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www. NYLJ.com
Wednesday, January 4, 2012
Volume 247—NO. 2
Expert Analysis
Cooperatives and Condominiums
Revisiting ‘Price Is Too Low’ for Board
Disapproval of Apartment Transfers
I
n exercising their fiduciary duties, cooperative
boards have a legitimate interest in maintaining the value of apartments in the building.
However, rejecting a purchase application
based on a low sales price may be at odds
with the interests of a selling shareholder who
wants to sell an apartment at an acceptable price
to him or her.
This column updates one published in 2009
dealing with floor price as a basis for co-op board
disapproval of an apartment sale.1 Based on then
existing case law, our previous column recommended that boards should avoid using a floor
price—a minimum transfer price—as a basis for
rejection in order to prevent apartment transfers
at below market prices. Instead, we suggested
other methods to regulate sales-price, such as
shareholder adoption of an option or right of first
refusal, which would allow boards to purchase
an apartment on behalf of the co-op and resell it
at market value.2 If a board is nonetheless determined to impose a floor price, we recommended
that it seek shareholder approval to do so and
that the board’s right to set a floor price be incorporated into the co-op’s governing documents.
But as we noted, there was still no guarantee that
a price-based rejection would be insulated from
challenge.
Potential Impact of Cases
However, two recent Appellate Division, First
Department, decisions that address the floor-price
issue may provide greater support than previously believed for price-based board disapproval
of apartment transfers. This column discusses
these recent cases and the underlying legal question they pose—whether price-based rejections
are an inherent unreasonable restraint on alienation and therefore impermissible, as a matter of
law, or whether the issue should be governed by
the business judgment rule.
By
Richard
Siegler
And
Eva
Talel
Co-op boards have broad discretion when exercising their decision-making powers. This business judgment rule standard of review for board
decisions was established by the New York Court
of Appeals in Levandusky v. One Fifth Ave. Apartment Corp.,3 and directs courts to defer to and
not disturb a board’s action unless the apartment
owner challenging the board can demonstrate
that the action is outside the board’s authority
or not taken in good faith and in the exercise of
honest judgment in the legitimate furtherance of
the co-op’s purposes as a whole. The business
judgment rule standard for board action was
reaffirmed by the Court of Appeals in 2003, in
40 West 67th Street v. Pullman,4 and continues to
give co-op boards considerable flexibility when
making decisions.
Two First Department decisions
may provide greater support than
previously believed for price-based
board disapproval of apartment
transfers.
Unreasonable Restraints
Richard Siegler is of counsel to Stroock & Stroock & Lavan
and an adjunct professor at New York Law School. Eva
Talel is a partner at Stroock and an adjunct professor at
Cardozo Law School. Toby Vickers, a student at New York
Law School, and Margaret Jones, a research librarian at
Stroock, assisted in the preparation of this article. Stroock
is counsel to the Real Estate Board of New York.
As of 2009 and based primarily on two lower
court decisions, it appeared that when a board
disapproved an apartment transfer based on a
low price, the same could be successfully challenged by a selling shareholder as an unreasonable
restraint on alienation. This legal principle was
held to restrict the board’s authority and render its
price-based determination unenforceable, without
regard to whether the board’s disapproval was in
furtherance of the best interests of the co-op as
a whole.
In Oakley v. Longview Owners,5 the board
rejected a selling price below the board’s minimum
“floor price.” The court initially noted that the
floor prices set by the board in the 160-unit co-op
were based solely on two apartment appraisals
and were set without notice to apartment owners.
The court recognized that the sale/alienability of
co-op shares may be reasonably restrained, relying
on the well-established holding by the Appellate
Division, First Department, in Penthouse Props.
v. 1158 Fifth Ave.6 However, the court ruled that
where an otherwise permitted restraint was potentially so long-lasting as to be an effective prohibition on transfer, it became a legally impermissible
unreasonable restraint on alienation.
The Oakley court reasoned that because the
floor-price restraint was dependent on real estate
market forces beyond the control of any party, it
was, as adopted, not a postponement of alienation
but a potentially long-lasting prohibition and therefore an unreasonable restraint which the board
had no power to impose. The court further held
that the board did not act within its authority as
the floor-price restriction was not provided for in
the co-op’s proprietary lease, bylaws, or certificate
of incorporation. Therefore, the court concluded
that setting a floor price for sales was outside the
scope of the board’s authority and not protected
by the business judgment rule.
Similarly, in Marine Midland Bank v. White Oak
Cooperative Housing Corp.,7 the court held that
requiring apartment owners to sell at a price set
by the board was an unreasonable restraint on
alienation, citing the Oakley decision.
Reasonable Restraints
In 2005, a decade after the Oakley decision, in
Demchick v. 90 East End Avenue Condominium,8
the First Department held that a transfer restriction enacted to preserve the character of the
condominium did not constitute an unreasonable
restraint on alienation. There, the board proposed
to unit owners that the condominium’s bylaws be
amended to restrict the sale of small studio units
in the building to purchasers or owners of the
building’s larger residential units; the amendment
was duly adopted by the unit owners.
Wednesday, January 4, 2012
Although the restraint was tantamount to a
permanent prohibition on transfers of studio units
separate from larger residential units, the court
held that the restriction was not an unreasonable
restraint on alienation because it could be modified or removed by further amendments to the
bylaws. Importantly, the court also found that the
restraint was permissible because it was reasonable in purpose (to preserve the luxury residential
character of the condominium)—a traditional and
well-established basis for determining whether a
restraint is unreasonable but one that was apparently not considered either in the Oakley or the
Marine Midland decisions.9
Recent Case Law
The underlying rationale of the Demchick decision prompts a reconsideration of whether a co-op
sales price limitation may be enforceable when its
purpose is to further the interests of apartment
owners as a whole in preserving apartment values,
especially if the restraint is incorporated in the
entity’s governing documents.
In 2010, two First Department decisions supported a board’s authority to reject a sale because
of a low price. In Harris v. Seward Park Housing
Corp.,10 plaintiff contracted to purchase an apartment from the co-op itself. Following plaintiff’s
board interview, the purchase application was
rejected. Plaintiff sued, alleging among other things
that the board’s determination to seek a higher
price for the apartment supported his claim for
breach of contract. The co-op contended that
because the contract of sale provided that the
transfer was subject to the unconditional consent
of the board, the board had the right to disapprove
the transfer based on inadequate price.
The court agreed, finding that the contract did
not provide any criteria for the board to assess
the application nor require the board to give a
potential purchaser a reason for rejection. Therefore, noting the conditional nature of the contract,
the court concluded that the board’s rejection of
plaintiff’s application did not constitute a breach
of contract, even if based on a sales price that was
“too low,” as a matter of law. Importantly, the court
did not address whether the co-op’s governing
documents provided for board authority to set or
consider sales price in exercising its authority to
consent (or not) to a proposed transfer. The court
relied solely on the board’s power to consent to
or reject a proposed transfer.
While the First Department dismissed the Harris
plaintiff’s appeal on procedural grounds, the court
held that even if it were to consider the appeal on
the merits, plaintiff would have no viable claim,
as a matter of law. The court thus essentially
supported the lower court’s determination—
that the co-op board had a legitimate interest
in procuring the highest possible price for the
apartment.11 Again, the court did not address
whether or require that the co-op’s governing
documents expressly provide for such price-based
board action.
In Singh v. Turtle Bay Towers Corp.,12 the apartment purchasers challenged a board’s exercise
of its right of first refusal, which was provided
for in the co-op’s proprietary lease. The lower
court summarily dismissed the claim, and the First
Department affirmed, holding that the co-op had a
valid right of first refusal and the board’s decision
to exercise it was legitimately based upon its view
that the purchase price was significantly below
market value, citing Pullman and Levandusky. In
effect, the court held that a board’s decision to
restrict the sale of an apartment because of a
low price falls within its business judgment and
is not a per se unreasonable restraint on alienation. Apparently, the co-op’s governing documents contained no express provision empowering the board to set a floor-price or determine
whether to exercise its right of first refusal based
on price.
And most recently, in Matter of Hershkowitz v.
White House Owners, Corp.,13 the administrator
of an estate sought a declaratory judgment to
compel a co-op board to consent to the estate’s
contract of sale for the decedent’s apartment. The
co-op contended that it had the right to withhold
its consent because the price was substantially
below market and would negatively impact the
value of other apartments. The Surrogate’s Court
held that the issue of the co-op’s refusal to consent
to the sale was a question to be determined under
the business judgment rule.
Recent decisions have not addressed
or required that the authority for a
board to reject apartment transfers
based on sales price be provided for
in the co-op’s governing documents
in order to establish that the board is
acting within its authority under the
business judgment rule.
Conclusion
Co-op law in the area of floor-prices for apartment transfers is clearly evolving. Initially, courts
rejected floor prices set by boards as an unreasonable restraint on alienation and appeared to
require, if such restraints were to be considered at
all, that the power to set floor-price limitations be
provided for in the co-op’s governing documents.
However, recent case law appears to address this
issue differently. Relying on the traditional analysis used by the Demchick court—whether the
restraint is reasonable in purpose—some courts
are concluding that a board’s decision to restrict
apartment sales based on a low price may be a
legitimate exercise of its business judgment.
Further, recent decisions have not addressed
or required that the authority for a board to reject
apartment transfers based on sales price be provided for in the co-op’s governing documents in
order to establish that the board is acting within
its authority under the business judgment rule.
Despite this, prudent boards may wish to consider
having the co-op’s governing documents so provide. Lastly, a board should have a foundation to
rely on for establishing a floor price, based on the
history of apartment transfer prices in the build-
ing, as adjusted for condition and any other unique
aspects of the apartment. As we noted in 2009,
there is still no guarantee that a board’s pricebased rejection of an apartment transfer will be
insulated from challenge, but it is now more likely
than not that such a rejection will be sustained
than would have been the case in 2009.
•••••••••••••
••••••••••••••••
1. See, generally, Richard Siegler and Eva Talel, “Price as a
Basis for Disapproval of Apartment Sales,” NYLJ, Sept. 2, 2009,
p. 3, col. 1.
2. In condominiums, boards generally have a right of first
refusal with respect to proposed unit transfers and leases, a
right which is not commonly found in co-op governing documents.
3. 75 N.Y.2d 530 (1990). In this case, an apartment owner
making unauthorized apartment alterations challenged the
board’s stop-work order. The court upheld the board’s decision, explaining that the business judgment rule, not a reasonableness standard, “best balance[d] the individual and collective interests at stake.”
4. 100 N.Y.2d 147 (2003).
5. 165 Misc.2d 192 (Sup. Ct. Westchester County 1995).
6. 256 App. Div 685, 690-91 (1st Dept. 1939).
7. NYLJ, March 19, 1997, p. 31, col. 5 (Sup. Ct. Westchester
County).
8. 18 A.D.3d 383 (1st Dept. 2005). The Demchick decision was
the precedent for the court’s ruling in Catsimatidis v. Board of
Managers of Petersfield Condominium, 2005 WL 6465157 (Sup. Ct.
N.Y. Co.), where plaintiff commercial condominium unit owner
challenged a bylaw amendment enacted by unit owners which
included an extension of the board’s right of first refusal to the
commercial unit as an unreasonable restraint on alienation. The
Catsimatidis court held that the restraint was reasonable, as a
matter of law, and summarily dismissed the claim. And in Raimondi v. Board of Managers of Olympic Towers Condominium, 52
A.D.3d 330 (1st Dept. 2008), the appellate court upheld the summary dismissal of plaintiff’s claim that an agreement he entered
into with the board whereby the board waived its right of first
refusal to purchase a unit in exchange for receiving from plaintiff
a 7.5 percent share of his profit if he resold the unit within five
years was an unreasonable restraint on alienation—his ability
to sell the unit—and therefore unenforceable. Although there
was apparently no express provision in the bylaws allowing the
board to condition its waiver on a profit-sharing agreement, the
court found that the bylaws gave the board broad powers to
carry out the affairs of the condominium and entering into the
agreement was within the scope of its authority.
9. See, e.g. Anderson v. 50 E. 72nd St. Condominium, 119
A.D.2d 73 (1986), appeal dismissed 69 NY2d 743 (1987).
“Whether a restraint on the disposition of property is unreasonable is a question of fact depending upon its purpose,
duration and, where applicable, the designated method for fixing the purchase price,” citing Metropolitan Transp. Auth. v.
Bruken Realty Corp., 67 N.Y.2d 156, 161-162 (1986).
10. 2009 WL 1905147 at 12 (Sup. Ct. New York County 2009),
appeal dismissed, 79 A.D.3d 425 (1st Dept. 2010).
11. 79 A.D.3d 425 (1st Dept. 2010), citing Singh v. Turtle Bay
Towers Corp., 74 A.D.3d 560 (1st Dept. 2010).
12. 74 A.D.3d 568 (1st Dept. 2010).
13. Slip Opinion 2011 WL 1616846 (Surrogate’s Court, New
York County). Subsequently, in Chappell v. Trump Plaza Owners Inc., 102282/11, NYLJ 1202521006679, at *1 (Sup. Ct., N.Y.
Co.) a 2011 decision on a motion to dismiss, the court was
presented with an allegation that a board rejected a transfer
based on price although the sales price was allegedly at market. On a motion to dismiss, the court was required to accept
this fact allegation as true, as a matter of law, and the court
therefore denied the motion. However, in doing so, the court
distinguished the Oakley and Marine Midland decisions.
Reprinted with permission from the January 4, 2012 edition of the NEW
YORK LAW JOURNAL © 2012 ALM Media Properties, LLC. All
rights reserved. Further duplication without permission is prohibited. For
information, contact 877-257-3382 or [email protected]. # 070-01-12-09