Can a Co-op Board Promulgate House Rules That Apply to Only One Owner?
Dec. 15, 2014 — The estate of Florence Weinbaum had to sell Weinbaum's co-op apartment at 260 West End Avenue. It contracted with a third party and, as is typical in co-ops, the sale was conditioned on the board's approval. The board waited until after the estate and the unit's purchaser had signed the contract to promulgate house rules directly addressed to this unit and the buyer refused to close.
In 1947, the unit — which was located on the "mezzanine" level and accessibly via the lobby — was leased to Weinbaum's father, a doctor, as a professional office. When the building converted to cooperative ownership in 1980, Dr. and Mrs. Weinbaum purchased the shares and he continued to use the unit as his medical office until his retirement in 1981.
What Gives?
The circa-1980 offering plan described the unit as a "doctor's office." The proprietary lease, in the "use of premises" paragraph, states that apartments were to be used as a private dwelling "and for such other purposes as may be permitted under applicable zoning laws and are otherwise legal."
Sublets were not permitted unless the board or a supermajority of shareholders consented. Leases could not be modified without a supermajority vote of the shareholders. Finally, the bylaws stated that reasonable fees to cover actual expenses could be charged on an assignment or sublet.
Notwithstanding the original provisions, the board promulgated house rules, two months after the estate and the unit's buyer signed the contract, which were obviously directed at this one particular unit.
The rules, all with the predicate "For professional space," included:
- The board will only grant subleases in one-year terms
- There can be a maximum of three concurrent subleases
- A lessee can only sublease if she conducts her professional activities in the building
- A percentage of the sublessee's rent shall be paid to the co-op
- No medical equipment, lab instruments, or heavy industrial devices can be brought into the space without the board's approval
- Business may only be conducted Monday through Friday from 8 a.m. until 8 p.m.
- Clients awaiting appointments shall not loiter in the lobby.
Off to court it was.
The Law
In Barrie Aguirre, as executrix of the Estate of Florence Weinbaum v. 260 Apartments Corp, the court began by reviewing whether the co-op met its fiduciary duty, which requires that all shareholders should be treated equally.
The court also discussed a statute that states a corporation cannot impose different conditions on shareholders who hold the same class of shares — and all shares in a co-op are of the same class.
Based on the statute, even if the board had the right to promulgate the house rules and impose conditions on subletting, including a sublet fee, it could not do so against a single shareholder.
Accordingly, the court vacated the house rules and enjoined the co-op from enforcing them.
The Takeaway
This decision raises a recurring issue: whether a board can impose obligations on one shareholder and not on others on the theory that the one shareholder is not similarly situated.
The board could have applied some the house rules it promulgated — such as not permitting people to loiter in the lobby — to all shareholders, which would have likely been less suspect.
Others — such as the "no equipment" rule and the hours of business — could only have been designed to affect the professional unit.
Richard Siegler is a partner in the New York City law firm of Stroock & Stroock & Lavan. Dale J. Degenshein is a special counsel for that firm.
Illustration by Liza Donnelly. Click to enlarge
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