Holders Of Unsold Shares and Sublet Fees – Is the Proprietary LeaseParagraph Which Exempts Holders of Unsold Shares from Sublet FeesVoid As A Matter of Law?

Cooperative Offering Plans and Proprietary Leases typically grant Holders of Unsold Shares greater rights than other tenant-shareholders. For example, a Holder of Unsold Shares in a cooperative is often exempt from board approval and fee requirements for sublets. The Appellate Division, First Department in Pastena v. 61 W. 62 Owners Corp., 169 A.D.3d 600 (1st Dept. 2019), rendered a decision wherein the Court issued the following dictum (i.e. a gratuitous assertion of law made by a court that, in the end, is not material to the holding): A proprietary lease, which purportedly exempts Holders of Unsold Shares in a Cooperative from certain expenses and fees assessed by a cooperative, is void as a matter of law.

In Pastena, the First Department shocked real estate lawyers by issuing a decision wherein it stated that paragraph “38” of the proprietary lease at issue in that case, which paragraph bestowed special rights on Holders of Unsold Shares, was void as a matter of law.

What is most significant about the Pastena case is that the provision actually at issue in the case was paragraph “39” (not “38”) of the proprietary lease. Paragraph “39” dealt with the payment of administrative fees on a transfer, and provided special rights to original purchasers in the cooperative, as opposed to subsequent purchasers. In New York, courts have held that proprietary lease clauses granting special rights to original purchasers, as opposed to subsequent purchasers, are invalid because they effectively create two classes of stock in the cooperative in violation of the Business Corporation Law.

The rights of Holders of Unsold Shares was not an issue before the court in the Pastena case. Nonetheless, the First Department opined that a lease clause which purportedly exempted Holders of Unsold Shares in a Cooperative from certain expenses and fees assessed by a cooperative, is void as a matter of law. The fact that the Court rendered an assertion of law regarding a proprietary lease paragraph dealing with the rights of Holders of Unsold Shares when that issue was not before the Court, renders that assertion of law mere dictum, as opposed to a legal holding. The significance in that legal distinction is that dictum does not have to be obeyed by other courts, it just has to be given a respectful consideration.

Thus, while the Pastena Court’s decision exists, it can virtually be guaranteed that when a future plaintiff relies on it to argue that a proprietary lease cannot legally confer special rights on a Holder of Unsold Shares, counsel for the Holder of Unsold Shares will certainly argue that the Pastena Court did not have a basis to address that issue. This will certainly be an issue that will have to be addressed by the Second, Third and Fourth Departments of this state, and, if those Departments issue varying decisions, ultimately by the Court of Appeals.

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