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Legal Case Notes: Can Boards Charge a Commercial Tenant a Sublet Fee?

Richard Siegler and Dale J. Degenshein in Featured Articles on July 30, 2013

136 Greene Street, SoHo, Manhattan

July 30, 2013

Campaniello withheld the sublet fee for two reasons: The lease did not authorize the fees and there were water leaks in the commercial unit that had not been repaired. The co-op board in October 2011 asserted he'd breached the proprietary lease by subletting the commercial unit without paying the sublet fee, and gave him 30 days to do so or 136 Greene Street would terminate his lease.

The following month, Campaniello sued to have (a) a declaration from the court that the amendment to the bylaws by the board, which purported to allow for a sublet fee, was not authorized by law or corporate documents and was therefore unenforceable; (b) a declaration from the court that the proprietary lease did not contain a sublet fee provision; and (c) an order enjoining the co-op from collecting a sublet fee. Also, to fix the leaks.

Under the terms of the proprietary lease, a commercial shareholder had the right to sublet his unit after obtaining the consent of the board, which "shall not be unreasonably withheld." The lease also provided that a consent to subletting "may be subject to such conditions" as the board "shall impose."

That '70s Vote

The original bylaws had provided that board had the authority to fix and assess a "reasonable fee to cover actual expenses and attorneys' fees" in connection with a sublet. The board contended that the co-op board in 1979 voted to impose a sublet fee as an amendment to the bylaws, and that this was in accordance with the bylaws, which stated they could be amended by the shareholders or the board. Since 1980, the co-op had collected a sublet fee from all shareholders who sublet, including those who owned commercial units.

The managing agent must maintain

accurate and complete records

of meetings and, in particular,

votes by the board or shareholders.

The court determined that the broad language in the proprietary lease — "any consent to subletting may be subject to such conditions" as the board "may impose" — gave the board the right to charge sublet fees even without the consent of the shareholders. Further, given that the proprietary lease permitted the board to amend the bylaws without seeking shareholder approval, the bylaw amendment had been properly adopted.

Although Campaniello argued that the notice of meeting for the 1979 meeting appeared to have been lost, so there was no evidence that the 1979 meeting was properly noticed (i.e., no evidence that the amendment to the bylaw was set forth in the notice of that meeting), The Board introduced affidavits to this effect from three people. Further, the court acknowledged that 136 Greene Street had demonstrated that it imposed the sublet fee uniformly for many years. Accordingly, the action was dismissed and the board was permitted to pursue its remedies in landlord-tenant court.

Two Kinds of Arrangements

In many co-ops, the commercial space is owned by the co-op and leased to a tenant, whether through a "sweetheart" lease to the sponsor or an arm's length lease to a tenant. In those situations, the commercial occupant is only a tenant, and the lease forms the agreement between the parties, including regarding sublets. But in this situation, the commercial units were owned by shareholders of the co-op, so that the agreements between the parties were the same as the agreements between the co-op and its residential shareholders — the proprietary lease and bylaws.

This case reminds us that it is important for the managing agent to maintain accurate and complete records of meetings and, in particular, votes by the board or shareholders. In order for a board to amend bylaws, the terms of the amendment should be set forth in the notice of meeting. Because the board (or agent) did not have a copy of the notice of meeting in this instance, the shareholder was able to argue that the meeting was not properly announced.

Here, the board was able to locate persons who had served as board members more than 30 years ago, and those persons were able to recall the sum and substance of the notice of meeting on this issue. Without their affidavits, we do not know how the court would have resolved this issue. Additionally, this case underscores the importance of uniformly implementing lease and bylaw provisions, as the court noted that the sublet fee had been charged to all shareholders — residential and commercial — for over three decades.

 

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.

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