First published: Jan 2006
Inwood Park Apartments Inc. vs. Coinmach Industries Co.
The trial court decision discussed above was recently upheld by an appellate court which reasoned that the right of first refusal did not save the right upon which Coinmach relied, since that right under the subject lease, if not exercised by Coinmach before the lease’s expiration, could be exercised indefinitely thereafter and without limitation as to the time within which the exercise was accomplished. Permitting Coinmach a temporally unrestricted right would constitute an unreasonable restraint upon the alienation of property. The appellate court perceived no beneficial purpose to be served by effectively requiring the residential co-op to retain Coinmach’s laundry room services indefinitely, regardless of their quality.
Can a laundry room operator in co-op buildings grant itself a right of first refusal to a renewal of the lease for the laundry room space after the original term of the lease expires? The answer was “no” in Inwood Park Apartments Inc. vs. Coinmach Industries Co., where the court held the right to be an unreasonable restraint on alienation that was unenforceable.
The plaintiff was a co-op apartment building at 585 West 214th Street in the Inwood section of Manhattan. Coinmach was engaged in operating laundry facilities. Under a lease agreement dated September 12, 1994, the co-op leased to Coinmach a laundry room in the building for a term of eight years from the date Coinmach installed laundry equipment in the premises. The lease provided that Coinmach would be responsible for installing laundry equipment and operating a coin laundry on the premises for the benefit of the residents of the building. The parties agreed that the initial term of the lease expired May 31, 2003. The second paragraph of the lease said: “This lease shall continue for like successive terms after the expiration of the original term unless either party shall give notice of its intention not to renew, sent by certified mail, return receipt requested, to the other party, no less than (90) days and no more than one hundred and twenty (120) days prior to the expiration of the original term or any successive term thereafter.”
The co-op alleged that on February 11, 2003, it notified Coinmach of its intention not to renew the lease and that in April 2003 it entered into an agreement with another party to operate the laundry room on the date the co-op delivered possession of the laundry room to the other party. The complaint also alleged that, on May 13, 2003, Coinmach wrote to the co-op attempting to exercise its right of first refusal in Paragraph 12(c) of the lease, but that Coinmach never forwarded any agreement documents to the co-op in that correspondence. Coinmach argued that the co-op failed to validly terminate the lease and that the lease therefore renewed automatically.
In addition, Coinmach submitted evidence – that was not refuted – that the co-op had sent Coinmach a copy of a lease dated April 2003 that it had executed with a new laundry operator and had sought Coinmach’s decision to match the offer. Coinmach observed that it was only after Coinmach communicated to the co-op on May 13, 2003, its choice to meet the offer that the co-op rejected Coinmach’s acceptance.
The complaint set forth four causes of action. The first sought a declaration that the lease had not renewed automatically. The second sought a declaration that Coinmach had not exercised the right of first refusal in Paragraph 12(c) of the lease because Coinmach did not provide the co-op with a signed agreement nor did it inform the co-op of the rent it deemed commercially reasonable. The third cause of action sought a declaration that the right of first refusal in Paragraph 12(c) of the lease was null and void under the rule against perpetuities because it could be exercised only after the initial term of the lease expired. The fourth cause of action sought a declaration that the right of first refusal in Paragraph 12(c) of the lease was null and void because it constituted an unreasonable restraint on alienation of property.
The merits of the co-op’s motion for summary judgment on its third and fourth causes of action involved a determination of the validity of Paragraph 12(c) of the lease. That section stated: “At the expiration or termination of this lease or any renewal, Lessee shall be provided with, and thereupon, shall have the right of first refusal to meet any bona fide bid or offer to lease the laundry room(s) and/or provide coin-metered laundry equipment services to the Premises on terms which are substantially equivalent to the terms of this Lease except that the Lessor may charge any new rent so long as it is commercially reasonable. Should Lessor not receive any bona fide bid or offer to take effect at the expiration or termination of this Lease or any renewal, then the terms of this Lease shall continue in effect until such time as Lessor has received a bona fide bid or offer and Lessee has been afforded its right of first refusal.”
The co-op argued that this clause violated the rule against perpetuities and the rule against unreasonable restraints on alienation. It also argued that Paragraph 12(c) of the lease created an option in favor of the defendant. The court disagreed and held that Paragraph 12(c) of the lease did not create an option, but instead creates a preemptive right. It cited a prior case which held: “An option grants to the holder the power to compel the owner of property to sell it whether the owner is willing to part with ownership or not. A preemptive right, or right of first refusal, does not give its holder the power to compel an unwilling owner to sell; it merely requires the owner, when and if he decides to sell, to offer the property first to the party holding the preemptive right so that he may meet a third-party offer or buy the property at some other price set by a previously stipulated method. Once the owner decides to sell the property, the holder of the preemptive right may choose to buy it or not, but the choice exists only after he receives an offer from the owner. If the holder decides not to buy, then the owner may sell to anyone.”
The lease at issue here was between a co-op and a commercial partnership and involved the provision of coin-operated laundry services to a building owned by the co-op. The lease was executed by people acting in their capacity as officers, not individuals, and concerned a laundry room, which was apparently outside of the residential area of the building. These factors weighed in favor of finding that the rule against remote vesting did not apply in this case because the lease came within the commercial exception.
Furthermore, the court said that an appellate court had held that, based upon the holding of an earlier case, “because the management of condominium developments has a valid interest not only in securing the occupancy of the units but also in protecting the ownership of the common areas and the underlying fee, its preemptive rights to repurchase units before sale to third parties should be excepted from the operation of the rule.”
In this entire case, the court had upheld the application of the commercial exception to the rule against perpetuities where the preemptive rights were lodged in the condominium because the policies underlying the exception – the encouragement and development of property – were supported by such application. The court in the earlier case had further stated: “In light of the comparatively recent emergence and widespread use of new and creative ownership arrangements of property, such as condominiums and cooperatives, that were uncontemplated in the postfeudal agrarian period in which the then progressive Rule Against Perpetuities had its rise, this modem trend of holding the ‘right of first refusal’ not to be subject to that rule appears to be more consistent with the realities of contemporary commerce and economics than [do] the authorities holding to the contrary.”
Thus, the court held that the preemptive right embodied in Paragraph 12(c) of the lease here was not subject to the rule against remote vesting as it came within the commercial exception to the rule cited; therefore, the co-op’s motion for summary judgment on the third cause of action was denied.
Finally, the court had to determine whether, as asserted in the co-op’s fourth cause of action, Paragraph 12(c) of the lease violated the common law prohibition against unreasonable restraints on alienation. It cited a prior case which said: “The test to be used in determining the validity of a preemptive right under the common-law prohibiting unreasonable restraints on alienation was the reasonableness of the restraint, judged by its duration, price and purpose. Significantly, the duration of the restraint is not measured by the life of the preemptive right, but rather by the period during which the right can be exercised once the owner decides to sell.”
In this case, the co-op argued that Paragraph 12(c) of the lease violated the rule against unreasonable restraints on alienation because it could be exercised at any time after the term of the lease was concluded. Furthermore, the court found, based on the express terms of the lease and Coinmach’s arguments, that the purpose of the preemptive right also violated the rule against unreasonable restraints on alienation. The express purpose of the lease clause was to ensure that Coinmach remained in possession of the premises as long as Coinmach matched any bona fide offer. While the requirement that Coinmach match any bona fide offer rendered the preemptive right reasonable as to price, no beneficial purpose has been demonstrated. In this lease transaction as opposed to a sale, the mere receipt by the co-op from Coinmach of equivalent consideration as would be available from a third party did not render the transaction beneficial. The proper exercise of the preemptive right by Coinmach compelled the co-op to lease the premises to a lessee whose leasehold it had terminated. Therefore, in the court’s view the preemptive right served no beneficial purpose and was thus null and void.
