Cooperative Directors and Managers:
The New York Court of Appeals recently issued its decision in the case of Del Terzo v. 33 Fifth Avenue, which had been moving through the New York courts for four and half years. The decision is significant because it establishes statewide limitations on the exercise of board discretion in many cooperatives insofar as reviewing the applications of family members to acquire apartments following the death of a lessee.
At issue in Del Terzo was the application of a proprietary lease provision providing that after the death of the lessee "consent shall not be unreasonably withheld to an assignment of the lease and shares to a financially responsible member of the Lessee's family." Acting under this provision, the board had decided not to consent to a transfer to the two sons of the deceased because only one of them had meaningful income and assets. The brothers had sought to buy the apartment jointly, although, at least in the short term, it was their intention that it be occupied by only the brother who was less well off. They did not dispute that only one of them satisfied the board's financial requirements.
The decision by the Court of Appeals affirmed rulings by the Supreme Court and the Appellate Division that because the particular lease provision being applied required "reasonableness" the determination of the board was not protected by the Business Judgment Rule which generally affords boards wide leeway and a great deal of judicial deference in their decision making. The courts' view was that, under the facts of the case, the board failed the "reasonableness" test. A secondary argument by the cooperative that it was inappropriate to permit the apartment in question to be acquired by two adult sons, both of whom could live there, was brushed aside.
The particular lease provision at issue in Del Terzo is not universal. A significant number of proprietary leases do not confer any special rights insofar as transfers on death to family members are concerned. Others give such rights only to spouses. However, Del Terzo-type provisions are not uncommon. Boards in buildings where such provisions exist should be aware of the Del Terzo decision and, insofar as they consider the ruling inconsistent with how they feel their cooperative should operate, they should consider seeking their shareholders' approval for a lease amendment that would negate its effect. The courts that considered Del Terzo gave no indication that there is any restriction on a board's exercise of its normal prerogatives when considering transfers to family members so long as the lease in question does not contain special provisions regarding them.
For all cooperatives, Del Terzo serves as a reminder that for any decision for which a proprietary lease provides a "reasonableness" standard, the latitude afforded a board under the Business Judgment Rule may not be available. In the event of challenge, such decisions must have been made by a process and upon standards that a court would view as "reasonable."
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