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Habitat Magazine July/August 2020 free digital issue

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ARCHIVE ARTICLE

Waving Goodbye to the Waiver of the Non-Waiver Clause

I’m on the board of a 243-unit Queens co-op. We have a house rule that bans washing machines. A shareholder has complained that the shareholders living above him have such a machine and has demanded that we take action. The shareholders with the machine claim that they’ve had it since the building’s conversion and that it has never caused a problem. They say the staff and prior board members have long known that they have it. Should we take action, and will we win?
This question provides the opportunity to wade through the dirty laundry of the waiver, the non-waiver clause, and waiving the non-waiver clause.

Virtually all co-op proprietary leases contain a provision referring to attached house rules, stating that violating the rules is the same as violating the lease and entitles the co-op to all available legal remedies. But co-ops generally are not quick to act against rule-breakers. Information flows slowly from staff to management to boards, which, in turn, frequently procrastinate, especially if shareholders do not complain, or decline to enforce certain rules entirely because they don’t approve of them or want to avoid the conflict and/or the expense of enforcing them.

But then – frequently years later – the situation changes. A new shareholder moves in below the rule-breaker and complains. The board now has a majority that supports strict enforcement. Is the new board’s action weakened or precluded by the prior board’s inaction? Is the complaining shareholder left to suffer the consequences?

The answer should be simple. The powers that created your co-op anticipated these issues and provided a solution fair to all. Virtually all co-op proprietary leases contain a standard provision (usually paragraph 26) for just this purpose. The language is straightforward and compelling: “The failure of the [co-op] to insist in any one or more instances, upon a strict performance of any of the provisions of this lease, or to exercise any right or option herein contained, or to serve any notice, or to institute any action or proceeding, shall not be construed as a waiver, or a relinquishment for the future of any such provisions, options or rights, but such provision, option or right shall continue and remain in full force and effect. The receipt by the [co-op] of rent, with knowledge of the breach of any covenant hereof, shall not be deemed a waiver of such breach, and no waiver by the [co-op] of any provision hereof shall be deemed to have been made unless in writing expressly approved by the directors.”

This magical clause constitutes a perfect solution to delays and inefficiencies that co-ops inevitably, but usually innocently, experience in enforcing their house rules. It puts shareholders on notice that the day may come when their co-op may decide to enforce previously unenforced rules. It provides justifiable relief for a complaining shareholder innocently suffering the consequences of such a violation. And, by expressly eliminating all but express written waivers, it negates a standard fabrication by rule-violators that a board or staff member told them that a specific rule will not be enforced against them.

The courts can intervene, however, and open the door to a protracted case-by-case analysis of whether certain factors may vitiate the ability of co-ops to enforce previously unenforced rules. This will occur if a shareholder can meet the burden of establishing the board’s bad faith, self-dealing, or other wrongful conduct in enforcing the rule, or, possibly, if the shareholder can show that he relied to his detriment on a representation that the board would not enforce the rule.

But the courts overstep, in my opinion, when they consider not allowing a co-op to enforce a rule as a result of the mere passage of time. That is the prime scenario that the non-waiver clause is plainly designed to resolve – and to do so in favor of co-ops innocently attempting to enforce house rules for the benefit of all shareholders. Can the the questioner’s co-op confidently and successfully invest its resources to remove the offending washing machine? Here’s the rocky terrain. I leave it to each of you to decide whether your co-op can traverse it to enforce your rules.

The analysis of this question is governed in significant part by reference to three cases from New York State’s highest court – the Court of Appeals – decided between 17 and 34 years ago. Strikingly, these decisions don’t involve co-ops and the first two mainly concern exercise of lease renewal options, which adds a factor not present in co-op disputes. So when a co-op is deciding whether to take action against a shareholder violating a house rule, it must consider how the situation at hand compares to three precedents interpreting provisions of commercial leases. But the decisions themselves fail to conclusively explain the critical distinctions they establish, and subsequent interpretations of them provide even less clarity.

Atkin’s Waste Materials Inc. vs. May (1974) is the first of the cases. At issue there was the renewal of a lease for municipal land by the city of Rochester for a junkyard business – presumably, in most cases, quite distinct from your typical co-op operation. The city rejected the exercise of an option to renew, claiming that the tenant was operating in violation of the lease. The court reversed the appellate division decision and ruled that the city acted improperly because it failed to respond to the option exercise for four months, failed to give the tenant adequate notice of its defaults and an opportunity to cure, and continued to accept rent through the end of the term “with knowledge of the defaults, if such there were.” The court held: “When rent is accepted with knowledge of particular conduct which is claimed to be a default, the acceptance of such rent constitutes a waiver by the landlord of the default.”

Jefpaul Garage Corp. vs. Presbyterian Hospital in City of New York (1984) provides a counterpoint and some hope for co-ops. There, too, a lease renewal was at issue, this time to a garage operation, somewhat closer than a junkyard to a typical co-op building. The landlord hospital refused to honor the tenant’s exercise of an option to renew based on the tenant’s defaults in failing to pay rent currently or consistently in the past, and instead declared the tenant’s default. The tenant paid in full, then defaulted again, but ultimately paid through the end of the lease term. No doubt cowered by the reversal it had suffered in Atkin’s Waste, the appellate division ruled that, in accepting rent while the tenant was in default, the landlord had waived the right to use those defaults to deny the tenant a renewal lease. In so ruling, the appellate division ignored plain language in the lease declaring that “the receipt by the Landlord of rent with knowledge of the breach…shall not be deemed to have been waived…”

But, in Jefpaul George, the appellate division suffered another reversal. The Court of Appeals first indisputably endorsed the plain importance of the lease’s non-waiver language to gauge the intent of the parties. Then, the state’s highest court went much further in distinguishing the situation in Jefpaul Garage from that in Atkin’s Waste, possibly because it is unclear whether the lease in Atkin’s Waste contained the non-waiver language. The court noted that the Atkin’s Waste landlord took four months to reject the renewal notice, never gave the tenant adequate notice and an opportunity to cure, and at the same time accepted rent payments.

In essence, the court seemed to be saying that, in Atkin’s Waste, the landlord’s goal was to fabricate an excuse to deny the lease renewal rather than to compel the tenant to cure the lease defaults. By taking its time, sending inadequate notices, and accepting rent, the landlord was unfairly letting the tenant conclude that the landlord did not really object to the alleged defaults. In Jefpaul Garage, on the other hand, the court concluded that the landlord had given the tenant an opportunity to cure, and, in not complying, the tenant lost the ability to renew the lease even though the tenant later paid through the end of the lease and the landlord accepted the payments.

The third case, TSS-Seedman’s Inc. vs. Elota Realty Company (1984), is the prodigal son of Atkin’s Waste, which it failed to even cite. To the astonishment of dissenting Justice Vito Titone, the court refused to honor the non-waiver clause that the Jefpaul Garage ruling had made the foundation of its finding of “no waiver.” Without even referring to Jefpaul Garage, the Court of Appeals held: “[W]e reject [the landlord’s] contention that, because the leases contained ‘non-waiver’ clauses, acceptance of the withheld rents did not prevent it from terminating the leases. Under the circumstances present here, acceptance of the rent waived the default.”

The court was reacting to the unfairness of a landlord’s terminating a lease based on a rent default even though the default had been cured by the time of the termination notice was sent. But, in doing so, the court opened the door for subsequent courts to ignore the non-waiver clauses of leases. That could happen even in situations where a tenant is given an opportunity to cure, simply because the landlord may have accepted rent at a time that it had knowledge of the default. That is a large leap from what motivated the court in TSS-Seedman’s to ignore Jefpaul Garage and it has serious implications to this very day.

Now let’s skip ahead to some subsequent co-op/condo cases to understand what the triumvirate of the Atkin’s Waste, Jefpaul Garage, and TSS-Seedman’s has wrought. One involves a commercial lease granted by a condo and another by a co-op. In Unionport Shoes Inc. vs. Parkchester South Condominium (1994), the appellate division affirmed the denial of a landlord’s motion for summary judgment based on allegedly improper subletting by a tenant. In doing so, the court cited Atkin’s Waste for the proposition that “the very length of the asserted subtenancy inclines us to afford plaintiff the opportunity to establish, if it can, a waiver of the subletting prohibition by [landlord] or its predecessor. . . .”

In Guardia vs. 250 West Street Corp. (1994), decided the very same month, the appellate division affirmed the grant of a landlord’s motion for summary judgment arising from an allegedly improper assignment of a lease by a tenant. In doing so, the court cited Jefpaul Garage for the enforcement of the lease provision “precluding a finding of the landlord’s waiver of the [consent requirement for any assignment] on the basis of its acceptance of rent with knowledge of a violation. . . .”

So, if a court has an inkling that a tenant was not treated fairly, it will cite Atkin’s Waste to preclude enforcement of the non-waiver clause; and, if disinclined toward a tenant, it will cite Jefpaul Garage, enforce the non-waiver clause, and grant the landlord summary judgment precluding a tenant from attempting to prove its case at trial. As Justice Titone’s dissent stated in TSS-Seedman’s, by so readily allowing waiver of the non-waiver clause, the courts have “rewritten the parties’ agreement,” which in turn “injects a level of uncertainty into the law governing landlord-tenant relations.”

This has severe consequences for a co-op trying to enforce house rules against tenant-shareholders. Co-ops should be able to rely on the non-waiver provision in almost all cases, unless there is express statutory language to the contrary like the city’s pet law, or palpable examples of bad faith, self-dealing, discriminatory conduct, and the like. The only conceivable exception to this should be when the default at issue is non-payment of rent itself. Then, arguably, acceptance of rent should trump the non-waiver clause, as it did in East 72nd St. Corp. vs. Zimberg (1990), an appellate division case citing TSS-Seedman’s.

Some more bad news for co-ops on the waiver front evolved in Dice v. Inwood Hills Condominium (1997). The appellate division affirmed the denial of summary judgment to a condo seeking to enforce a pet prohibition not previously enforced by claiming that, as a matter of law, “a general non-waiver clause in the condominium by-laws in and of itself precludes waiver of the right to enforce a provision of the by-laws or the rules and regulations.”

The court cited TSS- Seedman’s for the proposition that “the existence of non-waiver clauses does not in itself preclude waiver of a contract clause…” The one saving grace is that the court seemed concerned about the possibility that “the Board made representations to the [unit-owners] that the no-pets provision was not enforced…” Also, of course, though unsaid, the court may have felt that the unit-owners were entitled to at least an attempt to prove at trial that they were entitled to protections comparable to co-op shareholders under the “Pet Law.”

But some good news also came in Horowitz vs. 1025 Fifth Ave. Inc. (2004). There, a shareholder sued to preserve the right to maintain a terrace awning, which had been present since the construction of the building. The appellate division reversed the lower court and held that the co-op could enforce a rule banning awnings even though the rule was first adopted decades after the installation of the awning, not promptly enforced against the shareholder for many years after adopted, and not enforced at all against other shareholders. In so ruling, the court cited Jefpaul Garage and found that the “cooperative’s right to require its removal is preserved by the non-waiver provision of the proprietary lease.”

We now return full circle to the question at hand and two recent cases dealing with enforcement of rules prohibiting clothes washing machines. In Cannon Point North Inc. vs. Abels (1993), the court granted summary judgment to a co-op finding no waiver because of the “comprehensive non-waiver clause” and had no problem with the co-op’s prior non-enforcement of the laundry machine ban. But then in 255 Fieldstone Buyers Corp. vs. Michaels (2003), the court at least partially retreated from the march toward sanity. It cited Dice for the proposition that, in spite of a non-waiver clause, a co-op cannot have summary judgment enforcing a ban of a washing machine that had been present for many years. The court rejected the applicability of its own Cannon Point decision on the ground that “the board promptly moved to enforce a new house rule.”

This retreat is surprising since it is not plain from the decision (though it may be clear from the record) that the court in Cannon Point was, in fact, dealing with a new rule rather than new enforcement of an old rule. Rather, the court seemed to be making the point that since co-op boards can unilaterally “alter, amend, or repeal” rules “it cannot be reasonably argued that the [shareholders] somehow acquired vested rights in the continued maintenance of these machines.” In other words, since the board could prohibit washing machines previously allowed by simply amending the rules (i.e., no grandfathering is required), the board surely can prohibit machines previously allowed in practice but contrary to a longstanding rule.

More importantly, this retreat from Cannon Point and Jefpaul entirely vitiates the enforceability of the non-waiver clause in a situation where it should plainly apply, and is based on precedents (Atkin’s Waste and TSS-Seedman’s) in which the decision to ignore the non-waiver clause was much more solidly grounded.

In this situation, co-ops are the victims, left with lengthy and expensive litigations instead of quick motions for summary judgment, and with a roll of the dice at trial in trying to enforce their house rules. Co-ops need the Court of Appeals to rectify this in the same way that, in Levandusky vs. One Fifth Ave. Apt. Corp. (1990), it decided to apply the Business Judgment Rule to stay clear of co-op board decision-making in most cases. Co-ops need the Court of Appeals to revisit the Atkin’s Waste, Jefpaul Garage, and TSS-Seedman’s morass, and to bar, once and for all, waiver of the non-waiver clause.

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