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WEDNESDAY, SEPTEMBER 4, 2013
VOLUME 250—NO. 46
Expert Analysis
COOPERATIVES AND CONDOMINIUMS
Board Authority to Impose
Sublet and Leasing Fees
S
ublet and leasing fees can
be an important revenue
generating and policy setting tool for co-op and condominium boards. Such fees
can provide revenue to increase the
building’s reserves, offset increases in
maintenance charges or finance capital expenditures, while also discouraging non-owner occupancy within a
building. This can help ensure that
owner-occupancy rates do not fall
below requirements set by mortgage
lenders which may also depress the
value of apartments.
Such fees may also reduce the transient rental population in a building,
which may be less inclined to treat the
apartment, neighbors and the building with the same level of care as one
would expect from an owner-occupant
who has an investment in the building and resides there. Further, the
imposition of substantial fees may
deter apartment owners from renting their apartments and effectively
limit rentals.
Yet, many boards and managers remain
uncertain as to their authority to impose
sublet fees and how to implement them,
thereby perhaps depriving their buildings
of the benefits such fees provide.
RICHARD SIEGLER is of counsel to Stroock & Stroock & Lavan.
EVA TALEL is a partner at the firm. MICHAEL ROSENBLUM,
a law student, and MARGARET JONES, a research librar-
ian at the firm, assisted in the preparation of this column.
Stroock is counsel to the Real Estate Board of New York.
By
Richard
Siegler
And
Eva
Talel
This column discusses case law
regarding board authority to impose
sublet and leasing fees and addresses
the amount that a board can lawfully
impose and the enforceability of various
sublet fee structures. This column also
provides recommendations to boards
and managers for adopting and implementing such fees.
Co-op Sublet Fees
Co-op boards may only impose
sublet fees if the building’s governing documents so authorize. A typical
modern lease may authorize sublet
fees by providing that “any consent
to subletting may be subject to sublet
fees and/or conditions the Board of
Directors may deem appropriate in its
sole discretion….” Even if the provision does not specifically reference
“fees,” the board’s authority “to set
conditions” on leasing or subleasing
apartments is sufficient authorization
for a board to impose sublet fees.
As far back as 1983, in Zuckerman
v. 33072 Owners Corp.,1 the Appellate
Division, First Department, upheld
a sublet fee based on a proprietary
lease provision stating that subleasing
shall be “subject to such conditions
as the board may decide to impose.”
The court held that the clear import
of the broad language used included
monetary conditions.
Most recently, in July 2013, in Cohan
v. Board of Directors of 700 Shore
Road Waters Edge,2 the board issued
a “shareholder handbook” which prohibited subletting and sought to assess
a $3,000 sublet fine provided for in the
handbook against plaintiff for illegally
subletting her apartment, arguing that
the sublet prohibition and fine in the
handbook were enforceable House Rules
which had been incorporated into the
proprietary lease. The Appellate Division, Second Department held that the
board violated the lease and bylaws and
acted beyond the scope of its authority under the building’s governing documents because the sublet fine provision
of the handbook was not adopted as a
House Rule and was therefore not part
of the proprietary lease.
Absent an authorizing provision to
impose sublet fees or set conditions
for subletting, a board’s unconditional
authority to approve or reject subleases
does not permit it to condition sublease
approval on payment of sublet fees. In
Zimiles v. Hotel des Artistes,3 the proprietary lease authorized the board to
approve or reject subleases, but the First
WEDNESDAY, SEPTEMBER 4, 2013
Department rejected its imposition of
a sublet fee because the lease did not
authorize the board to impose such a
fee, nor did it provide the board with
general authority to set conditions for
approval of subleases.
If a co-op’s governing documents do
not provide a board with authority to
impose fees or set conditions on subleasing, a board may seek shareholder
approval to amend the lease. If such an
amendment is adopted, all apartment
owners are bound by the new sublet
fee rules—including those who voted
against the amendment.4
Condominium Leasing Fees
Condominium boards are more limited
than co-op boards in their ability to regulate leasing and are generally limited to
a right of first refusal with regard to the
proposed lease. However, while condominiums are real property and common
law protects owners from the imposition
of unreasonable restraints on alienation,
common law upholds covenants prohibiting leasing by owners.5
Further, the New York Condominium
Act provides that condominium bylaws
may include “provisions governing the
leasing of units.”6 Courts have upheld
restrictions on condominium leasing when the bylaws grant the board
such authority. In 1999, in Four Brothers Homes at Heartland Condominium
II v. Gerbino,7 the Second Department
upheld a board’s leasing prohibition,
rejecting plaintiffs’ contention that it
unreasonably restrained the ability to
alienate their apartments. The court
noted that the Condominium Act authorized bylaws to contain such a provision and that in choosing to purchase a
condominium apartment, plaintiffs gave
up certain rights and privileges which
traditionally accompany fee ownership
of property. While our research has
found no New York cases that explicitly
uphold a condominium board’s right to
impose leasing fees, the Four Brothers
decision suggests that courts would
uphold such fees, provided the same
are authorized by the bylaws.
Fee Amounts
A board’s discretion in setting the
amount of sublet fees depends on
whether the specific language and intent
of the authorizing provision requires
that such fees be “reasonable.” Courts
have overturned excessive fees imposed
by boards that are subject to a reasonableness restriction. However, when an
authorizing provision or other indicia of
intent reflect that the provision’s goal is
curtailing subleasing, rather than requiring reasonable fees, courts have upheld
substantial board-imposed fees.
Co-op boards may only impose
sublet fees if the building’s governing documents so authorize.
In Bailey v. 600 Grand Concourse
Owners,8 the First Department held
that sublet fees equal to 30 percent of
annual maintenance may have exceeded board authority under bylaws that
provided for a “reasonable fee to cover
actual expenses and attorney fees.” In
Rakowsky v. Excelsior 57th,9 where plaintiffs relied on Bailey to challenge a 20
percent of maintenance sublet fee, the
Civil Court, New York County, upheld
the fee because the lease provided for
such conditions on subletting as the
board may impose and the shareholders amended the bylaws to impose a 20
percent sublet fee.
However, in Peckolick v. 135 West 17th
Street Tenants Corp.,10 the First Department upheld a graduated sublet fee of up
to 60 percent of maintenance because
the bylaws conferred broad power on
the board to impose sublet fees and
board minutes reflected that the fees
were intended to curtail subleasing, not
to ensure reasonable fees. Our research
has disclosed no other cases that have
adopted the court’s rationale for upholding the imposition of a fee of such magnitude—as a means of curtailing subleasing. Further, in our experience, boards
do not utilize excessive sublet fees as a
means of curtailing subletting. The best
practice for establishing an unassailable
sublet fee percentage is to establish the
percentage or a percentage range by
shareholder amendment of the proprietary lease.11
Sublet Fee Structures
Boards have structured sublet fees
as a fixed percentage of rent received
from the subtenant, a fixed percentage of maintenance charges, a fixed
sum per share or a fixed amount per
apartment. If the governing documents
specify a fee structure, a board’s use of
any other structure is vulnerable to legal
challenge. However, compliance with a
fee structure established in a lease or
bylaws does not necessarily render the
structure enforceable. Fee structures
may be unenforceable because they violate New York Business Corporation Law
§501(c), which requires each share in a
company to be “treated equal to every
other share of the same class.”12 In Fe
Bland v. Two Trees Management13 the
Court of Appeals made clear that co-ops
are bound by §501(c); the Condominium
Act likewise binds condominiums to a
proportionality regime. 14
In Wapnick v. Seven Park Avenue
Corp.15 and Spiegel v. 1065 Park Avenue
Corp.,16 the First Department held that
a fee structure that favored original
shareholders over subsequent purchasers was unlawful, even though it
was provided for in the proprietary
lease, because it constituted unequal
treatment of shareholders of the same
class of shares in violation of §501(c).
Fees based on a set dollar amount
per share are lawful because they treat
similarly situated shareholders equally. Fees based on a fixed percentage of
WEDNESDAY, SEPTEMBER 4, 2013
maintenance charges are also lawful
because maintenance charges reflect
share proportionality and do not violate §501(c). However, in 303 West End
Apartment Corporation v. Kelly,17 the
Court of Appeals held that an apartment
transfer fee based on a percentage of
shareholder profits violated §501(c),
because it resulted in similarly situated
shareholders being treated differently.
While §501(c) was subsequently amended to exclude only apartment transfer
fees from its requirements, the 303 West
End decision suggests that sublet fees
based on a fixed amount per apartment
or a percentage of rent paid by the subtenant would violate §501(c).
However, courts have carved out
a special exception for sponsors by
concluding that they are not similarly
situated to other shareholders. Therefore, sponsors may, if the proprietary
lease so provides, lawfully be exempt
from paying sublet fees imposed on
other shareholders. In Susser v. 200
East 36th Street Owners Corp.,18 the First
Department rejected a shareholder’s
assertion that a sponsor’s exemption
from sublet fees constituted differing
treatment of shareholders, holding
that the sponsor’s exemption was
justified by obligations imposed upon
sponsors that are not shared by other
shareholders.
The enforceability of a graduated fee,
which discourages subleasing by increasing the percentage of sublet fees payable the longer an apartment is rented,
depends on whether the underlying fees
comply with the shareholder proportionality requirement. Therefore, graduated
fees based on a fixed sum per share or
on a percentage of maintenance costs
have been enforced.19
Recommendations
Before implementing a sublet or leasing fee, boards and managers should
determine whether the proprietary lease
or bylaws authorize the same. Even a
general provision authorizing the board
“to set conditions” for subleasing provides sufficient authority to levy such
fees. Without such authority, an amendment to the lease or bylaws providing
for such authority is required.
Board discretion in setting fee
amounts and fee structures may depend
on whether the authorizing provision
was demonstrably intended to curtail
subletting or requires reasonable fees. If
the goal is curtailing subletting, at least
one court has upheld board discretion
to set fees that go beyond a “reasonable”
amount. If the clear intent is to ensure
reasonable fees, the board is constrained
to do so. Boards and managers should
also determine whether governing documents impose a fee structure and, if so,
whether the structure complies with the
requirements of BCL §501(c) and the
Condominium Act, as the case may be. If
not, the structure may require a lease or
bylaw amendment by apartment owners.
Courts have overturned excessive fees imposed by boards that
are subject to a reasonableness
restriction. However, when an
authorizing provision or other
indicia of intent reflect that the
provision’s goal is curtailing subleasing, rather than requiring reasonable fees, courts have upheld
substantial board-imposed fees.
Where board authority is obtained
by amending governing documents,
the amendments should be clear, proportional and set a percentage, range
or upper limit for such fees. To best
protect board authority to impose fees,
the board should be vested with specific authority to do so, in addition
to general authority to “set conditions regarding subleasing.” It is also
advisable to state in the amendment
whether a board is limited to levying
reasonable fees and if so, what factors
a board may consider in determining
a reasonable fee.
By understanding their authority to
impose sublet and leasing fees and how
to create such authority if none exists in
the governing documents, or the existing
provision is unenforceable, boards and
managers can successfully implement
an enforceable sublet policy that best
suits the needs of the building and its
apartment owners.
••••••••••••••••
•••••••••••••
1. 97 A.D. 2d 736 (1983, 1st Dept.). See also, Richard
Siegler, “The Imposition of Sublet Fees,” NYLJ, Sept. 7, 1994,
at 3, col. 1.
2. 2013 NY Slip Op 05447, 2013 WL 3814235 (2d Dept.
2013). In addition, the court awarded plaintiff her attorney
fees incurred in the proceeding. The court did not address
whether the sublet prohibition and fine would have been
enforceable had they been adopted by the board as House
Rules, without their adoption by shareholder amendment of
the lease or bylaws.
3. NYLJ, March 15, 1994, p. 21, col. 3 (Sup. Ct. N.Y. Co.),
aff’d as modified, 216 A.D.2d 45 (1st Dept. 1995).
4. In Sherry Associates v. The Sherry-Netherland, NYLJ,
June 13, 1996, p. 30, col. 4 (Sup. Ct. N.Y. Co.), aff’d, 239 A.D2d
121 (1st Dept. 1997), apartment owners who lived in the
building and comprised some 74 percent of shareholders
adopted an amended and restated lease which increased
sublet fees payable by shareholders who owned and used
their apartments for transient hotel occupancy. Certain transient unit owners sued, claiming they could not be bound
by an amendment for which they had not voted. The First
Department unanimously affirmed that the transient apartment owners were bound by the sublet fee amendment.
5. Demchick v. 90 East End Ave. Condominium, 18 A.D.3d
383 (1st Dept. 2005).
6. N.Y. Real. Prop. Law §339-v(2)(a) (McKinney 2008).
7. 262 A.D.2d 279 (2d Dept. 1999).
8. 199 A.D.2d 1 (1st Dept. 1993).
9. 167 Misc.2d 476 (Civ. Ct. N.Y. Co.).
10. NYLJ, July 15, 1998, p. 21, col. 3 (Sup. Ct.
N.Y. Co.), aff’d, 268 A.D.2d 339 (1st Dept. 2000).
11. See, generally, Richard Siegler, “The Imposition of Sublet Fees,” NYLJ, Sept. 7, 1994, at 3, col. 1.
12. N.Y. Bus. Corp. Law §501(c) (McKinney 2013).
13. 66 NY2d 556 (1985).
14. N.Y. Real. Prop. Law §339-v(2)(a)
15. 240 A.D.2d 245 (1st Dept. 1997)..
16. 305 A.D.2d 204 (1st Dept. 2003).
17. 124 Misc.2d 870 (Sup. Ct. N.Y. County 1984), aff’d 108
A.D.2d 1107 (1st Dept. 1985), aff’d 68 N.Y.2d 556 (1985).
18. 262 A.D.2d 197 (1st Dept. 1999).
19. See, Peckolick v. 135 West 17th Street Tenants Corp.,
supra, note 10.
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