ALTERATION AGREEMENTS, P.2

The business judgment rule, which the Court of Appeals in Levandusky v. One Fifth Avenue Apartment Corp. said applied to co-op boards, 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."

Arnold's proprietary lease 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 …" Alterations, however, were governed not by the house rules but by the section 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 renovation contract between the co-op and a tenant would be 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. Under these came the following statement: "Before board's approval, the building's architect will review the plans."

That was precisely what happened here. Arnold submitted all the documents required; the board's architect reviewed the plans; and after that architect had been satisfied by the revisions that he requested, managing agent 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 had executed the agreement – would transform the permission for renovation into a trap. Residents who began construction, relying on the board's permission to do so, would risk of having to undo what they had done.

Other issues arose, but in sum, the court ruled that Arnold had shown he and the co-op entered hd into a contract, which the co-op then breached. The court also cited Real Property Law (RPL) Section 234 to conclude that Arnold was entitled to recover attorney's fees.

The co-op had granted Arnold permission to alter his apartment and install central A/C. When the board had second thoughts, it acted as if the permission were 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. 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.

Adapted from Habitat May 2005. For the complete article and more, join our Archive >>