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Spiegelman v. 2100 Linwood Avenue Owners, Inc.

A-5183-97T3 (N.J. Super. App. Div. 1999) (Unpublished)

COOPERATIVES; SUBLETTING—A cooperative housing corporation’s board, applying reasonable business judgment, may impose reasonable restraints on subletting co-op apartments.

A tenant-shareholder in a co-op housing building sought damages from the cooperative corporation because of its alleged refusal to permit him to sublet his apartment. The proprietary lease limited the identity and class of persons that could occupy the apartment and the length of time the apartment could be occupied by guests. An owner was required to obtain consent to subletting from the corporation’s board of directors or from a supermajority of the corporation’s shareholders. In addition, the proprietary lease stated that “[t]here shall be no limitation on the right of Directors ... to grant or withhold consent, for any reason or for no reason, to a subletting.” Violation of the subletting provision of the lease was one of the grounds that permitted termination of the proprietary lease. The owner tried unsuccessfully on several occasions to obtain approval for subletting from the corporation’s board. In none of those cases did he follow the procedures set forth for obtaining such approval. Nonetheless, the board made at least an informal review of each request before denying its consent. Then, the owner allowed at least four other people to reside in his apartment for extended periods while he principally resided elsewhere. In doing so, it appeared that the owner engaged in some deceptive behavior. At times, the board had policies forbidding subletting and at other times it permitted a maximum of two sublets within a five-year period, provided that an application fee was paid and interview requirements were met. Testimony was given to the effect that subletting was denied during certain periods because various banks were denying financing for apartments because there were too many rentals in the building. At other times, the policy allowing subletting was reinstated to relieve hardships caused by a depressed real estate market. Each time the policy was changed, the new policy was reduced to writing. The apartment owner was unsuccessful in obtaining relief before the lower court. On appeal, he claimed that the subletting rules of the cooperative were unenforceable because they were unreasonable restraints that were void as against public policy. The Appellate Division agreed with the lower court and held that the board’s actions met the test of reasonableness. Further, it held that judicial review of such actions is limited by the “business judgment rule.” Although this case involved a cooperative and not a condominium association, it found that the same two-prong test was applicable, i.e.: “(1) whether its action was authorized by statute or its own by-laws, and, if so, (2) whether the action was fraudulent, self-dealing or unconscionable.” The Court believed that the lower court was correct when it determined: “[c]learly the subletting policies were designed to protect the safety and investment of the building residents by promoting shareholder residency.” Both the lower court and the Appellate Division were satisfied that the underlying policies, as issued, and the actions taken, were reasonable. Consequently, the board did not breach its fiduciary duty to the tenant-shareholder and further the tenant-shareholder breached its duty of honesty and cooperation to the cooperative corporation. The tenant-shareholder then argued that a subsequently adopted statute prohibited cooperative corporations from unreasonably inhibiting or preventing a holder of a proprietary lease from making an apartment available for rental. To this, the Court answered that the statute was not in effect at the times in question and, further, the statue does not prohibit subletting; it merely requires that a co-op’s restrictions not “unreasonably inhibit or prevent” a proprietary lessee from subletting an apartment.


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