An important concern for co-op and condominium boards and managers is obtaining reimbursement of legal fees incurred by the entity from apartment owners, where appropriate and warranted, so that all apartment owners do not bear the burden of legal fees attributable to the actions or omissions of only one or a few apartment owners. To that end, co-op proprietary leases and condominium by-laws generally provide for such reimbursement when legal fees result from the default of or act/omission by an owner. Nonetheless, legal fees remain difficult to recover from apartment owners, and reimbursement provisions are subject to strict scrutiny by the courts and (with regard to co-ops) statutory constraints. See generally Richard Siegler and Eva Talel, “Legal Fee Recovery When Disputes Arise with Apartment Owners,” NYLJ (March 4, 2009) p. 3, col. 1.

This column updates the earlier one cited above, and discusses a recent Appellate Division, First Department, decision limiting legal fee recovery rights of co-ops, statutory provisions limiting such recovery, and provides guidance to boards, managers and counsel in light of the same.

Legal Fee Recovery Provisions: The First Department Speaks. On Nov. 8, 2018, the First Department in Krodel v. Amalgamated Dwellings, 2018 WL 5831028, unanimously held, as a matter of law, that a proprietary lease providing for payment of attorney fees to a co-op even if it is the defaulting party is unconscionable and unenforceable as a penalty. The First Department noted that while it had not previously addressed enforceability of such a provision, motion courts had addressed similar provisions and found them to be unconscionable, citing Weidman v. Tomaselli, 81 Misc.2d 328 (Rockland County Ct 1975), aff'd, 84 Misc.2d 782 (App. Term, 2d Dep't 1975) (“effect of such clause (was) to permit the petitioner (landlord) to exact tribute from the respondents (tenants) for the petitioner's legal proceedings, successful or not”); East 55th St. Joint Venture v. Litchman. 122 Misc.2d 81, 85-86 (Civ. Ct. NY Co. 1983), aff'd, 126 Misc.2d 1049 (App. Term, 1st Dep't 1984).

In Krodel, the apartment owner commenced several proceedings against the co-op beginning in 2014 (the court document list as of Dec. 15, 2018 reflects no fewer than 495 entries), seeking, among other things, to compel the co-op to issue shares to her for an apartment she purchased from her former husband as part of their divorce proceeding/settlement. The owner initially refused to pay a required “flip-tax,” but did so after she commenced her proceeding against the co-op. The motion court, addressing the co-op's motion for summary judgment on its counterclaim for attorney fees and plaintiff's motion to dismiss it based on the co-op's alleged default in not initially issuing the shares to her, dismissed the co-op's counterclaim as unenforceable, finding that the legal fee provision in the proprietary lease created a disincentive to apartment owners to pursue their rights and had a “chilling effect” on the same. Krodel, 152176/2014, NYSCEF Doc. No. 376.

Importantly, it appears that neither in the motion court nor in the First Department was an applicable New York state statute—which addresses the courts' concerns and could have resulted in preserving enforceability of the lease provision while balancing the rights of all 236 co-op apartment owners—sufficiently considered.

Real Property Law Levels the Playing Field—Statutory Reciprocity. Section 234 of the Real Property Law, which is applicable to co-ops (but not condominiums), provides that if a residential lease permits a landlord to recover legal fees incurred in any action or proceeding arising out of the lease, the tenant is also entitled to recover legal fees if it successfully defends or prosecutes an action arising out of the lease. N.Y. Real Prop. Law §234 (McKinney 2006).

The purpose of §234 is to level the playing field between landlords and tenants, creating a mutual obligation that acts as an incentive to resolve disputes expeditiously and without undue expense. The statute effectively grants tenants the same reciprocal benefit, as an independent statutory right, that the lease grants landlords, thereby discouraging both parties from engaging in frivolous litigation. However, recovery of legal fees by condominiums is governed by the entity's by-laws. There is no landlord/tenant relationship and thus §234 does not apply. However, by-laws may give condominium apartment owners reciprocal rights to recover attorney fees.

Respectfully, and with no criticism intended, had §234 been applied in the Krodel case, there may not have been a nullification of the provision at issue—one that is commonly used in proprietary leases. Instead, a determination would have been made as to whether either party was entitled to legal fees based on whether and to what extent each had prevailed. The decision/transcript in the motion court reflects that the court did determine that a flip tax was not collectible from the apartment owner and that legal fees should not be awarded to the co-op—a result that could have been reached by applying §234, without the First Department's subsequently declaring the lease's legal fee provision to be unenforceable. (The motion court was careful to state that “I am not going to go so far as to say this [legal fee] provision as a whole should be stricken and never used in any other proprietary lease.” Krodel, 152176/2014, supra.)

Conclusions and Recommendations

Many co-op proprietary leases have provisions similar to the one nullified by the First Department in Krodel, so what is a prudent board to do? First and foremost, boards should review their building's lease/legal fee provision with counsel. Possible solutions could be to imbed in the proprietary lease's legal fee provision the same reciprocity language contained in §234, or to add a prevailing-party provision, and thus balance the legitimate needs and expectations of all apartment owners without relying on the degree of court consideration accorded to §234. Although amending a lease can be difficult and costly because it requires consent from a super-majority of apartment owners, the alternative—living with the risks of what may be an unenforceable legal fee provision—may nonetheless warrant amending the lease.

Eva Talel is a partner at Stroock & Stroock & Lavan and an adjunct professor at New York Law School. Margaret Jones, a legal analyst at Stroock, assisted in the preparation of this column. Stroock is counsel to the Real Estate Board of New York.