Commercial Tenant Sues After Coop Board Rejects Installation of Outdoor HVAC

Did Board Unreasonably Withold Consent/ Breach Fiduciary Duty?

Heykal Properties, LLC, a commercial tenant of Unit 2S in a commercial cooperative building, assert causes of action against the board of 450 West 31St. Owners Corp. and board member Karen Atta for breach of fiduciary duty in rejecting Heykal’s’ proposals to install an HVAC on an outdoor space adjacent to the leased unit. The motion by the board and Atta for summary judgment was denied. And they appealed.

The proprietary lease provided that, to make alterations to a unit, a lessee must first obtain the written consent of the lessor, “which consent shall not be unreasonably withheld.” Where a “reasonableness” standard is imposed, the actions of the board and its members must be legitimately related to the welfare of the cooperative. The board contended that Heykal’s alteration plans were reasonably rejected because the plans sought to use a common element of the building for the tenant’s own exclusive use, and there were concerns about whether the space was structurally sound for the proposed alterations. The board moved for summary judgment..

The building’s governing documents (i.e. the offering plan and proprietary lease) were ambiguous as to whether Unit 2S had exclusive use of the adjacent outdoor space. The offering plan as amended only designated the 12th floor penthouse as having additional outdoor space, although the board conceded that other units in the building had exclusive outdoor space. However, Paragraph 1 of the proprietary lease provided that the term “unit” included terraces and balconies allocated exclusively to the occupant of the unit. Paragraph 7 of the lease provided that if a terrace or balcony was included, the tenant shall have exclusive use of it, referring to terraces and balconies in the plural.

Where a contract is ambiguous, extrinsic evidence may be considered to determine the parties’ intent.. Here, extrinsic evidence supported Heykal’s contention that it had a right of use of the adjacent outdoor space. The only access was through double doors in Unit 2S, which also supplied the electrical and fire alarm connections to the outdoor space. Moreover, a prior tenant litigated the same issue in 1999 and obtained a preliminary injunction based, in part, on the sponsor’s affidavit that the outdoor space adjacent to Unit 2S was for its exclusive use.

Thus, triable issues of fact precluded the board’s motion for summary judgment on its claim that Heykal’s alteration plans for the outdoor space were reasonably rejected on the basis that the space was a common element and not available for a single shareholder’s use. Similarly, Heykal raised an issue of fact as to whether the board’s actions were legitimately related to the welfare of the cooperative by submitting photographs revealing exclusive use by another unit of its adjacent outdoor space to install air conditioning. Although the board cited an engineer’s structural report from the prior litigation, they submitted no structural evidence with respect to the alteration plans.

And Heykal raised a triable issue of fact as to whether Atta, as a member of the board, improperly exerted her influence for personal gain, in breach of her fiduciary duty. Although Atta contended that she properly recused herself from the initial vote on Heykal’s alteration plan and disclosed her personal interest in the matter since her unit would be directly affected, correspondence among the board members and the board meeting minutes indicated her continuous presence at discussions regarding the HVAC proposals and her vocal opposition to Heykal’s’ use of the space. The record also revealed that the board tried to condition approval of Heykals’ alteration plans on the relinquishment of any right of use to their adjacent outdoor space 

  The appeals court affirmed  denial of the motion by the board and Atta for summary judgment.

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