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Sponsors Must Now Pay Co-op Sublet Fees

Bill Morris in Legal/Financial on October 3, 2019

Upper West Side, Manhattan

Unsold Shares
Oct. 3, 2019

A new ruling by an appeals court judge suggests that holders of unsold shares can now be required to pay sublet fees, a potentially major new source of revenue for co-op boards.

Judges write the strangest things. Judge Nancy Bannon of the state Supreme Court’s Appellate Division ruled recently that the standard provision in many co-op proprietary leases that protects the holders of unsold shares from paying sublet fees is “void as a matter of law.” 

“The court is wrong,” says Robert Braverman, principal at the law firm Braverman Greenspun, which successfully defended the co-op board at 61 West 62nd Street when a shareholder named Janis Pastena sued the board, claiming she was exempt from paying sublet fees because, as an original purchaser during the co-op conversion, she was protected by Paragraph 38 of the proprietary lease. “My view is that my firm is not going to do anything because we won the case,” Braverman adds. 

After ruling that Pastena did not qualify as a holder of unsold shares – which was the question before the court – Judge Bannon added these explosive words: “However, even if factual issues were presented by plaintiff’s contract of sale, paragraph 38 of the proprietary lease, which purportedly exempts holders of unsold shares from certain expenses and fees assessed by the landlord, is void as a matter of law.” 

Kelly Ringston, a partner at Braverman Greenspun who successfully represented the West 62nd Street co-op board, is still flabbergasted by Judge Bannon’s pronouncement. “Why did the Appellate Division turn the world on its head?” Ringston asks. “This ruling is causing a high level of anxiety for people who represent holders of unsold shares. As soon as the ruling came out, my phone started ringing. People wanted to know what was happening. Attorneys wanted clarification. It seemed to me like a scrivener’s error, a typo. But until there’s clarification, it’s there. It’s a precedent. Lawyers will use it as a negotiating tool. Why not?” 

One lawyer who has already used the ruling to a client’s advantage is Andrew Stern, a partner at Tane Waterman & Wurtzel. When a holder of unsold shares demanded a refund of sublet fees from Stern’s co-op board client, Stern pointed to the ruling in the Pastena case and persuaded the holder of unsold shares to drop the demand for a refund, which would have been “sizable.” 

“This is a previously untapped revenue stream for many co-op boards,” Stern says. “Ultimately, it’s up to boards to decide how they wish to assess these fees. The watchword is that you have to treat all shareholders equally. This puts boards on much stronger footing.” 

A holder of unsold shares, typically the sponsor who converted a rental property to a co-op and held onto one or more apartments, enjoys special privileges that do not always jibe with the best interests of the co-op corporation. These privileges often include the right to sell, sublet, and renovate units without co-op board approval. If the sponsor holds enough unsold shares, he or she can control the board. If close to half of the shares remain unsold, shareholders and the co-op board can run into difficulty securing loans, which diminishes the desirability of the building. And holders of unsold shares have traditionally been exempt from various financial obligations, such as paying sublet fees. 

The ruling in the Pastena case calls this last privilege into question. In light of the confusion Judge Bannon’s ruling has caused, Stern says his firm is preparing a guidance for its co-op board clients and their property managers. “We assume that as people wake up to this possibility, they’ll start to assess sublet fees on unsold shares,” Stern says. “It’s potentially a substantial revenue stream.”

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