This was originally published on the SGR Blog.
Proprietary leases for units at residential cooperatives often prohibit an assignment of the lease without the prior written consent of the board of managers. But what are the ground rules if the unit is owned by a limited liability company; the interests in the LLC are assigned: and the lease does not expressly prohibit or require board approval for such an assignment?
A recent case addressed the question: Does a change in the beneficial ownership of an LLC/lessee violate a provision of a proprietary lease which required board approval for any assignment of the lease or the shares appurtenant thereto, “including any interest therein,” but did not expressly prohibit changes in the beneficial ownership of the lessee?
Big Deal Realty on Greene Street, Inc. is the owner of a cooperative building located at 133-137 Greene Street, New York, New York. 60G 133 Greene St. Owners, LLC, is a proprietary lessee and shareholder of the co-op.
In February 2000, the board of the co-op approved a mandatory flip tax of 1% to be paid by a selling shareholder. At the annual meeting on November 8, 2000, the co-ops’ shareholders voted to ratify and implement the flip tax.
60G acquired two shares of the co-op appurtenant to the leasehold comprised of Unit 1 and the basement unit for $40 million. Upon its acquisition of the shares, 60G agreed to be bound by the co-ops’ governing agreements.
Paragraph 16 of the proprietary lease provides that:
And, pursuant to Article V, Section 5 of the by-laws, the board is authorized to implement and enforce conditions in connection with an assignment or transfer by a lessee of any interest in a lease or the related shares.
In the Fall of 2018, the prior owners of 60G conveyed the entire ownership interest in 60G to a lender to satisfy a debt in lieu of a foreclosure. 60G did not assign its interest in the lease or the shares or any interest in either the lease or the shares.
The change in beneficial ownership of 60G triggered two real estate tax payments: (i) New York City Real Property Transfer Tax of $802,712.15 and (ii) New York State Real Estate Transfer Tax of $122,320.00. Both payments were made.
The board asserted that the transfer of the beneficial ownership of 60G was either invalid because the board did not consent to such transfer or otherwise required payment of the flip tax which was not paid. The board alleged that 60G not only failed to make the payment but also failed to notify the board of the transfer.
The board sued 60G and sought a declaratory judgment and damages for breach of contract alleging (i) the transfer was invalid from its inception because 60G failed to obtain board approval, or (ii) in the alternative, if the transfer is not deemed null and void, 60G’s failure to seek board approval or pay the flip tax constituted a breach of the lease and by-laws and the board was therefore entitled to terminate 60G’s interest in the lease and shares and/or recover the flip tax.
60G moved to dismiss the complaint because Paragraph 16 of the lease was not violated because 60G did not transfer anything at all, and changes in beneficial ownership of lessees did not require approval or payment of the flip tax. In its opposition papers, the board argued that it had sufficiently alleged a transfer of an interest in the lease or the shares.
The Court rejected the board’s arguments.
A transfer of an interest in a tenant does not constitute an assignment of a lease absent a contractual provision which provides otherwise. A landlord entering a lease with a corporate tenant is presumed to know that it is an artificial entity with a life distinct from the individuals who may from time to time be its owners. If a landlord wished to protect itself against such changes, it could easily write into the lease a condition subsequent. But one cannot be implied.
The co-op could have provided that transfers of interests in the tenant required board approval and payment of the flip tax–but did not do so.
The lease was not violated. The clear and unambiguous language of the lease provides that “the Lessee shall not assign this lease or transfer the shares to which it is appurtenant or any interest therein”. 60G, did not transfer its interest in the proprietary lease or transfer the shares appurtenant to the lease. Nor did it transfer “any interest therein”. Here, the transfer was a transfer of an interest in the lessee itself and the lease did not proscribe any such transfer without board approval or otherwise require payment of the flip tax upon any such transfer. By contrast, the NYC Administrative Code and the New York State Tax law specifically provide that a transfer or acquisition of a controlling interest in any entity that owns an interest in real property (i.e., a change in beneficial ownership) is a triggering event requiring payment of the real estate transfer tax.
The board failed to point out a provision in the lease or by-laws that transfers in ownership of the lessee were proscribed without board approval or that the flip tax was otherwise due upon such transfer. The Court would not rewrite the flip tax rule under the guise of interpretation, Because there was no restriction on the transfer of beneficial ownership of a lessee, the transfer was valid without obtaining board consent and no flip tax was due.
60G’s motion to dismiss was granted.