A section of the proprietary lease that can create issues for co-op boards is a provision called “Reimbursement of Lessor’s Expenses.” This section covers the co-op’s right to recover attorneys’ fees and disbursements from its shareholders. Every proprietary lease must be reviewed for its specific content, as there is much variation among leases.
The general rule in New York is that each party to a litigation is responsible for its own legal fees, unless otherwise provided by statute or contract. The typical co-op lease’s reimbursement clause limits the coop’s recovery to reasonable attorneys’ fees and disbursements incurred in instituting an action or proceeding based on a default by the shareholder, or while defending or asserting a counterclaim in a proceeding brought by a shareholder.
Unless the recovery of attorneys’ fees and disbursements is specifically provided for in the lease clause, courts have held that a co-op does not have a right to recovery. It is common for a board to incur legal fees relating to a shareholder default or a violation of a lease without ever beginning any legal action. Legal fees for consultation with counsel, preparation of demand letters, and counsel’s communication and negotiation with a shareholder or a shareholder’s attorney may all occur before a lawsuit begins. However, these pre-litigation fees and costs are not recoverable under the standard lease provision.
There are also legal disputes that do not involve defaults and may not even necessarily arise from a shareholder’s wrongdoing. Unfortunately, boards are not able to recover legal fees for these either under the standard lease provision.
Even if legal fees are incurred in a litigation, and even if they arise from a shareholder’s default, New York courts require that the co-op be the prevailing party in the proceeding in order to recover legal fees. This requires the successful party to win on the central claims in the litigation in order to obtain substantial relief, even in a settlement.
In order to broaden the co-op’s right to recover legal fees, a board may seek shareholder approval to amend this section of the proprietary lease. An amendment could provide that all legal fees can be recovered if the shareholder defaults or violates a provision of the lease, even if legal proceedings are started. The amendment could further provide that fees incurred in connection with the board’s consultation with counsel to evaluate a shareholder’s violation or default can be recovered. In addition, the amendment should provide that the prevailing party in a litigation between a co-op and shareholder shall be entitled to recover legal fees, whether or not the litigation is based on the shareholder’s default. It is noted that under a provision grants the landlord a similar right, even if the lease does not contain a reciprocal provision. of the Real Property Law that applies to co-ops, a shareholder has the right to recover legal fees incurred in a proceeding if the proprietary lease