New York Law Review

Tag: Cooperative Conversion

  • 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002): Implied Covenant of Good Faith in Cooperative Conversion

    511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002)

    In New York, every contract contains an implied covenant of good faith and fair dealing in the course of its performance, ensuring neither party injures the other’s right to receive the benefits of the agreement; this is particularly important in cooperative conversions where sponsors owe tenants high standards of fair dealing.

    Summary

    A cooperative corporation and tenant-shareholders sued the sponsor of their building’s conversion, alleging breach of contract for failing to sell the remaining unsold shares after the conversion. The New York Court of Appeals held that the plaintiffs sufficiently pleaded a breach of contract cause of action to survive a motion to dismiss. The court emphasized the implied covenant of good faith and fair dealing inherent in all contracts, particularly significant in cooperative conversions due to the unequal bargaining power between sponsors and tenants. The sponsor’s retention of a majority of shares, frustrating the creation of a viable cooperative, could constitute a breach.

    Facts

    Jennifer Realty Co. (the sponsor) converted a 66-unit rent-regulated apartment building into a cooperative in 1988 under a non-eviction plan after obtaining the Attorney General’s approval. After the conversion, the sponsor sold some shares but retained over 62% of the shares, corresponding to 41 apartments. The sponsor stopped updating the offering plan in 1996, preventing them from selling additional shares. In 1998, the tenant-owners learned that the sponsor had rejected bona fide purchase offers for vacant apartments. The tenant-owners argued that the sponsor’s actions undermined the viability of the cooperative.

    Procedural History

    The tenant-owners and the Co-op Board sued the sponsor, alleging breach of contract. The Supreme Court dismissed the contract claim. The Appellate Division reinstated the contract cause of action. The Appellate Division granted the sponsor leave to appeal to the Court of Appeals, certifying the question of whether the Appellate Division’s order was properly made.

    Issue(s)

    Whether the plaintiffs sufficiently pleaded a cause of action for breach of contract based on the sponsor’s alleged failure to act in good faith and deal fairly in fulfilling the terms and promises of the cooperative offering plan.

    Holding

    Yes, because based on the offering plan and the sponsor’s conduct, the plaintiffs sufficiently alleged that the sponsor undertook a duty in good faith to timely sell enough shares to create a viable cooperative, and that the sponsor’s retention of a majority of shares and rejection of purchase offers undermined that duty.

    Court’s Reasoning

    The Court of Appeals emphasized that on a motion to dismiss, the court must determine whether the pleadings state a cause of action, liberally construing the complaint and accepting the facts alleged as true. The Court found that the plaintiffs’ complaint alleged that the sponsor, by offering the shares for sale but retaining a majority, failed to act in good faith to create a viable cooperative.

    The Court relied on the principle that New York law implies a covenant of good faith and fair dealing in every contract. “This covenant embraces a pledge that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract’” (quoting Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995)). The Court further cited Vermeer Owners v Guterman, 78 N.Y.2d 1114, 1116 (1991) which stated that cooperative sponsors must meet “high standards of fair dealing and good faith toward tenants” because tenants lack equal bargaining power.

    Specifically, the plaintiffs asserted that the sponsor frustrated their ability to resell shares, interfered with refinancing, and caused maintenance payments to increase, thus undermining the fundamental objective of creating a viable cooperative. The court concluded that the sponsor’s documentary evidence did not clearly refute these assertions. Because the Attorney General imposes a duty on the sponsor not to abandon the offering plan (13 NYCRR 18.3 [r] [11]), the sponsor’s CPLR 3211 motion to dismiss must fail. The Court explicitly limited its holding to the sufficiency of the pleadings and did not address the merits of the claim or whether the sponsor had impliedly promised to sell all unsold shares.

  • Sutton v. East River Savings Bank, 55 N.Y.2d 550 (1982): Implied Reasonable Time for Contract Performance

    Sutton v. East River Savings Bank, 55 N.Y.2d 550 (1982)

    When a contract does not specify a time for performance, the law implies a reasonable time, the determination of which depends on the specific facts and circumstances of the case.

    Summary

    Sutton, as limited partners, agreed to a partnership where their interest would terminate on a specific date, with a clause allowing termination upon property disposal if written notice was given. After the property was transferred to a corporation and converted to cooperative apartments, the limited partners accepted profits for 22 months before attempting to terminate the partnership. The New York Court of Appeals held that the 22-month delay in providing notice was unreasonable, barring the limited partners from relief even if the property transfer triggered the termination clause. This case highlights the importance of timely action when a contract lacks specific deadlines.

    Facts

    Plaintiffs’ predecessors sold property with apartment buildings to defendant general partnership, receiving a mortgage in return. When the partnership struggled with payments, the plaintiffs became limited partners with a 20% profit share in exchange for consenting to mortgage refinancing. The partnership agreement stated that if the property was sold or disposed of before January 31, 1985, the partnership could terminate upon written notice by any partner. The agreement did not specify a time frame for providing this notice. In November 1982, the general partnership formed a corporation, transferred the apartment complex to it, and converted the property to cooperative apartments. The general partners then paid off the original mortgage. Approximately 20% of the cooperative shares were sold to individual apartment owners.

    Procedural History

    The plaintiffs, as limited partners, initially did not provide notice to terminate the partnership after the property transfer and cooperative conversion. They accepted their 20% share of profits, including proceeds from the apartment sales, for 22 months. Subsequently, they attempted to give notice of termination, which the general partners rejected. The lower courts ruled in favor of the general partnership, finding the delay in providing notice unreasonable. The case then reached the New York Court of Appeals.

    Issue(s)

    Whether a 22-month delay in providing notice to terminate a partnership, after a triggering event as defined in the partnership agreement, constitutes an unreasonable delay, thereby precluding the right to terminate.

    Holding

    Yes, because the 22-month delay was deemed unreasonable given the circumstances, even if the cooperative conversion triggered the right to terminate under the partnership agreement.

    Court’s Reasoning

    The Court of Appeals affirmed the Appellate Division’s order. The court stated that when a contract doesn’t specify a time for performance, a reasonable time is implied. The court cited Webster’s Red Seal Publs. v Gilberton World-Wide Publs., noting the principle that a reasonable time depends on the facts and circumstances of each case. They also cited Ben Zev v Merman. The court emphasized that the plaintiffs accepted profits for nearly two years after the property transfer before attempting to terminate the partnership. The court agreed with the Appellate Division’s conclusion that the 22-month delay was unreasonable. The court reasoned that, even if the cooperative conversion triggered the right to terminate, the plaintiffs’ unreasonable delay barred them from any relief. The Court’s decision turned on the practical implications of allowing a party to delay exercising a contractual right, especially when that delay prejudices the other party or allows the delaying party to benefit from the status quo before attempting to change it. As the court implied, a party cannot wait an unreasonable amount of time to see how things play out before attempting to enforce a contractual right. The court did not discuss any dissenting or concurring opinions.

  • 10 West 66th Street Corp. v. Finance Administration, 73 N.Y.2d 19 (1988): Defining ‘In Connection With the Sale’ for Real Property Transfer Tax Deductions

    10 West 66th Street Corp. v. Finance Administration, 73 N.Y.2d 19 (1988)

    A mortgage placed on real property as an integral part of financing a contemplated sale, such as a cooperative conversion, is considered to be placed “in connection with the sale,” and therefore is not deductible from the net consideration subject to the real property transfer tax, regardless of the time elapsed between the placement of the lien and the taxable sale.

    Summary

    10 West 66th Street Corp. challenged a determination by the Finance Administration of the City of New York disallowing deductions for two mortgages from the net consideration subject to real property transfer tax. The mortgages were placed on an apartment building in anticipation of its conversion to a cooperative. The Court of Appeals held that these mortgages were placed “in connection with the sale” to the cooperative corporation, and thus were not deductible. The court reasoned that the mortgages were integral to the financing of the cooperative conversion and the building’s ultimate sale, regardless of the time between the mortgage placement and the sale.

    Facts

    In 1979, 10 West 66th Street Corp. obtained a loan from Chemical Bank, secured by a mortgage, to purchase an apartment building, with the express intention of converting it into a cooperative. The loan agreement required the corporation to submit a proposed offering plan to the Attorney-General. The mortgage terms allowed for its transition into permanent financing upon the building’s resale to a cooperative corporation. Later, a portion of the mortgage was assigned to Connecticut General Life Insurance Co. (CGLIC). In 1980, the corporation contracted to sell the building to a cooperative corporation, which would assume the CGLIC mortgage. At the closing in 1981, a series of complex financing transactions resulted in the consolidation and splitting of the mortgages, with the Chemical Bank mortgage assigned to the grantee (cooperative corporation). The grantee then assumed the CGLIC mortgage.

    Procedural History

    The 10 West 66th Street Corp. deducted the amounts outstanding under both the Chemical and CGLIC mortgages from the total consideration paid when computing the real property transfer tax. The Finance Administration disallowed these deductions. The corporation initiated an Article 78 proceeding to challenge the determination. The Appellate Division initially concluded that there was not substantial evidence to support the finding that the mortgages had been placed on the property “in connection with the sale.” The Court of Appeals reversed the Appellate Division’s ruling, reinstating the Finance Administration’s original determination.

    Issue(s)

    Whether mortgages placed on real property in anticipation of a future sale, as part of a cooperative conversion plan, are considered to be placed “in connection with the sale” under the Real Property Transfer Tax Regulations, thereby precluding their deduction from the net consideration subject to the tax.

    Holding

    No, because the mortgages were an integral part of the financing for the cooperative conversion and the ultimate sale to the cooperative corporation, regardless of the time elapsed between the placement of the lien and the sale. Therefore, the regulation disallowing deductions for encumbrances placed “in connection with the sale” applies.

    Court’s Reasoning

    The Court of Appeals found that the Finance Administration’s interpretation of the regulation was rational, as it does not impose a temporal proximity requirement between the placement of the lien and the sale. The explicit terms of the mortgages and their modifications demonstrated that they were intended to be an integral part of the financing for the cooperative conversion and the building’s ultimate sale. The court emphasized that it was clear that a cooperative conversion involving a sale to some corporate entity was contemplated from the outset. The Court distinguished this situation from ordinary assumable mortgages, stating that the mortgages in this case “required petitioner to exert its best efforts to effect a resale and expressly provided for conversion to permanent financing upon completion of that resale.”

    The court further reasoned that the regulation was a reasonable measure to prevent the circumvention of the transfer tax through manipulation of the timing of mortgage and sale closings. The court supported this interpretation by noting that similar regulations exist under similar State and Federal transfer tax statutes. As the Court stated, respondents’ interpretation of the regulation “permits its application without regard to the amount of time elapsed between the placement of the lien and the taxable sale.”

  • People v. Rachmani Corp., 71 N.Y.2d 775 (1988): Material Omission in Securities Fraud Under the Martin Act

    71 N.Y.2d 775 (1988)

    Under the Martin Act, an omission is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to act, viewing the omission in light of the total mix of information available.

    Summary

    This case addresses whether a real estate company’s failure to disclose an unmet precondition to a cooperative conversion constitutes fraud under New York’s Martin Act. The Attorney-General sought an injunction, arguing that the omission misled tenants into purchasing their apartments. The Court of Appeals reversed the lower court’s decision, holding that the omitted information (a mortgage requirement to sell 40.5% of the units) was not material because it was already disclosed in the original offering plan and would not have significantly altered a reasonable tenant’s decision to purchase by the insider deadline, given the other conditions that had been met.

    Facts

    Rachmani Corporation was the selling agent for the cooperative conversion of an apartment building. The offering plan, distributed in December 1979, required 35% of tenants to subscribe for an eviction-type conversion and a separate condition imposed by the mortgagee requiring 40.5% of the apartments to be sold by June 26, 1981. On July 3, 1980, Rachmani notified tenants that the 35% requirement was met, but did not mention that the 40.5% requirement was not. Tenants had until July 6, 1980, to purchase at the insider price. The Attorney-General alleged that the omission of the 40.5% requirement in the July 3 notice constituted fraud under the Martin Act.

    Procedural History

    The Attorney-General brought an enforcement action. The trial court found that the defendants committed fraud by omitting the 40.5% requirement, issuing an injunction under the General Business Law and Executive Law. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s order, vacating the injunction and dismissing the complaint.

    Issue(s)

    Whether the failure to mention the unmet 40.5% sales requirement in the July 3 notice, when the 35% tenant subscription requirement had been met, constituted a material omission amounting to fraud under the Martin Act.

    Holding

    No, because the omission of the 40.5% sales requirement was not a material omission that would have significantly altered a reasonable tenant’s decision to purchase their apartment, given that this requirement was already disclosed in the original offering plan and the tenants were deciding whether to purchase at the insider price before the July 6 deadline.

    Court’s Reasoning

    The Court of Appeals adopted the federal securities law standard for materiality, stating, “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote * * * [T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” The court reasoned that a reasonable tenant would be presumed to have knowledge of the original offering plan, which disclosed the 40.5% requirement. The court emphasized that tenants were primarily concerned with whether they could be evicted if they did not purchase by July 6. Since the 35% requirement had been met, they knew eviction was possible if they did not purchase. The 40.5% requirement, which could be satisfied by sales to tenants or outsiders, and which had almost a year to be met, would not have significantly impacted their decision. The Court highlighted that “there is no requirement that information already adequately disclosed be spoonfed to them” and that including unnecessary information could be misleading. A gratuitous reminder of the unmet 40.5% condition could even be interpreted as an attempt to dissuade tenants from exercising their insider rights.

  • Manolovici v. Manolovici, 69 N.Y.2d 775 (1987): Defines ‘Tenant in Occupancy’ for Cooperative Conversion Rights

    Manolovici v. Manolovici, 69 N.Y.2d 775 (1987)

    A tenant of record to a rent-stabilized apartment, even if not residing there full-time, can qualify as a ‘tenant in occupancy’ and thus retain the right to purchase the apartment at the insider’s price during a cooperative conversion if they maintain a sufficient legal and factual nexus to the apartment.

    Summary

    This case addresses the question of who qualifies as a ‘tenant in occupancy’ with the right to purchase an apartment at a favorable insider’s price during a cooperative conversion. The Manolovicis, a divorcing couple, were co-tenants on a rent-stabilized apartment lease. While Ms. Manolovici lived in the apartment with their children, Mr. Manolovici resided elsewhere but continued to support the family. The court held that both parties, as co-tenants with equal rights and a sufficient connection to the apartment, were entitled to purchase the shares allocated to the apartment. This decision emphasizes that legal rights and continued financial support, rather than exclusive physical occupancy, can establish ‘tenant in occupancy’ status.

    Facts

    Diana and Gerard Manolovici were co-signatories to a rent-stabilized lease for a three-bedroom apartment.
    The apartment served as their marital home.
    During the lease term, a cooperative conversion plan was accepted for filing by the Attorney-General.
    The plan gave the “tenant in occupancy” on September 6, 1979, the right to purchase the apartment at a discounted price.
    At that time, the Manolovicis were in divorce proceedings.
    Mr. Manolovici lived elsewhere but supported the family; Ms. Manolovici lived in the apartment with the children.
    Their divorce judgment did not address possessory rights or who could purchase the apartment.

    Procedural History

    Both parties sought a declaratory judgment on their rights to purchase the apartment.
    Ms. Manolovici claimed exclusive right to purchase; Mr. Manolovici argued for co-equal rights as tenants in common.
    The trial court found that Mr. Manolovici maintained a sufficient nexus to qualify as a tenant in occupancy.
    The Appellate Division’s decision was appealed to the New York Court of Appeals.

    Issue(s)

    Whether Mr. Manolovici, despite not residing in the apartment on the critical date, maintained a sufficient connection to the apartment to qualify as a “tenant in occupancy” entitled to purchase the apartment under the cooperative conversion plan.

    Holding

    Yes, because Mr. Manolovici retained a sufficient connection to the apartment, maintaining his landlord-tenant relationship and legal right to occupy the apartment, making him a “tenant in occupancy” entitled to purchase the apartment on a coequal joint basis with Ms. Manolovici.

    Court’s Reasoning

    The court emphasized that the critical date for determining tenant in occupancy status is when the offering plan is accepted for filing by the Attorney-General. Although the term “tenant in occupancy” is not explicitly defined in the statutes, prior cases established that a tenant of record may qualify even without using the apartment as a primary residence. The court stated that “a tenant of record may qualify as a ‘tenant in occupancy’ of a rent-stabilized apartment without actually using the apartment as his primary residence”. The court found that Mr. Manolovici retained a sufficient connection to the apartment, specifically noting that “Regardless of any informal agreement the parties may have had regarding possessory rights, Mr. Manolovici retained the legal right to occupy the apartment. He maintained his landlord-tenant relationship as of the date the plan was accepted for filing.” Because both parties had an equal right of possession and were using the former marital residence for their family, the court concluded that Mr. Manolovici qualified as a tenant in occupancy. The court distinguished this case from situations where a tenant completely relinquished their rights to the apartment. The court highlighted that neither party asserted the right to possess or purchase the apartment in the divorce proceedings, further solidifying Mr. Manolovici’s claim. This decision reinforces that legal rights and financial responsibilities, rather than solely physical presence, are crucial factors in determining tenant in occupancy status in the context of cooperative conversions.

  • 궐 Gerard Towers Company, Inc. v. Roth, 61 N.Y.2d 726 (1984): Clarifying Taxable Events in Cooperative Conversions

    Gerard Towers Company, Inc. v. Roth, 61 N.Y.2d 726 (1984)

    The transfer of shares as part of a cooperative plan is a taxable event under Article 31-B of the Tax Law, with the overall cooperative plan being subject to the statute unless specifically exempted.

    Summary

    Gerard Towers Company sought a declaratory judgment to determine if the transfer of real property underlying a cooperative corporation plan or the transfer of shares was the taxable event under Tax Law Article 31-B. The plaintiffs argued transfers under the plan are exempt from tax. The Court of Appeals held that the transfer of shares as part of a cooperative plan is indeed a taxable event. The Court reasoned that the legislative intent, as evidenced by exemptions and clarifications in the statute, supports this construction. The amendment to Tax Law § 1440(7) was deemed a legislative amplification rather than a change of intent.

    Facts

    Gerard Towers Company was involved in a cooperative corporation plan regarding real property. A dispute arose concerning whether the transfer of the real property itself or the transfer of shares within the cooperative was the taxable event under New York Tax Law Article 31-B.

    Procedural History

    The Special Term initially ruled that the transfer of shares of stock by the cooperative corporation was the taxable event. The Appellate Division affirmed this decision. The case then reached the New York Court of Appeals.

    Issue(s)

    Whether the transfer of real property underlying a cooperative corporation plan or the transfer of shares in the cooperative is the taxable event under Tax Law Article 31-B.

    Holding

    Yes, the transfer of shares as part of a cooperative plan is a taxable event because the legislative intent, as demonstrated by the structure of Article 31-B, including its exemptions and subsequent amendments, indicates that the transfer of shares within a cooperative is the taxable event.

    Court’s Reasoning

    The Court of Appeals focused on interpreting the legislative intent behind Tax Law Article 31-B. The court noted that Section 1443(6) specifically exempts certain transfers after the effective date of the act, implying that, generally, transfers of shares in a cooperative plan are taxable. The court further supported this view by pointing to the exception in Section 1440(7) regarding cooperative or condominium plans and Section 1442, which fixes the date of transfer under a cooperative plan. The court stated: “Amendment of a statute, without more, does not require a change in its judicial construction. In view of the fact that the statute in its original form can be so read, the amendment must be regarded as but a legislative amplification of its previous intent.” The court also referenced the State Executive Department Memorandum accompanying the bill that amended the law, which clarified the gains tax treatment of cooperative conversions, supporting the interpretation that the amendment was intended to clarify, not change, the law. The Court thus held that the overall cooperative plan is subject to tax, save for specific exemptions, confirming that the transfer of shares is the taxable event.

  • Whalen v. Lefkowitz, 36 N.Y.2d 75 (1975): Limits on Class Action Suits Challenging Cooperative Conversion Plans

    Whalen v. Lefkowitz, 36 N.Y.2d 75 (1975)

    A class action challenging a cooperative conversion plan will be dismissed if the plaintiffs fail to demonstrate a triable issue of fact supporting their claims of misconduct or misrepresentation by the sponsor.

    Summary

    Tenants in a rent-controlled building brought a class action against the sponsor of a cooperative conversion plan and the Attorney-General, alleging violations of New York City’s Rent, Eviction and Rehabilitation Regulations and the General Business Law. The plaintiffs sought a declaration that the conversion plan was invalid and damages. The Court of Appeals affirmed the dismissal of the complaint, holding that the plaintiffs failed to present sufficient evidence of misconduct or misrepresentation by the sponsor to warrant a trial. The Court emphasized the absence of reliance or financial expenditure by the tenants on the alleged misrepresentations.

    Facts

    The plaintiffs, tenants in a rent-controlled Manhattan apartment building, initiated a class action lawsuit. They challenged the validity of a cooperative conversion plan sponsored by Washington Park Urban Renewal Corp. The plaintiffs claimed the plan failed to comply with the New York City’s Rent, Eviction and Rehabilitation Regulations. They further alleged the Attorney-General improperly accepted the plan for filing under the General Business Law. The plaintiffs sought a declaratory judgment invalidating the plan and monetary damages.

    Procedural History

    The defendants moved for summary judgment, arguing the complaint lacked sufficient facts to state a cause of action. The Attorney-General also moved to dismiss, asserting that challenges to his acceptance of the plan were only reviewable via a CPLR Article 78 proceeding, which was time-barred. Special Term dismissed the causes of action against the Attorney-General and two causes of action against the sponsor. The Appellate Division modified the order, dismissing the remaining causes of action for declaratory relief and damages, as well as the defendants’ counterclaim. The Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    1. Whether the plaintiffs presented sufficient evidence of misconduct or misrepresentation by the sponsor of the cooperative conversion plan to warrant a trial.
    2. Whether the plaintiffs’ cause of action for damages could be sustained in the absence of reliance or expenditure of money based on the defendants’ actions.

    Holding

    1. No, because the plaintiffs failed to demonstrate a triable issue of fact supporting their claim that the sponsor was guilty of misconduct or misrepresentation in its promotion of the plan.
    2. No, because the plaintiffs neither purchased apartments nor expended money in reliance upon anything which the defendants did or said.

    Court’s Reasoning

    The Court of Appeals affirmed the dismissal of the complaint. The Court reasoned that the plaintiffs’ claim for damages failed because they did not purchase apartments or spend money based on the defendants’ actions or statements. The Court distinguished this case from Richards v. Kaskel, where purchasing tenants demonstrated misrepresentations by the sponsor. Here, the plaintiffs did not provide enough evidence to create a factual dispute regarding misconduct or misrepresentation. The court stated, “summary judgment was, nevertheless, properly granted dismissing the class action counts for the reason that the plaintiffs failed completely to demonstrate the existence of a triable issue of fact in support of their claim that the sponsor was guilty of misconduct or misrepresentation in its promotion of the plan.” The Court emphasized the lack of reliance or financial expenditure by the plaintiffs. The court implicitly reinforced the importance of demonstrating concrete harm to sustain a claim for damages. While the plaintiffs were entitled to bring a class action (citing Richards v. Kaskel), their claim failed on the merits due to lack of evidence. There were no dissenting or concurring opinions noted in the decision.

  • Katcher v. Praetorian Realty Corp., 32 N.Y.2d 178 (1973): Constitutionality of Rent Stabilization Law’s Co-op Conversion Provision

    Katcher v. Praetorian Realty Corp., 32 N.Y.2d 178 (1973)

    The Rent Stabilization Law’s provision allowing for co-operative conversion of rental buildings upon purchase by a statutory minority (35%) of tenants does not violate due process, as it grants a limited right to lease renewal that tenants did not previously possess.

    Summary

    Tenants challenged the constitutionality of the Rent Stabilization Law (RSL) provision allowing landlords to refuse lease renewals when converting to co-operative ownership, arguing it was triggered by a minority of tenants purchasing shares. The landlord, Praetorian, had filed a co-op conversion plan with the Attorney General, which included vacant apartments in calculating the required 35% tenant purchase threshold. The tenants argued that making their right to renewal leases subject to abrogation by a minority of tenants violated due process and that the Housing and Development Administration (HDA) acted arbitrarily in approving the inclusion of vacant apartments in the 35% calculation. The court upheld the constitutionality of the RSL, finding it granted a new, limited right to lease renewal, and the inclusion of vacant apartments was a valid interpretation of the law.

    Facts

    Praetorian Realty Corp. filed a co-operative reorganization plan for an apartment building in 1969. The plan required agreements for the purchase of 75% of the shares for effectiveness but allowed Praetorian to declare it effective with only 35% purchase agreements. The Rent Stabilization Law (RSL) became effective in May 1969, controlling the property. The RSL initially required 15% tenant purchase for co-op conversion, later amended to 35%. Praetorian amended its plan, including purchases of apartments that became vacant after the plan was presented to meet the 35% requirement. The Attorney-General accepted this amendment, and Praetorian declared the plan effective in October 1970, including vacant apartments in the calculation.

    Procedural History

    The tenants initiated an Article 78 proceeding challenging the constitutionality of the RSL and the HDA’s approval of the Industry Code section allowing inclusion of vacant apartments. Special Term dismissed the petition. The Appellate Division affirmed without opinion. The New York Court of Appeals reviewed the case.

    Issue(s)

    1. Whether section YY51-6.0(c)(9)(a) of the Rent Stabilization Law, allowing for co-operative conversion upon purchase by a minority (35%) of tenants, is unconstitutional as a denial of due process.
    2. Whether the City Housing and Development Administration (HDA) acted arbitrarily in approving section 61(4)(a)(ii) of the Industry Code, which allows sponsors to include purchases of vacant apartments in calculating the 35% tenant purchase requirement.

    Holding

    1. No, because the RSL grants a limited right to lease renewal that tenants did not previously possess; it doesn’t arbitrarily limit a pre-existing right.
    2. No, implicitly. The court found the statute constitutional, thus undermining the argument that the HDA’s interpretation was arbitrary because the interpretation was consistent with the law.

    Court’s Reasoning

    The court modified the order to declare the RSL provision constitutional. The court acknowledged that an Article 78 proceeding is typically not the correct vehicle to challenge the constitutionality of legislative action, but the court converted the proceeding to a declaratory judgment action. The court reasoned that the tenants’ argument failed because they did not have an unlimited right to renewal leases before the RSL. The RSL granted them a limited right, subject to the co-operative conversion exception. The court stated, “The law, thus, does not arbitrarily limit a more extensive right, but, rather, grants to tenants a limited right which they previously did not have.” Therefore, the tenants had no basis for a constitutional challenge. The court did not explicitly address the second issue regarding the HDA’s actions but implicitly affirmed its validity given its ruling on the constitutionality of the overall scheme. The court emphasized that courts should focus on whether a cause of complaint exists and mold the action accordingly, quoting Justice Hopkins: “The true question is whether a cause for complaint has been stated; the form of the action or proceeding can [then] be molded by the court”.

  • Burns v. 500 East 83rd Street Corporation, 24 N.Y.2d 117 (1969): Defining ‘Tenant in Occupancy’ for Co-op Conversion Rights

    Burns v. 500 East 83rd Street Corp., 24 N.Y.2d 117 (1969)

    A subtenant in exclusive possession of a rent-controlled apartment for the entire term of the lease, with the landlord’s explicit consent to the sublet, qualifies as a ‘tenant in occupancy’ and is entitled to the exclusive right to purchase the co-operative shares allocated to that apartment during a co-op conversion.

    Summary

    This case addresses the rights of a subtenant in a rent-controlled apartment during a building’s conversion to cooperative ownership. Burns, a subtenant, sought to compel the building owners to offer her the co-op shares allocated to her apartment. The court held that because Burns was in exclusive possession for the entire lease term with the landlord’s explicit permission and treated as a tenant, she qualified as a ‘tenant in occupancy’ under rent control regulations, entitling her to purchase the co-op shares. This decision clarifies the definition of ‘tenant in occupancy’ to include subtenants with long-term, landlord-approved arrangements, preventing landlords from circumventing tenant protections during co-op conversions.

    Facts

    Burns was a subtenant occupying a rent-controlled apartment. The original tenant, Henderson, had a lease containing a clause that the landlord would grant permission for a sublet to Burns. Burns continuously occupied the apartment throughout Henderson’s two-year lease. The landlord accepted rent payments directly from Burns. During this period, the building’s owners initiated a cooperative conversion plan, which, under New York City rent regulations, gave ‘each tenant in occupancy’ the right to purchase the allocated shares. The landlord refused to offer Burns the shares, arguing she was merely a subtenant.

    Procedural History

    Burns sued the building owners and managers seeking an order compelling them to offer her the co-op stock allocated to her apartment. The trial court ruled in favor of the defendants. The Appellate Division affirmed the trial court’s decision. Burns appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether a subtenant in exclusive and continuous possession of a rent-controlled apartment for the entire term of a lease, with the landlord’s express consent to the sublease, qualifies as a “tenant in occupancy” under Section 55(c)(3) of the Rent, Eviction and Rehabilitation Regulations, thereby entitling her to the exclusive right to purchase the co-operative shares allocated to the apartment?

    Holding

    1. Yes, because the rent regulations define “tenant” to include “subtenant” and “sublessee,” and the landlord’s explicit consent to the sublet, coupled with the subtenant’s continuous and exclusive occupancy, demonstrates that the subtenant is the “tenant in occupancy” for the purposes of the co-op conversion offering. The court found that Henderson was not a “tenant in occupancy” because he did not live in the apartment. The Court held, “It was for the protection of just such an occupant of rent-controlled accommodations that section 55 (subd. e, par. [3]) was promulgated.”

    Court’s Reasoning

    The Court of Appeals emphasized the broad definition of “tenant” in the relevant regulations, which explicitly includes “subtenant” and “sublessee.” It reasoned that Burns’s continuous and exclusive occupancy of the apartment, coupled with the landlord’s express consent to the sublease, established her as the “tenant in occupancy” within the meaning of Section 55(c)(3) of the Rent, Eviction, and Rehabilitation Regulations. The court noted that Henderson, the named tenant, did not occupy the premises during the lease term, further solidifying Burns’s claim. The Court stated, “It is not open to dispute, therefore, that plaintiff was for the entire period of the lease the ‘tenant in occupancy’ of the apartment literally within section 55 (subd. c, par. [3]) of the Regulations.” The court distinguished Burns’s situation from “casual occupation, or other kinds of relationships with landlords,” suggesting that the specific facts—long-term occupancy and landlord approval—were crucial. Furthermore, the court suggested that the subletting for the entire lease period, expressly approved by the landlord, may have had the legal effect of an assignment of the lease. The court ultimately decided it was unnecessary to reach the question whether she is also an assignee of the lease because she was found to be a tenant in occupancy.

  • De Minicis v. 148 East 83rd Street, Inc., 15 N.Y.2d 432 (1965): Rent Control Law and Cooperative Conversions

    De Minicis v. 148 East 83rd Street, Inc., 15 N.Y.2d 432 (1965)

    The Emergency Housing Rent Control Law does not apply to cooperative conversions where no statutory tenants in possession are evicted, and the Rent Commission lacks jurisdiction absent an eviction.

    Summary

    Plaintiffs sought to rescind a proprietary lease agreement for a cooperative apartment, alleging the cooperative conversion violated the Emergency Housing Rent Control Law. The defendant converted the building into a cooperative after purchasing it and renovating vacant apartments. The plaintiffs purchased shares and a lease for an apartment that had been voluntarily vacated. The court held that the Rent Commission lacked jurisdiction because no statutory tenants were evicted during the conversion. The plaintiffs entered an arm’s length transaction, and applying rent control in this situation would not advance the law’s purpose.

    Facts

    Defendant Carsen purchased a building in 1954, taking title under the corporate defendant’s name. The building was subject to the Emergency Housing Rent Control Law, with some apartments occupied by statutory tenants and others vacant. After renovations, the defendant arranged a cooperative ownership plan where purchasing shares entitled the owner to a 99-year proprietary lease. In 1957, Carsen vacated an apartment and offered its corresponding shares for sale. The plaintiffs purchased the shares, paying $2,000 down and agreeing to monthly “Maintenance Rent” and “Leasehold Lien Rent”. The plaintiffs took possession and one plaintiff even served as president and director of the corporation. The dispute arose after disagreements about selling the property.

    Procedural History

    The plaintiffs filed suit seeking to rescind the lease agreement. The lower courts held the plaintiffs’ complaint sufficient. The Court of Appeals reversed the lower court’s decision.

    Issue(s)

    Whether the Emergency Housing Rent Control Law applies to a cooperative conversion when no statutory tenants in possession have been evicted.

    Holding

    No, because the Rent Commission lacks jurisdiction over premises except when statutory tenants in possession are sought to be evicted.

    Court’s Reasoning

    The court reasoned that the Emergency Housing Rent Control Law primarily aims to protect statutory tenants from eviction. The relevant regulations, such as Section 55(3) and Section 10(4), focus on procedures for evicting tenants and withdrawing housing accommodations from the rental market. The court emphasized that the Rent Commission’s jurisdiction is limited to situations involving the eviction of statutory tenants. The court cited People ex rel. McGoldrick v. Sterling, 283 App. Div. 88, 92, stating that “The State’s police power is exercised through control of evictions”. Here, the plaintiffs were not statutory tenants and took possession based on an arm’s length purchase agreement. Granting relief would not advance the Emergency Housing Rent Control Law’s purpose. The court noted the plaintiffs did not rely on any representations that rent laws had been complied with and make no claim based on fraudulent inducement. The court stated that absent an eviction, the Rent Commission is without jurisdiction.