315-321 Eastern Parkway Development Fund Corp. vs. Wint-Howell

Were co-op shareholders entitled to an abatement of maintenance charges on the theory of breach of the warranty of habitability for the inconvenience caused by the renovations of their cooperative apartments, which was done with the approval of the co-op’s board? The answer was a clear “no” in 315-321 Eastern Parkway Development Fund Corp. vs. Wint-Howell.

In this case, the co-op petitioner moved the court for summary judgment in nonpayment proceedings seeking maintenance charges for certain co-op apartments at 315 and 321 Eastern Parkway, in Brooklyn. The respondent co-op shareholders opposed the motion on the grounds of breach of the warranty of habitability and each sought a full abatement for the months of September through December 2004 and for one-half of January 2005.

The petitioner was a not-for-profit corporation organized under Article XI of the Private Housing Law to provide housing for persons of low income. In 2002, the board of directors agreed to apply to the Department of Housing Preservation and Development (HPD) to restructure its then-existing loan with the city of New York in order to retire the balance on the mortgage and to borrow additional sums of money to repair defective conditions in the buildings.

Thereafter, HPD approved a secured loan in the amount of $1 million on the condition that the maintenance would be raised to cover the cost of the loan. The shareholders were then informed of the loan application procedure, the renovations contemplated, and the fact that their maintenance would have to be increased accordingly.

On August 22, 2002, all the tenants and shareholders received written notification, by ordinary mail, that if the loan was granted there would be “rehabilitation work throughout the building” and that “[i]t is anticipated that this work will take 6-9 months to complete…requiring access to each apartment.” The petitioner’s application for a loan was approved by HPD and closed on June 18, 2004 and the work contracted for on July 1, 2004 with Novalex Contracting, LLC for $917,019.

The respondents argued that, during the extensive renovations, adequate kitchen and bathroom facilities were not provided to accommodate them; causing great inconvenience. While the co-op did not dispute the fact that the respondents, as well as all the other tenants in the two buildings, were inconvenienced during the renovation process, it noted that, of the 24 shareholders involved, only the two respondents in this case were not paying their maintenance and were seeking an abatement under these circumstances.

In analyzing the law applicable to the case, the court said that the seminal case regarding the authority and autonomy of a cooperative’s board of directors to make decisions for the benefit of the cooperative was Levandusky vs. One Fifth Ave. Apt. Corp. , decided in 1990. In Levandusky, the Court of Appeals was faced with “the legal question of what standard of review should apply when a board of directors of a cooperative corporation seeks to enforce a matter of building policy against a tenant shareholder. [It] conclude[d] that the Business Judgment Rule furnishes the correct standard of review.”

Developed in the context of commercial enterprises, the Business Judgment Rule prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board’s.

The court’s holding in Levandusky regarding the Business Judgment Rule was further reiterated and reinforced in its decision in 40 W. 67th Street vs. Pullman, in 2003, stating that “the Business Judgment Rule best balances the individual and collective interests at stake in the residential cooperative setting.”

The co-op cited a 1992 case, a nonpayment proceeding seeking maintenance charges, in which both parties moved for summary judgment. The respondent sought abatement on the ground of breach of the warranty of habitability, alleging that work done by the petitioner cooperative “wrongfully rendered [his] terrace uninhabitable.”

Ironically, the court noted that the respondents in the case at bar were relying on that same case for the proposition that the warranty of habitability applies to co-op apartments and, therefore, they were entitled to monetary relief in the form of an abatement.

Although the court there stated “as a matter of law, the warranty of habitability as set forth in Real Property Law Section 235-b applies to co-op apartments and buildings, regardless of any clauses to the contrary in the proprietary lease,” it did not award any abatement to the respondent-shareholder. In fact, the court citing Levandusky, noted that it “cannot disturb” the business judgment of the cooperative regarding the work done on the terrace and the inconvenience it caused the shareholder.

While this work no doubt caused great inconvenience to the respondent and affected the appearance of the terrace, the court there found that there was not a breach of the warranty of habitability. The co-op was properly exercising its right to work on the terrace to repair roof leaks. No evidence had been presented to show that the work was unnecessary or improper. Similarly, the court said that the work undertaken by the co-op was necessary to fulfill its obligations pursuant to the proprietary lease to maintain the premises. The board approved the work contracted for and all the tenants were given notification of the proposed work.

While all the parties and the court concurred that the warranty of habitability applied to co-ops, it was necessary to examine the circumstances on a case-by-case basis to determine whether it was an appropriate relief for the conditions in tenant’s apartment. Moreover, there was a clear distinction between being a rental tenant and a co-op shareholder who was, in effect, an owner of the building itself. In the court’s view, it was well settled that conditions within the co-op apartment that are not caused by external factors for which the co-op can be held accountable are the sole responsibility of the shareholder. Here, while the conditions within the respondents’ apartments were a direct result of a building-wide renovation project that the board of directors voted on and approved, it did not fall within the purview of a breach of the warranty of habitability, especially where the renovations would inure to the benefit of the shareholders by protecting their investments in a properly maintained building.

The respondents’ position – that the board and the contracting company did not provide appropriate alternative facilities (i.e., sufficient and accessible kitchens and bathrooms), resulting in major inconvenience and disruption during the renovation period – did not require a finding by the court that an abatement was warranted. Regardless of the fact that the co-op’s attempts to alleviate any disruption of the tenants’ use of their respective premises were inadequate, there had been no proof forthcoming that these inadequacies were anything other than poor planning. The court said that the respondents had not demonstrated that the board’s conduct was willful or outside of its scope of authority.

Were the court to grant the respondents an abatement, the respondents would, in effect, be seeking damages against themselves, as they, along with all the other shareholders who have not sought any abatement, would have to vote an assessment against themselves to cover the cost of any recovery. This would result in a zero gain for the respondents and an unnecessary out-of-pocket expenditure for all the other shareholders. The court cited an earlier case, which held that, “an owner cannot be given financial compensation against himself and fellow owners for necessary maintenance.”

The court said that the respondents’ disenchantment with the renovation process had to be weighed against the greater good that had been bestowed upon the co-op as a whole. Neither the court, nor any other court, could substitute the judgment of the co-op board unless it could show that the board had acted in bad faith or without authority. Such was not the case here.

A co-op or condo is by nature a myriad of often competing views regarding personal living space, and decisions taken to benefit the collective interest may be unpalatable to one resident or another, creating the prospect that board decisions will be subjected to undue court involvement and judicial second-guessing. Allowing an owner who is simply dissatisfied with a particular board action a second opportunity to reopen the matter completely before a court, which generally may or may not agree with the reasonableness of the board’s determination, threatens the stability of the common living arrangement.

Therefore, the court held that the respondents were not entitled to any abatement for breach of the warranty of habitability for the conditions in their apartments during the renovation process. Accordingly, the co-op’s motions for summary judgment were granted as to each respondent. The co-op was awarded a final judgment in the amount of $5,6921.11 against one respondent and a final judgment in the amount of $3,468.40 against another respondent.