Yes, Boards and Sponsors CAN Cooperate and Avoid Costly Litigation
Feb. 25, 2014 — Even the bitterest of rivals in the relationship between co-op shareholders and what we colloquially call sponsors must come together when there is a common interest at stake. When an issue escalates to the point of litigation, for example, the sponsor will often work with the board to get testimony from shareholders to support his or her case.
In one instance, recalls John LaGumina, of The LaGumina Law Firm, a cooperative had not been paid maintenance for many months on a sponsor-owned apartment because of a dispute between the sponsor and the rental tenant. The board debated bringing a lawsuit, but the co-op's manager attempted to establish a relationship with the sponsor in hopes of avoiding litigation.
"I supported the approach of the property manager," says LaGumina. "In spite of the breach by the sponsor, costly litigation could result. The cooperative board accepted my advice, although not without some dissent from members who apparently saw my advice as a sign of weakness." Ultimately, the agent was able to come to an acceptable resolution that involved virtually no legal fees, and the economic benefit far exceeded what a lawsuit would have brought in.
Mission: Impossible
There are times, however, when it is impossible to come together. If the sponsor agrees to take a particular case to court and the issue drags on, and the tenant still refuses to comply, the "sponsor may have second thoughts about funding the case," says Neil Davidowitz, president of Orsid Realty, "and might say, ‘The courts are not going to see it our way. I'm not going to waste more money on this.'"
Consider this scenario, suggested by Robert Tierman, a partner in the law firm of Litwin & Tierman: "You've got a free-market tenant who is renting a year at a time, and he's creating a nuisance so the co-op wants him out. The investor may say, 'Let him be. He's only got six months left on his lease and then I won't renew. I'm not going to waste my time suing someone who's only got six months left on the lease.' But the co-op gets tough and serves a notice to cure both on the investor-owner and the subtenant. The landlord will then sue his tenant in landlord-tenant court. If he doesn't do so, the co-op can default the two of them, which takes time and money, and the chance of getting legal fees back is not that great."
A better approach would be to talk with the nonresident owner and work something out. "The co-op might cut them some slack," Tierman says. "There is no advantage for the investor to have a disruptive tenant. The investor will probably want to have a good relationship with the co-op, too."
Consider Compromising
An even more extreme situation would be if the case goes to court and the tenant agrees to rectify the issue, but the board still wants to move forward with an eviction. At that point, says Davidowitz, the relationship can become frosty, because the sponsor feels as if it has taken care of its responsibility — and paid the legal fees — but the board wants to push on, costing the sponsor more time, effort and money.
According to attorney Bruce Cholst, a partner in Rosen, Livingston & Cholst, when the holder isn't diligently working to solve the tenant problem because of legal costs or other issues, the board must exert pressure. "The board can start eviction proceedings for the sponsor himself — and this may motivate the sponsor to take responsibility even if he doesn't want to." If a sponsor owns numerous units, his share of a tax assessment can represent a large sum. The board may then have to confront the sponsor for arrears. "It can affect the co-op's cash flow," he adds. "You really need to lean on the sponsor."
While there is no guarantee that a judge is going to rule in your favor, sometimes a lawsuit may be the only recourse. If you're forced to litigate and can afford it, "you don't have a choice," attorney LaGumina says. "But there are uncertainties in any litigation. If you're stubborn, it could backfire."
Melissa Gibbons, the board president of 17 East 96th Street for the past three years, says her board's protocol for reaching out to a holder is as simple as an informal phone call suggesting a way of dealing with a tenant issue. "They usually get back to us within an hour," she says. "Now, they might say they have a better idea, and we say, ‘OK.'"
Gibbons says her board and the sponsors have the same goals, so both sides try to keep the lawyers out of it, particularly when it comes to tenant problems. She is definite about one point: "If it can't be [solved by] a simple knock on the door, then we'll take the legal route."
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