Dale Degenshein, Special Counsel, Stroock & Stroock & Lavan

We've all seen situations where boards can get into trouble. But this is a little bit different. It is a situation where a board didn't quite get into trouble, but it also didn't know its documents and therefore wasn't able to get everything that it was looking for in the litigation.

This case was decided back in 2004 when Michael Horowitz, a shareholder at 1025 Fifth Avenue, a co-op, was sued by the board. What happened was that Horowitz had a terrace and there was a 30-foot awning against the facade of the building and the awning had been there since 1954, which was right about the time that the building was built. So it had been there forever.

Sometime in the mid-1980s the board came up with a rule that if you wanted to have air-conditioning you had to have through-the-wall air-conditioning. You couldn't use window units.

At that time, the people above Horowitz decided that they wanted to put in through-the-wall air conditioning and they needed Horowitz to remove his awning. The board told him to remove it. And, in fact, by the time the board did this there had been a rule in place that anybody who wanted to put an awning on the building over their terrace needed board permission to do it. Horowitz brought what’s called a declaratory judgment action. That means he was asking the court for a declaration that he didn't have to remove his awning.

The appellate court ruled in favor of the co-op. The court said, “Look, there is a rule in place and Horowitz, like all other shareholders, has to comply with the rule, and if the board tells him to remove the awning, he has to remove it and can't replace it without board permission.”

One of the most important aspects of this decision is there is a section in every proprietary lease called a non-waiver provision. What it says is that even if a co-op has not pursued an action for years, or even for decades, it can still enforce it at a later date; it has not waived its rights. There are circumstances where a board will have waived its rights, but those circumstances aren't present here.

There is another significant element to consider. In this case, the board said, “Wait a minute. We were the prevailing party in a litigation, and therefore we want our attorney’s fees reimbursed.” And, in fact, the proprietary lease has an attorney's fees provision. What it basically says is that if the shareholder is in default and the board is required to begin or defend an action based on that default, the board can get its attorney's fees back. (As an aside, let me add that even though proprietary leases don't speak to when a shareholder can actually recover attorney’s fees, there is a statute that makes the proprietary lease provision reciprocal so that if the board can get fees under certain circumstances, the shareholder can get fees under certain circumstances.)

In any event, in this case the court explained the importance of looking at the words of the proprietary lease. It is, after all, a contract like any other contract. You have to read its words and understand what they mean. For the board to recover fees, the lease stated that Horowitz would have had to have been in default. But he was never in default; the board never sent a proper default notice. It looks as if they tried but somehow it was defective. And under that circumstance, the board was not entitled to collect attorney's fees.

To sum up, there are two important points that came out of this case: the non-waiver provision and the attorney fee provision. And the overarching lesson is that boards and shareholders have to know their documents and understand what they're looking at.