Uncertainties in terminating a co-op's proprietary lease.

Two recent cases, one in Civil Court and the other in the Supreme Court of New York County, help resolve the uncertainties faced by co-ops who attempt to terminate a shareholder's proprietary lease. In both cases, the "conditional limitation" provisions contained in most proprietary leases (usually paragraph 31) came under scrutiny. The conditional limitation provision states that the proprietary lease of a shareholder may be terminated by the co-op if the shareholder fails to cure a default after written notice of the default is given to him.

In the Supreme Court case of DeCastro v. Karen Gardens Apartment Corp. (New York Law Journal, July 28, 1993 pg. 24, Col. 6) Mr. DeCastro was withholding his maintenance charges in the course of a rent strike against the co-op. The co-op instituted a non payment proceeding against the shareholder in Civil Court, at which time he raised the defense of breach of warranty of habitability by the co-op because of alleged reduction of service. While the Civil Court action was still proceeding, the co-op served DeCastro with a Notice to Cure based upon the shareholder's failure to pay maintenance charges. The Notice to Cure provided that unless the maintenance charges were paid in full, the proprietary lease would be terminated and the co-op would proceed to sell the shares of stock and proprietary lease of the DeCastro apartment at a UCC foreclosure sale. DeCastro then immediately commenced a Supreme court action and temporarily restrained the co-op from proceeding with the termination of the proprietary lease.

Justice Simmeon Golar ruled that the provisions of Real Property and Proceedings Law of New York [sections] 753(4) superseded the "conditional limitation" provision of the proprietary lease. The statute provides that when a landlord (here the co-op) seeks to recover possession of a residential unit based upon a claim that the tenant (here the shareholder DeCastro) has breached a provision of the lease (non payment of maintenance charges) the court must grant a ten day stay after judgment, during which time the tenant May correct such breach. The Court ruled that a proprietary lease provision which allows for the removal of the shareholder from the apartment without a judicial determination of default and without an opportunity for the shareholder to cure the default is void as against public policy.

The Civil Court case in New York county, 305 East 4th Street Owners, Corp. v. Diamond contains a factual pattern somewhat different, but with the same results.

Mr. Diamond, a shareholder, agreed to purchase a heating convector for his apartment for which he agreed to pay an assessment of $2,360 to the co-op. (The cooperative mass-purchased convectors for many shareholders who agreed to reimburse the co-op). On March 1, 1989 when the assessment became due, Mr. Diamond refused to pay, claiming the installation of the convector was faulty and that he sustained damage as a result. The co-op served Mr. Diamond with a Notice to Cure in the accordance with the requirements of paragraph 31 of the proprietary lease. The notice stated that unless Mr. Diamond paid the assessment, his proprietary lease would be terminated. Mr. Diamond didn't pay and on June 19, 1989 the co-op served Mr. Diamond with a Notice of Termination of the proprietary lease.

Diamond continued to pay his monthly maintenance charges (without the assessment) and his checks were accepted. In October 1989, four months later, the management agent of the co-op made a notation on the maintenance checks that they were accepted without prejudice. Subsequent maintenance checks were accepted and deposited with the same notation. That same month, October 1989, Mr. Diamond commenced his own law suit in Civil Court against the co-op, claiming damages as a result of the negligent installation of the convector. Aa month later, in November 1989, the co-op again served Mr. Diamond a new Notice to Cure and later again served him with a new Notice of Termination. The shareholder still did not cure his default in the payment of the assessment.

Two issues confronted the Court. One was whether acceptance of maintenance by management after the June Notice to Cure and Notice of Termination were served constituted a waiver by the co-op of the default. The other question was even if no waiver did take place, was it proper for the co-op to terminate the proprietary lease by means of those notices or does the shareholder have the right to cure his default after a trial.

Judge Louise Gruner Gans ruled that the acceptance of maintenance by the co-op after the June notices constituted a waiver of Diamond's default of his non payment of the assessment. Judge Gans stated that although the proprietary lease contains a "waiver clause," usually found in proprietary leases in paragraph 26, which states that the receipt by the co-op of maintenance charges with knowledge that the proprietary lease has been breached shall not be deemed a waiver of such breach; it is settled law that the acceptance of rent by a landlord from a tenant with knowledge of tenant's violation of a lease results in a waiver of the violation. In this case, the knowledge by the co-op of the shareholder's failure to pay the convector charge and the acceptance of maintenance after the June Notice of Termination constituted a waiver. Any possible doubt of the co-op's intention to waive is dissipated by its service of a new Notice to Cure and Notice to Terminate in November 1989. These subsequent notices constitute an admission that the proprietary lease was still in effect and that the co-op waived its right to terminate based upon the June 1989 notices.

However, the judge raised the issue as to whether the acceptance of maintenance checks constituted a permanent waiver of Diamond's default, forever forgiving the shareholder for his breach of his lease for non-payment of the assessment. She stated that a factual determination must be made as to whether the co-op intentionally waived permanently the right to proceed against Diamond for non payment of the assessment. Although the co-op clearly waived its right to terminate its lease pursuant to its June Notice of Termination, there is evidence that the co-op did not intend to permanently waive its right to collect the convector charge. The co-op did after all, deposit the checks only after indicating "accepted without prejudice" and it did serve a new Notice of Termination in October of that year. This issue must be determined at a trial.

Judge Gans then considered the matter of the effectiveness of the "conditional limitation" provisions to terminate a proprietary lease. The Court stated that while conditional limitation provisions of a lease are enforceable in New York, the courts have interpreted them so as to avoid forfeiture of the tenant's lease when the tenant was otherwise allowed to cure a default following a final judgement of possession. The Judge again relied upon the Real Property Actions and Procedures Law [sub-sections] 751 (1) and 753 (4) and stated that a residential tenant has a right to cure his default after a trial.

Also, the Court considered Diamond's claim for breach of warranty of habitability. Judge Gans ruled that Real Property Law [sections] 235-b gave Diamond the absolute right to raise as an affirmative defense against the co-op's law suit, his claim for breach of warranty of habitability. The shareholder would have no opportunity to interpose this defense if the proprietary lease could be terminated by the co-op simply by notice.

The conditional limitation provisions of the proprietary lease which entitles a cooperative to terminate a lease after notice of default are unenforceable, since they cannot be reconciled with the shareholder's right to plead his claim for breach of the warranty of habitability and to allow the shareholder the right to cure his default after a judgment is rendered against him.