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Habitat Magazine October 2020 free digital issue

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ARCHIVE ARTICLE

A Conversation About Sublet Fees

Naomi Semeniuk:
Our co-op building board recently raised the sublet fee to $100 for shareholders in our co-op building who’re renting their co-op. They say it’s because of property taxes, but the building is secure financially. Last year, a sublet fee [increase] was $55, but $100 just like that to me is questionable and I would like to ask if it’s lawful. The co-op board has absolute power but what happens when they do questionable things? One hundred dollars for sublet fees to shareholders who’re renting their apartments doesn’t sound lawful to me. Can you shed some light on this issue?

DavidG:
I would start with reviewing your governing documents. Do they allow subletting, and if so, do they allow a fee for subletting? If yes to both questions – any fee must be applied equally to all shareholders. The board has discretion as to what the fee will be and to increase/reduce it. Some buildings don’t allow subletting at all; some have higher fees like $1 a share per month, others a flat fee like $50 or $100. The board can set the fee as necessary under the Business Corporation Law – and they don’t have to justify the decision to shareholders.

I am glad to hear your building is financially sound. Many boards can point to the increase in water bills this year, along with the continued rise in real estate taxes and energy costs, insurance prices and staff costs, and an increase in regulatory requirements as a rationale to increase maintenance.

Has anything else changed in the sublet policy or is it just the fees? If it’s just the fees, the board may be proactively planning financially to raise capital while still allowing sublets and maintaining costs for all shareholders.

These are just my thoughts from a board member who worked hard to impose a first sublet fee where none existed before. We needed to increase revenue and while sublettors were slightly disappointed – many are renting several hundred dollars above the maintenance charges – the benefits financially for the corporation have been well received by the board and shareholders.

VP11104:
DavidG is right. Boards have as much power as the property lease gives them, and I can assure you it’s not absolute. But the sublet fee increase is very likely legal. I’m glad your building is financially sound, that means the board is doing something right. Why not transfer the increase to your subtenant ? Forty-five dollars a month seems reasonable.

Mark Levine:
Sublet fees are usually within the scope of the board’s powers. Although they are not often viewed as a positive to the shareholder who is subletting, excessive subletting in buildings could cause an issue with lending banks, so it’s a way of deterring it and giving the cooperative some soft-income in the process. In addition, subletting is seen as a privilege, not a right, and a lot of cooperatives like to charge a fee to the shareholder since more likely than not, the shareholder is making a profit on their apartment per month. With subletting, the cooperative should always have a rider to the sublease agreement stating that if the shareholder fails to pay maintenance, the cooperative can capture the arrears directly from the rent of the subtenant and once the cooperative is made whole again, the shareholder can receive their rent again.

HabitatReporter: Here is advice on this subject from attorney Phyllis H. Weisberg, a partner at Kurzman Karelsen & Frank: “Typically, for a sublet fee to be valid, it must be specifically authorized in the proprietary lease. If not, except in limited cases, it will be invalid. If the sublet fee here is authorized by the proprietary lease, then the question is whether the proprietary lease also gives the board the discretion to set and/or change the amount. If the proprietary lease in this case specifically set the sublet fee at $55 and did not give the board discretion to change the amount, then, notwithstanding the board’s broad powers, it is without power to change the amount without amending the proprietary lease – an act that requires approval of a supermajority of shareholders. If, however, the proprietary lease gives the board the authority to set and/or change the amount, then the board acted lawfully in changing the amount and its determination will withstand legal challenge.”

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