First published: Nov 2005
DeSoignies v. Cornasesk House Tenants’ Corp.
This case illustrates the ongoing conflict between a board’s power to enact house rules and shareholders’ rights to control fundamental changes that amount to a proprietary lease amendment requiring shareholder approval. It suggests that rule-making may be counterproductive when subletting requests can be reviewed and approved on a case-by-case basis without a lease amendment.
In DeSoignies v. Cornasesk House Tenants’ Corp., the court upheld a co-op board’s absolute right to control subletting as provided in the co-op’s proprietary lease, although subletting rules adopted by the board that limited the right to sublease and imposed a surcharge were held to be an impermissible amendment of the proprietary lease requiring shareholder approval.
In 1972, 1973, and 1980, DeSoignies purchased the shares allocated to three co-op apartments at 238 East 84th Street, a building owned by the co-op. She never lived in any of the apartments and had subleased them for over 25 years. DeSoignies claimed that before this litigation, she uniformly submitted applications to the board of directors before entering into sublet agreements. For example, in July 1997, DeSoignies sublet Apartment 2B for one year, with the board’s approval. That subtenant remained in possession of Apartment 2B as a month-to-month tenant. In March 2001, DeSoignies sublet Apartment 113, also with the board’s approval, and thereafter extended that subtenancy for an additional year. In January 2000, DeSoignies sublet Apartment 5A for one year, with the co-op’s approval. This subtenancy was extended for a period of time on a month-to-month basis. DeSoignies sublet Apartment 5A on May 25, 2002, to another subtenant without the board’s approval and, similarly, sublet Apartment 1B without board approval on October 23, 2002.
On August 1, 2001, the board adopted new subletting rules, effective January 1, 2002. Among other things, the 2002 rules restricted the subletting of apartments to two of every four years and imposed a 10 percent surcharge on every sublet. DeSoignies was served with 10-day notices to cure for the three apartments in May 2002, alleging that she was in violation of the proprietary leases in that she had sublet the apartments without the co-op’s consent.
DeSoignies began the action in June 2002, seeking a declaration that she had an unconditional right to sublet the apartments based on a December 11, 1972 letter she received from the chairman of the co-op board. That letter stated: “This will confirm our conversations whereby we stated that the shareholders of the Cornasesk House Tenants Corporation are allowed to sublet unconditionally their apartment(s) for the duration of their ownership.”
Both parties moved for summary judgment. In support of its motion, the co-op argued that the actions of a co-op board are protected by the Business Judgment Rule. Also, the co-op asserted that the 1972 letter conflicted with the provisions of the proprietary leases, and violated Business Corporation Law, Section 501(c). Paragraph 15 of the proprietary leases states: “ ... the Lessee shall not sublet the whole or any part of the Apartment or renew or extend any previously authorized sublease, unless consent thereto shall have been duly authorized by a resolution of the Directors, or given in writing by a majority of the Directors or, if the Directors shall have failed or refused to give such consent, then by lessees owning at least 65% of the then issued shares of the Lessor.... There shall be no limitation on the right of Directors or lessees to grant or withhold consent, for any reason or for no reason, to a subletting.”
However, the court determined that, to the extent the 2002 rules limited subleasing to two out of four years and imposed a 10 percent surcharge on sublets, they were invalid. On that issue, the court stated: “Paragraph six of the leases provides that the ‘form’ of the lease cannot be changed unless the change is authorized by 75 percent of the lessor’s shares then issued.”
Article 5.01 of the bylaws, entitled “Form of Lease,” included subletting. Article 5.04, “Fees on Assignment,” which also included subletting, stated that the board may impose “the proper fees of its attorneys and managing agent for services in connection therewith.” There was no provision for a surcharge. The court found that the 2002 rules, to the extent that they restricted the subletting of apartments to two (out of four) years and imposed a 10 percent surcharge on subletting, represented an unauthorized change to the form of the leases and were in violation of paragraph six of the leases and Articles 5.01 and 5.04 of the bylaws.
However, paragraph 15 of the proprietary leases accorded the co-op board discretion to withhold consent to any sublease for any reason or no reason at all. This language afforded the board unfettered rights with respect to consideration of sublet applications and, unless there was a showing of a breach of fiduciary duty, the Business Judgment Rule precluded judicial inquiry into the reasonableness of its decisions. According to paragraph 15 of the proprietary lease, any tenant whose application had been denied by the board had the right to obtain approval of a sublet by seeking the consent of “lessees owning at least 65 percent of the then issued shares of the lessor.” This option was not pursued.
