May shareholders of a co-op who enjoy the use of a terrace appurtenant to their apartments seek to shift the repair costs of the terrace from themselves to the co-op? The answer was a clear "no" in Mariaux v. Turtle Bay Towers Corp. where the express provisions of the co-op's proprietary lease clearly placed such repair costs on the shareholders.
In this case, the plaintiffs were shareholders, current and former, of nine apartments with terraces and/or greenhouses who began this lawsuit against the co-op corporation, Turtle Bay Towers Corp., its board of directors, and the managing agent of the building, Rockrose Development. Plaintiffs sought a declaration that the repair and replacement program (RRP), as addressed to the repair and replacement of terraces and greenhouses, violated the proprietary lease and that the co-op was not permitted to seek payment from the plaintiffs for the cost of the terrace/greenhouse repairs and replacement.
The plaintiffs initially moved by order to show cause seeking to enjoin the co-op from starting work, according to the RRP, on the grounds that they did not receive a 30-day notice. The court denied the application for a temporary injunction in February 2000, and work began.
Plaintiffs moved by order to show cause for a preliminary injunction to stay any billing of the costs of the terrace and greenhouse repair work and for leave to amend the complaint to seek a declaration from the court that the plaintiffs were not responsible for individually paying for the terrace/greenhouse repairs.
The parties entered into a stipulation dated October 16, 2001, whereby a temporary injunction was agreed upon and the plaintiffs were permitted to interpose the first and eighth causes of action against the co-op. Defendants moved for summary judgment on the first and eighth causes of action, and to dismiss the complaint, while the plaintiffs moved for summary judgment on the first and eighth causes of action, and for leave to amend the complaint to interpose the first and eighth causes of action against Rockrose and the board, and the second through seventh causes of action against the co-op. The parties agreed to submit the first and eighth causes of action against the co-op to the court for determination as a matter of law.
Plaintiffs advanced three arguments in support of their position that they should not have to pay for the greenhouse and terrace work. First, the plaintiffs never received a 30-day notice from the defendants; second, the defendants were liable for the repairs under the proprietary lease; and third, these repairs were unnecessary.
Defendants argued that the court's prior denial of the plaintiffs' application on the ground of lack of notice was the law of the case and that the same argument could not be raised again in this motion. Earlier, Justice Goodman ruled in a decision and order, dated February 29, 2001, that the co-op had made a prima facie showing that it acted within its authority under the bylaws and proprietary leases and in good faith in approving the RRP. However, the court said that, since that determination was made in the context of a motion for a preliminary injunction seeking temporary relief, Goodman's finding was not binding in deciding the merits of plaintiffs' case in this motion for a permanent injunction.
Nevertheless, upon examination of the merits, the court found that the plaintiffs misinterpreted the proprietary lease when they contended that notice was a precondition to implementing repairs. Paragraph 19 of the proprietary lease stated that, if the lessee (in this case, the plaintiff) failed for 30 days after notice to make repairs to any part of the apartment, its fixtures, or equipment as required by the lease or as requested by the lessor (in this case, the co-op), the co-op lessor had the right to make the repairs without liability to the lessee.
The section was a boilerplate provision making clear the lessor's right to remedy defaults by the lessee. It was a mechanism by which the defendants could ensure that repairs were made, and put the lessees on notice that if they did not fix the problem, the lessor would. However, the court said that it did not, as the plaintiffs argued, create an implied covenant limiting the right of the defendants to make repairs. Nowhere was it stated in the lease or evidenced otherwise, said the court, that failure to provide the 30-day notice would result in the lessor's inability to make repairs that it, through the co-op's decision-making process, deemed necessary for the good of the building and its tenants.
Plaintiffs' interpretation, that only when the tenant did not first make the repair after receiving notice can the lessor make repairs, was not a reasonable interpretation. The court said it was well-settled that "courts should be extremely reluctant to interpret an agreement as implied by stating something which the parties had neglected to specifically include."
Even if notice were given, the court said that the lessee would not have been permitted to make any alterations to the terrace without prior consent of the lessor. According to paragraph 21 of the lease, the lessee must file an alteration application, which must be approved by the co-op. Here, the co-op had decided that the best way to proceed with the repairs was by implementing the RRP.
Plaintiffs contended that the defendants should pay for the repairs because they were part of a major capital improvement program for the benefit of the entire building whose costs the plaintiffs should not have to individually bear. It was made clear at the outset that the amounts sought by the defendants from the plaintiffs were solely for the repair and replacement of the terrace and greenhouses that were appurtenant to their units, and not for repairs to the rest of the building.
According to defendants' architect Howard Zimmerman, the estimated cost for the entire RRP was $6.5 million. The estimated cost of the terraces and greenhouse repairs was $3.7 million. The portion sought from the plaintiffs totaled roughly $500,000. Each plaintiff was assessed a different amount, ranging from $4,633.10 to $112,204.51, depending on the square footage of the particular greenhouse or terrace. There are 337 apartment units in the building.
Paragraph 2 of the lease provided that "[t]he Lessor shall at its expense keep in good repair all of the building including all of the apartments, the sidewalks and courts surrounding the same, and its equipment and apparatus except those which are expressly stated to be the responsibility of the Lessee pursuant to Paragraph 18 hereof."
Paragraph 18 set forth areas of responsibility that the lessee was responsible for maintaining, repairing, and replacing; including plumbing, gas and heating, and equipment in the apartment, all lighting fixtures, appliances, meters, fuse boxes, and circuit breakers. Paragraph 18 also provided, "[t]he Lessee shall be responsible for maintaining and repairing and replacing, as may be required any roof area, terrace (specifically including drains and drain covers servicing the Lessees terrace or any adjoining terrace[s]), greenhouse (specifically greenhouse glass), balcony, yard or window which is appurtenant to Lessee's apartment and for Lessee's exclusive or substantially exclusive use and shall be responsible for any damage caused to such areas, the building or any other apartment by such improvements or the negligent or intentional acts of the Lessee, or its family, guests or servants. The replacement of the foregoing items shall be in conformity with building standards. All other repairs to such areas shall be the responsibility of the Lessor."
It did not appear that the plaintiffs were arguing that they were not responsible for the terrace and greenhouse work. Instead, they contended, through their attorneys' affirmation, that "[w]hile the cooperative corporation may have the right to initiate the replacement Program, and while it may have the right to implement it without notice to plaintiffs, it does not have the right to discriminatorily impose the costs of said Program upon plaintiffs."
Once again, it appeared unclear to the plaintiffs that the defendants were not billing the plaintiffs for the costs of the program but holding them responsible for the portions of the project that dealt with work on the terraces and greenhouses that the plaintiffs owned. Plaintiffs argued that the contract at most required them to "make minor repairs such as appliances locate [sic] inside their units."
The court said, however, that this argument flew in the face of the plain language of the lease, which specifically held the lessees responsible for the costs of maintaining, repairing, and replacing their terraces and greenhouses. Nowhere did the contract differentiate between "major" repairs and "minor" ones to the terrace/greenhouse. It simply stated that the lessee was responsible for any work replacement or repair "as may be required." The rationale for this provision was supported in paragraph 18, which set these terraces/greenhouses apart because they were "for the Lessee's exclusive or substantially exclusive use."
It was a rational interpretation of the lease that the costs for repairing terraces and greenhouses that were exclusively enjoyed by some were not paid for by all. While the sponsor, 410 East 46 LLC, owned a large number of units with terraces/greenhouses, Jean-Paul Noens, a non-sponsor affiliate of the co-op board, explained in his affidavit that there were about 120 apartments without the benefit of a terrace or greenhouse owned by non-sponsor tenant-shareholders, most of whom lived in studio or one-bedroom apartments. If the plaintiffs prevailed, they would be requiring these non-terrace/greenhouse apartment-owners each pay an additional $11,000 without receiving the benefits of a new greenhouse or improved terrace.
The court observed that the written language of the proprietary lease governed the rights and responsibilities of the parties, and it was to that document that proper inquiry lay. A lease agreement, like any other contract, essentially involves a bargained-for exchange between the parties. The court said that, in the interpretation of leases, the same rules of construction apply as are applicable to contracts generally.
Thus, the intent of the parties was to be given paramount importance. However, where the intent of the parties was to be gleaned from the agreement alone, the court would concern itself with the parties' intent only insofar as the latter might be discerned from the document. The court concluded that the proper aim was to reach a practical interpretation of the expressions of the parties to the end that there be a realization of their reasonable expectations.
In resolving an alleged conflict between sections of a contract, the court said that it should adopt an interpretation that gave meaning to every provision of a contract. Contrary to the plaintiffs' arguments otherwise, there was no inconsistency in the proprietary lease between the provision that required the lessor to keep the building in good repair and the provision that required the lessee who enjoyed the private benefit of a terrace or a greenhouse to bear the costs associated with work done to their terrace or greenhouse. The court held that to bill the plaintiffs for more than the lease did not authorize the work done on their respective terraces and greenhouses and was beyond what the defendants sought.
Assuming that the language of the whole lease was deemed ambiguous and extrinsic evidence was accepted to establish the intent of the parties as to what the lessee would be responsible for paying, the court determined that such an inquiry would not result in the plaintiffs' favor either. The defendants' submissions supported their interpretation of the contract as requiring the plaintiffs to bear the costs of the terrace/greenhouse repairs and replacement.
The drafter of the proprietary lease, Arthur Schein, stated in his affidavit that the intent with respect to paragraph 18 was that the tenant-shareholders whose apartments were appurtenant to greenhouse or terraces would be responsible for all maintenance, repairs, and replacements. He further explained that this provision was different from the language in other proprietary leases but was intentionally included because "the sponsor was concerned that purchasers of apartments who did not have the benefit of the exclusive use of the greenhouses and terraces would not want to pay for the necessary work to them, and that the language in paragraph 18 was specifically included to apprise both the purchasers of greenhouse/terrace apartments and the purchasers of non-greenhouse terrace apartments that the former would be responsible for the costs of maintaining, repairing and replacing the greenhouses and terraces...which they had the right of exclusive use."
The defendants also submitted a portion of the offering plan in which the lease was summarized as holding the tenant-shareholder responsible for "maintaining and repairing any roof area, terrace, balcony, greenhouse and greenhouse glass, and/or window appurtenant to his or her apartment." By contrast, the court said that the plaintiffs' submissions would be insufficient in raising an issue of fact as to the intent of the parties in their favor. In all of the almost 20 affidavits submitted by the plaintiffs, not one lessee stated that, when they purchased shares in the co-op and entered into the lease, they did not know that they would be responsible for the costs of repairing, maintaining, and replacing their terraces and/or greenhouse, or that they would only have to pay for minor repairs to their terraces or greenhouses.
Plaintiffs submitted reports from two architects they hired to evaluate the condition of the greenhouses and terraces. The architects, whose inspection covered only the visible, external condition of the apartment, noted that, while the terraces probably should be fixed, the greenhouses did not need to be replaced. One plaintiff also obtained an estimate to replace her greenhouse that was dramatically cheaper than the cost required by the RRP, although the accuracy of the estimate was questioned.
The defendants submitted minutes from the board meetings, detailed provisions of the program including cost estimates, and records of ongoing work in progress. Defendants' architect, upon whose opinion the co-op relied, submitted several affidavits detailing the thorough and ongoing inspection it made to the building that revealed the corrosion in steel beams from water infiltration through the greenhouse structures.
It was also reflected in the record that the problem with water infiltration into the building was ongoing for years, primarily seeping in throughout the old greenhouse structures and terraces. The erosion of the water caused rust in the building's steel beams and other structures. Extensive internal probes, analyses, and reports were ordered and reviewed in numerous board meetings. Based upon the recommendation of the defendants' architect, the RRP was proposed and approved as the best way to prevent further water infiltration and to repair the damaged building. The court noted that the record reflected that, subsequent to the start of the RRP, the progress of the repairs continued to be discussed and evaluated during the board's meetings.
The court said that the correct standard of review to be applied when tenant-shareholders challenge a decision of the board of directors of a co-op affecting building policy is the Business Judgment Rule. What the Court of Appeals explained in the landmark case of Levandusky v. One Fifth Avenue Apartment Corp., the court quoted: "The cooperative or condominium owners consent to be governed, in certain respects, by the decisions of a board. Like a municipal government, such governing boards are responsible for running the day-to-day affairs of the cooperative and to that end often have broad powers in the areas that range from financial decision making to promulgating regulations regarding pets and parking spaces. Authority to approve or disapprove structural alterations, as in this case, is commonly given to the governing board.
"... [T]he consent standard of review should not undermine the purposes for which the residential community and the governing structure were formed: protection of the interest of the entire community of residents in an environment managed by the board for common benefit."
Thus, the burden was on the shareholder seeking review of the board's decision to demonstrate a breach of fiduciary duty, not on the board to demonstrate that its decision was reasonable. The court said that examining the merits or wisdom of the board's decision was an improper inquiry.
The court further quoted Levandusky: "So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board's. Stated somewhat differently, unless a resident challenging the board's action is able to demonstrate a breach of this duty, judicial review is not available."
"Reasonableness," as the standard used in challenging a board's decision, was rejected by the Court of Appeals in the Levandusky case. Here, plaintiffs made no allegation that the board had breached its duty or that it operated on bad faith or self-dealing. Plaintiffs accused the sponsor, who owned two-thirds of the units in the building, of controlling the board, but it was not alleged how the sponsor's involvement had caused the board to act in bad faith, especially when the board's decision required the sponsor to also bear the cost of replacing the greenhouses and terraces on the units it owned.
Plaintiffs' application was mostly supported by evidence challenging the reasonableness of the board's decision to replace the greenhouses, which was an improper inquiry. Accordingly, the court held that the plaintiffs failed to meet their burden of challenging the board's decision in accordance with the Business Judgment Rule.
Plaintiffs Mariaux and Larrabure sought summary judgment against the co-op on a separate cause of action seeking to have released monies held in escrow to pay for the terrace and greenhouse repairs for their units. The board approved an amendment requiring that the sellers of any units with terrace and/or greenhouses sold prior to the completion of the RRP place in escrow the estimated amount for the cost of the repairs.
In June 2000, Mariaux sold one of her apartments to Robert Paul for $585,000.00 and placed into escrow $112,204.51 of the sale to pay for the cost of the greenhouse repairs when completed. In August 2000, Larrabure sold her apartment to Vincent Lawrence and placed $39,601.59 into escrow for the same purpose. The plaintiff-seller(s), the buyer(s), the co-op, and the escrow agent signed both escrow agreements. The agreements provided that the escrow agent was authorized to release the funds to the co-op only to repay it for the cost of the work done on the greenhouse and/or terrace, that all accumulated interest on the account would be credited to the plaintiff-seller, any excess money left in the account would be returned to the plaintiff-seller, and any cost exceeding the escrow amount would be the responsibility of the buyer. Both escrow agreements also stated that they cannot be changed except in writing signed by all the parties.
It was undisputed that there was no consent to alter the agreements' terms from all the parties. The court concluded that plaintiffs failed to show a sufficient legal basis to invalidate the contract or alter its terms, and certainly had not joined all the proper parties, including the purchasers, who would be affected by this determination. The escrow expressly provided that the buyer would not be liable to the co-op for monies charged against the unit for the RRP. Plaintiffs' allegation in this cause of action that the defendants' decision to charge the plaintiffs for the costs of the RRP constituted a breach of fiduciary duty. Entitling them to a return of the escrowed money was unsupported by factual contentions of how this duty was breached, the court concluded.
Plaintiffs' motion for partial summary judgment on another cause of action for legal fees and costs was denied since the plaintiffs had not prevailed on their motion for summary judgment. Defendants' motion for summary judgment seeking dismissal of this cause of action was also denied since plaintiffs' remaining claims in the complaint had not yet been adjudicated in either parties' favor.
With respect to plaintiffs' motion to amend, the court said that, although leave to amend a pleading should be "freely" granted, the motion had to be supported by an affidavit of merit and evidentiary proof that could be considered upon a motion for summary judgment. Specious amendments should not be allowed. A motion to amend could not be granted without first passing upon the validity of the causes of action amended.
Leave to amend the first cause of action against defendant Rockrose and defendant board of the co-op was denied as moot in light of the decision granting partial summary judgment to the defendant co-op. Leave to amend the eighth cause of action against defendant Rockrose and the board was denied since, in the court's view, there was no legal basis asserted for holding these defendants, neither of whom were parties to the proprietary lease between the plaintiffs and the co-op, liable for attorneys' fees under the lease.
The second and third causes of action sought damages for breach of quiet enjoyment and constructive or actual eviction due to the defendants' work on the terrace. Plaintiffs' allegations, that the terrace repairs had not been completed, and that their terraces remained unusable and had been unusable for as much as 18 months, were sufficient to permit leave to amend the complaint to add the second and third causes of action as against the defendant co-op only.
The fifth cause of action sought damages against Rockrose for improper control of the board. The facts alleged, however, said the court, were against the sponsor 410 East 46 LLC (formerly Welco Associates), for owning a majority of the outstanding shares, controlling the board, and initiating the RRP "for its own financial benefit." Neither 410 East 46 LLC nor Welco was a party to this action and any alleged wrongdoing by the sponsor was not assumed by defendant Rockrose simply because it had principals in common with 410 East 46 LLC/Welco.
The seventh cause of action was against Rockrose for careless, reckless, and/or negligent implementation of the RRP, resulting in substantial cost overruns. Defendants noted, and the court agreed, that Rockrose's duties in overseeing the RRP were contractual as between Rockrose and the co-op, not the plaintiffs, and there was no cognizable claim for negligent performance of contract. Accordingly, leave to add this seventh cause of action was denied.
Comment: As is customary in most New York metropolitan area co-op proprietary leases, responsibility for terrace repairs is specified either to belong to the co-op or the shareholder of the apartment that enjoys exclusive use of the terrace. In this case, the lease was quite clear that responsibility for such repairs was assigned to the shareholders. An effort to challenge this result failed here and the board's right to enforce the lease provisions was reinforced by the landmark 1990 Levandusky case, which requires courts to give broad deference to board decisions when adhering to the Business Judgment Rule.