A decision of the Appellate Division, 1st Department issued at the end of February 2019 may be a real game changer for cooperatives that have individuals who own units as holders of unsold shares. In a brief decision in Pastena vs. 61 West 62nd Street (Read decision here), the court wrote that paragraph 38 of the proprietary lease – the paragraph that typically grants special rights to a holder of unsold shares such as exempting “holders of unsold shares from certain expenses and fees assessed by the landlord, is void as a matter of law.” The Court did not explain its rationale.

In Pastena, the shareholder claimed to be exempt from the cooperative’s sublet fees and consent requirement as both an original purchaser and holder of unsold shares. The cooperative argued that plaintiff was not a holder of unsold shares under the cooperative’s documents and further, any special status granted to plaintiff, would violate business corporation law 501(c) which prohibits unequal treatment of shares in the same class of stock.

Although the Court found that plaintiff did not prove he was a holder of unsold shares, the Court went on to state that holder of unsold share status under paragraph 38 is void as a matter of law (Assuming plaintiff would have proven he met the definition of a holder of unsold shares under the corporate documents). This holding is far reaching in that it strikes down many of the special privileges enjoyed by a holder of unsold shares. Implicit in the court’s decision is that any special privilege granted to a holder of unsold shares would be void (though the Pastena decision dealt primarily with the exemption from sublet fees.) This means that a holder of unsold shares must obtain consent for sublets and sales and pay all associated fees. It is not clear that exemptions from flip taxes will be struck down because the business corporation law specifically allows for unequal treatment of those fees. Also, bear in mind that the courts have historically drawn distinctions between a plan’s sponsor and a holder of unsold shares and upheld the Sponsor’s special treatment under corporate documents. There is no reason to believe at this time that the decision is applicable to sponsors.

We will continue to keep you apprised as the Court’s apply this decision in the future. If you have any questions as to how this decision may affect your building, please give us a call to discuss.