Co-op Boards Must Set "Reasonable" Sublet Surcharges

Q: After buying into a Queens co-op about 35 years ago, a shareholder began subletting the apartment. About 15 years ago, the co-op board imposed a 10% surcharge on the monthly maintenance fees for apartments that are rented out. That increased to 20% about five years ago. Should the apartment have been grandfathered in, exempting it from the surcharge? Does a co-op board even have the right to impose this extra fee?

A: Co-op boards have wide latitude to operate in the best interests of the building and the shareholders under the business judgment rule, replies the Ask Real Estate column in The New York Times. However, shareholders should check the governing documents to see exactly what they say about subletting. Even if the board is within its rights, that doesn’t necessarily mean shareholders should be paying a 20% surcharge.

The proprietary lease should state whether subletting is allowed, and under which conditions. But the fee might not be specified. Some leases give boards broad authority to set conditions for the approval of a sublet, which may include the right to impose a maintenance surcharge like the one described here.

“The board’s decision to do so, and to increase or decrease the fee, is governed by the business judgment rule, which permits it to make decisions in good faith on behalf of the shareholders and within its authority under the co-op’s governing documents,” says Andrew Bart, senior counsel at the law firm Kagan, Lubic, Lepper, Finkelstein & Gold.

Charging an extra fee for shareholders who sublet their apartments is not uncommon. The board must treat shareholders equally, but imposing this surcharge and occasionally altering its conditions would not be discriminatory or illegal if authorized by the proprietary lease, says Steven Anderson, a lawyer who works in the condominium and co-op practice at the firm Becker. And there does not appear to be grounds for the Queens shareholder to avoid the surcharge simply because he was subletting his unit before the surcharge was imposed.

Here's where a slippery word comes into play. Co-op boards are required to set "reasonable" fees, and the 20% could be deemed unreasonable in court, Anderson says. Typical surcharges are around 5% to 10% Perhaps the board, in knowing how much a shareholder is charging a subletter to rent the apartment, assumes the shareholder can easily pay the 20% surcharge. Depending on how much rent the shareholder is charging, it might be wise to consult with a lawyer to evaluate whether demanding a lower fee is worth it.