A New Revenue Stream?

Judge Nancy Bannon of the State Supreme Court’s Appellate Division ruled this fall that the standard provision in many co-op proprietary leases that protects the holders of unsold shares from paying sublet fees is “void as a matter of law.”

The law firm of Braverman Greenspun successfully defended the co-op board at 61 West 62nd Street when a shareholder named Janis Pastena sued the board, claiming she was exempt from paying sublet fees because, as an original purchaser during the co-op conversion, she was protected by Paragraph 38 of the proprietary lease.

After ruling that Pastena did not qualify as a holder of unsold shares – which was the question before the court – Judge Bannon added these explosive words: “However, even if factual issues were presented by plaintiff’s contract of sale, Paragraph 38 of the proprietary lease, which purportedly exempts holders of unsold shares from certain expenses and fees assessed by the landlord, is void as a matter of law.”

Kelly Ringston, a partner at Braverman Greenspun who successfully represented the West 62nd Street co-op board, is still flabbergasted by Judge Bannon’s pronouncement.

“Why did the Appellate Division turn the world on its head?” Ringston says. “This ruling is causing a high level of anxiety for people who represent holders of unsold shares. As soon as the ruling came out, my phone started ringing. People wanted to know what was happening. Attorneys wanted clarification. It seemed to me like a scrivener’s error, a typo. But until there’s clarification, it’s there. It’s a precedent. Lawyers will use it as a negotiating tool. Why not?”

One lawyer who has already used the ruling to a client’s advantage is Andrew Stern, a partner at Tane Waterman & Wurtzel. When a holder of unsold shares demanded a refund of sublet fees from Stern’s co-op board client, Stern pointed to the ruling in the Pastena case and persuaded the holder of unsold shares to drop the demand for a refund, which he says would have been “sizable.”

“This is a previously untapped revenue stream for many co-op boards,” Stern says. “Ultimately, it’s up to boards to decide how they wish to assess these fees. The watchword is that you have to treat all shareholders equally. This puts boards on much stronger footing.”

In light of the confusion Judge Bannon’s ruling has caused, Stern says his firm is preparing a guidance for its co-op board clients and their property managers. “We assume that as people wake up to this possibility, they’ll start to assess sublet fees on unsold shares,” Stern says. “It’s potentially a substantial revenue stream.”