Q&A: Boards and the Right to Sublet Apartments

Q&A: Boards and the Right to Sublet Apartments
Q Can original co-op owners' rights to sublet their apartment be changed by a board resolution which refers to the BCL Section 501(c)? It seems that the appellate division of the Supreme Court of New York has ruled that section 501 (c) prohibits giving original owners more favorable subletting rights than non-original purchasers. Is it possible to take away rights that were there when the unit was bought? Original owners used to be able to rent their apartments out indefinitely, but now we can only rent 3 out of 5 years.

—Right to Rent

A “The questioner asks whether the board of directors,” says attorney David L. Berkey, a partner with the New York law firm of Gallet Dreyer & Berkey, LLP, “by resolution, can change special sublet rights granted by an offering plan to original purchasers, relying upon Business Corporation Law Section 501(c)? That section provides, with certain exceptions, that each share of stock shall be equal to every other share of the same class. Courts have interpreted BCL 501(c) to mean that all shareholders who own the same class of shares must be treated in the same manner (cooperatives almost always only issue one class of stock so they qualify for income tax benefits pursuant to Internal Revenue Code Section 216).

“A cooperative with organizing documents (offering plan, bylaws or proprietary lease) that gives some shareholders different sublease rights than others, based upon their being original purchasers or based upon the length of time they have owned their shares, is likely to have such provisions declared illegal because it violates BCL 501(c). To remedy this problem, a board has two choices. It can either grant to all shareholders the same privileges enjoyed by the most favored shareholders, so that all are treated the same, or it can attempt to amend the corporate documents to create uniform rules for subleasing that apply to all shareholders.

“When the board attempts to change subleasing rules by merely passing a board resolution, it may be acting beyond its authority and the resolution may not be effective. The corporate documents should be examined to determine what procedures need to be followed to amend the proprietary lease or bylaws to effect the changes desired by the board. If the board attempts to take away rights enjoyed by some shareholders, rather than extend such favorable rights to all shareholders, those adversely affected by the resolution may well challenge such action as being beyond the board’s authority and not protected by the business judgment rule.”

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  • Michele A. Peters, Esq. on Friday, May 30, 2014 12:20 PM
    If I understand the original question, I believe the rights to sublet have been changed for all the shareholders, not just one set. If this is so, the change most likely would fall under the Business Judgment Rule -- if the Board is making a decision that they believe benefits the Cooperative as a whole in a reasonable manner. There can be many good reasons why a Board might decide to curtail subletting in a building, among them the possible inability of new shareholders to obtain favorable financing to purchase. The court grants great latitude to Boards in making business decisions. Those actions must be made in good faith, in furtherance of the purposes of the co-op, and within the scope of the board’s authority.