meeting that contained a resolution to increase maintenance by 84 cents per share. The board also submitted a letter to all shareholders reporting the maintenance increase. The co-op did not, however, introduce evidence that showed the cash requirements or the full maintenance charges on a per-share basis.

The co-op argued that, because the shareholders previously paid maintenance, the amount was established through what is known as the “voluntary payment doctrine.” The court acknowledged that repeated payment of a set amount over time could prove an agreement between the parties, but here the shareholders paid different amounts each month. Accordingly, the doctrine did not apply.

The court concluded that the co-op had not proved the amount of monthly maintenance due and thus it could not collect those fees.

Alterations

There was also an issue concerning attorneys’ fees alleged to be due in connection with the shareholders’ alteration – they combined two apartments into one. The lease allowed the co-op to collect professionals’ fees if the shareholder performed an alteration, so that the co-op could hire an architect, engineer, lawyer, or other professional to review contracts, architectural drawings, and plans, and to inspect the alterations.

The co-op introduced a letter into evidence specifying the charges due under the alteration agreement for these professional fees. But, the court noted, the proprietary lease did not allow the co-op to charge those expenses as “additional rent.” Further, the court explained that the alteration work was performed in 1992. Since the co-op’s maintenance ledger showed a zero balance in May 2012, the court could not accept that the money from a 1992 alteration remained due.

The Takeaway

This case is instructive for a number of reasons. Although it is not clear whether it would have been sufficient, when co-op boards wish to increase maintenance charges, it may be prudent to adopt resolutions that spell everything out – i.e., that the maintenance prior to the increase is $X per share, that the maintenance is being increased by $Y per share in accordance with the cash requirements section of the lease based on a specific budget, and the total maintenance due is $Z per share following the date of the resolution. Although this may appear to be unnecessarily burdensome and “overkill,” such language may have satisfied the court’s concerns.

As to the alterations, there are two important points. First, the proprietary lease did not state that the professional fees to be paid under the alteration agreement could be collected as “additional rent.” Typically, a proprietary lease will include words to the effect that additional rent shall be collected as maintenance. When that language is in place, it allows the board to bring a non-payment proceeding to collect additional rent. But the predicate to this, of course, is that the monies being charged are “additional rent.” If they are not, then the board would presumably have to bring a money action against the shareholder to collect the fees, as described in whatever contract under which they are due – here, the alteration agreement. It is important to check documents; in most, if not all, instances, boards want to make sure that all money owed by a shareholder is deemed “additional rent.”

The other noteworthy aspect of the decision is that the co-op’s ledger showed a zero balance long after this money would have been due. That is something as to which boards – and more to the point, managing agents – must be diligent. If there is money owed by a shareholder, that amount must be properly reflected on the shareholder’s arrears ledger. Absent that, a court may find that the money was paid, waived, or otherwise uncollectible. n

Attorneys

For the Co-op: Kagan Lubic Lepper Finkelstein & Gold

For the Shareholders: Rosen Livingston & Cholst