Brabert Realty Co. v. 20125 Owners Corp., 86 Civ. 5977(PNL).

• Decision Date: 18 January 1989
• Docket Number: No. 86 Civ. 5977(PNL).,86 Civ. 5977(PNL).
• Citation: 703 F. Supp. 314
• Parties: BRABERT REALTY CO., Plaintiff, v. 20125 OWNERS CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

703 F. Supp. 314

BRABERT REALTY CO., Plaintiff, v. 20125 OWNERS CORP., Defendant.

No. 86 Civ. 5977(PNL).

United States District Court, S.D. New York.

January 18, 1989.

Stroock & Stroock & Lavan, New York City (Robert J. Zastrow, Alyssa Walden, of counsel), for plaintiff.

Galef & Jacobs, New York City (Alan Warshauer), of counsel, for defendant.

OPINION AND ORDER

LEVAL, District Judge.

Plaintiff, Brabert Realty Co. ("Brabert") moves under Rule 56, Fed.R.Civ.P., for summary judgment voiding a Notice of Termination of Lease served on it by defendant 20125 Owners Corp. ("Owners Corp."). Defendant cross-moves for summary judgment enforcing the asserted Termination of Lease and dismissing the complaint.

Background

The action arises from the conversion of a residential apartment building located at 201 East 25th Street, New York, from rental property to cooperative ownership, on May 15, 1984. Plaintiff Brabert was the former owner and sponsor of the conversion. Owners Corp. became the new owner of the building. Under a Master Lease ("Lease") executed that day, Owners Corp. leased to Brabert an indoor parking garage in the basement of the building ("Garage") and a store facing Third Avenue (the "Commercial Space").¹ The Lease was for an initial term of twenty-five years, with an option to renew for a second twenty-five year term, at an annual rent of $100,000. The Lease does not allocate the $100,000 rent as between the Commercial Space and the Garage.

At the time Owners Corp. entered into the Lease, it was controlled by Brabert through nominees he had appointed as officers and directors. Over five weeks later, on June 27, 1984, the shareholders elected a new board of directors, replacing those appointed by Brabert at the time of conversion, so that Owners Corp. was no longer controlled by the sponsor.

On May 28, 1986, Owners Corp. served notice that it had elected, by a vote of more than 89% of the eligible shareholders, to terminate the Lease. Brabert brought this suit challenging the validity of the termination.

Discussion

The question whether the lease termination is valid is governed by the Condominium and Cooperative Abuse Relief Act of 1980, 15 U.S.C. §§ 3601-3616 ("the Act"), which was enacted to confer protections on tenants in the cooperative conversion process. See H.R. Conf. Rep. No. 96-1420, 96th Cong., 2d Sess. 4 reprinted in 1980 U.S.Code Cong. & Admin.News 3506, at 3707. Section 3607(a) of the Act provides cooperative apartment owners with a method of terminating certain long term self-dealing arrangements by sponsors or developers. It provides as follows:

Operation, maintenance, and management contracts; penalty

(a) Any contract or portion thereof ... which

(1) provides for operation, maintenance, or management of a condominium or cooperative association in a conversion project, or of property serving the condominium or cooperative unit owners in such project;

(2) is between such unit owners or such association and the developer or an affiliate of the developer;

(3) was entered into while such association was controlled by the developer through special developer control or because the developer held a majority of the votes in such association; and

(4) is for a period of more than three years, including any automatic renewal provisions which are exercisable at the sole option of the developer or an affiliate of the developer,

may be terminated without penalty by such unit owners or such association.

(b) any termination under this section may occur only during the two-year period beginning on the date on which—

(1) special developer control over the association is terminated; or

(2) the developer owns 25 per centum or less of the units in the conversion project, whichever occurs first.

15 U.S.C. § 3607(a), (b).

This case raises two issues: whether the termination of the Lease occurred within the applicable statute of limitation, 15 U.S. C. § 3607(b); and whether this Lease is terminable under the Act. 15 U.S.C. § 3607(a).

I.

The timeliness of the termination turns on whether it occurred within two years of the end of "special developer control."² Special developer control is defined in Section 3603(22) of the Act as

any right arising under State law, cooperative or condominium instruments, the association's bylaws, charter or articles of association or incorporation, or power of attorney, or similar agreement, through which the developer may control or direct the unit owners' association or its executive board.

15 U.S.C. § 3603(22).

Brabert argues that special developer control ended on May 15, 1984, the date the building was converted, more than two years prior to the June 27, 1986 Notice of Termination of Lease. Owners Corp. contends that Brabert continued to hold special developer control until the first meeting of shareholders on June 27, 1984, when a new board was elected to replace the sponsor's nominees. Defendant's argument is supported by the terms of the Offering Plan,³ the By-laws of Owners Corp.,⁴ and Section 404 of the Business Corporation Law of the State of New York.⁵

I find no basis for plaintiff's contentions. Until the June 27, 1984 election of new directors, Brabert in fact controlled the board through its nominees. This constituted special developer control. Accordingly, the Lease "was entered into while such association was controlled by the developer through special developer control," and the termination of the Lease on May 28, 1986 occurred within two years of the end of special developer control. See 181 East 73rd Street Co. v. 181 East 73rd Tenants Corp., 87 Civ. 3362 (RO) (S.D.N.Y. April 27, 1988) 1988 WL 45634 (at the time the tenants elected a new board of directors replacing those appointed by the sponsor, Tenants Corp. was no longer controlled by the sponsor). The termination was timely.

II.

The second issue raised is whether the Garage and Commercial Space is "property serving the ... cooperative unit owners." Only contracts affecting such property are terminable under the Act. In West 14th Street Commercial Corp. v. 14th Street Owners Corp., 815 F.2d 188 (2d Cir.), cert. denied, ___ U.S. ___, 108 S.Ct. 151, 98 L.Ed.2d 107 (1987), the Court of Appeals considered whether termination of leases for an on-site garage (which was open to the public but with preferences for the owners), a laundry room, and four retail establishments fell within the scope of Section 3607. The court held that "a parking garage, with or without tenant preferences, provides a service that tenants might reasonably expect as an essential adjunct of their apartment complex." Id. at 198-99. Thus, the garage lease was found to be a contract for "property serving" the unit owners within the meaning of the Act, and therefore properly terminable. The four retail stores open to the public, however, were found not to be "property serving" the unit owners, and therefore not terminable under the Act. That ruling controls this controversy.

This case presents a Lease a portion of which, covering the Garage, is properly terminable under Section 3607, and a portion covering the Commercial Space is not. Plaintiff argues that the Notice of Termination should be declared invalid because a portion of the Lease is not properly terminable under the Act. Defendant argues that, because the terminable and the nonterminable were inseparably mixed together, the entire Lease is subject to termination.

Plaintiff relies on King v. 415 Second Owners Corp., 86 Civ. 4800 (JMW), ___ F.Supp. ___, (S.D.N.Y. Oct. 14, 1987), and Cromwell Associates v. Oliver Cromwell, Inc., 87 Civ. 784 (JMC) 705 F.Supp. 116, (S.D.N.Y. July 11, 1988), for the proposition that a notice of lease termination is void if it seeks to terminate a lease covering both terminable and non-terminable premises. Those authorities may be distinguishable— Cromwell on the ground that the statute of limitations had not yet run at the time of the decision so that the cooperative association retained the opportunity to terminate "portions" of the master lease, and King on the ground that the issue of partial enforcement was not argued to the court. In any event, I decline to follow those decisions.

The Act recognized, and undertook to remedy the serious potential for abuse that arises during the course of conversion when the sponsor, exercising temporary "special developer control" of the...