Earlier this year, a survey of co-ops and condos indicated a surge of litigation between boards and building
residents. Such lawsuits can be very costly for both the resident and the building. One important deterrant to frivolous or unnecessary lawsuits is the ability of the prevailing party to recover at least part of their legal fees from the losing party.
In one well-known case, a co-op shareholder refused to pay the cost of installing window guards in his apartment, an expense that was his responsibility under the proprietary lease. Apparently concerned with the precedent that would be set if its right of collection was not enforced, the board sued and won summary judgment. Two appeals and several court hearings later, the co-op was awarded $30,000 in legal fees in addition to the original $919 owed for the installation cost.
Most proprietary leases and condominium by-laws do authorize the board's recoupment of attorney's fees in the event it prevails in litigation with shareholders or unit owners. However, the circumstances under which recovery is permitted are often limited. Under New York State law, a successful litigant may not recoup his attorney's fees from a losing party unless such a recovery is specifically permitted by contract or statute.
Only in Default Cases
Courts have taken a restrictive stance toward the standard lease provision in co-ops regarding attorney's fees, holding that the board's right to recoup attorney's fees is triggered only when the suit is predicated upon a lease default. In the leading case on this issue, a former shareholder paid his flip tax under protest and then sued for reimbursement, claiming the transfer fee was illegal. Although the flip tax was upheld, the co-op's claim for reimbursement of attorney's fees was denied on the grounds that the shareholder was never in default, since he had paid the money owed, but under protest.
Thus, under a typical proprietary lease provision, a successful co-op board cannot recover attorney's fees where the underlying controversy entails a claim for ordinary money damages, injunctive relief or a judicial declaration of the parties' rights relative to a specific dispute.
In a condo, the typical by-law provision relating to recovery of attorney's fees against unit owners exists only in the context of collecting common charge arrears. Thus, the condominium association's ability to recoup such expenses is similarly limited. While actions for ordinary money damages, injunctive relief and declaratory relief between boards and building residents are relatively commonplace, the standard attorney's fee provision falls far short of providing the association with complete relief.
Other Restrictions
In order to recover attorney's fees, the board must demonstrate that it has prevailed in the lawsuit, receiving a substantial portion of its requested relief. For instance, in one case, a co-op board obtained a judgment for $7,000 in maintenance arrears against a shareholder, but failed to establish its entitlement to an additional $7,800 in claimed late fees. The court held that, Since landlord has not prevailed on the issue of late charges, which represented a substantial portion of the arrears sought in the petition, it should not be deemed a M-prevailing party' entitled to the recovery of attorney's fees under the prop ffb rietary lease.
Another limitation set forth in the typical proprietary lease clause regarding collection of attorney's fees is that it does not allow recovery of any fees incurred prior to the commencement of a formal action or proceeding. Thus any pre-action analysis, legal research, strategy sessions, settlement conferences, correspondence and preparation of predicate notices would not be recoverable.
Finally, the typical lease provision stipulates that only reasonable legal fees may be awarded. This means that the board is required to show at a hearing that the fees sought to be recovered were actually incurred, and that they were appropriate in light of the nature of the litigation and quality of services rendered. The reasonableness restriction gives courts broad discretion to severely limit the size of any fee award.
Provisions Can Be Amended
Boards should carefully analyze the scope of their attorney's fee provisions as well as the manner in which they are drafted before attempting to recover any fees incurred. In addition, they should consult the building's attorney as to the feasibility of amending the provisions to increase their chances of recovery. Although such amendments would theoretically restrict shareholder and unit owner rights, residents may be convinced to support the idea on the grounds that it can protect the building from frivolous lawsuits and make legal costs the responsibility of the losing party in any lawsuit. This is especially appealing in buildings where one or two residents account for most of the litigation costs being incurred by the board.
One caveat may be in order for any co-op board considering amending its proprietary lease to expand coverage of the attorney's fee provision. Real property law section 234 gives a residential tenant the statutory right to recover reasonable attorney's fees incurred as a result of landlord's breach of any of its lease obligations or in the successful defense of any litigation commenced by the landlord arising out of the lease. The lease also permits the landlord to recover attorney's fees incurred as the result of the failure of tenant to perform any agreement contained [in the lease.]
Although this statute does not explicitly permit the tenant to recover legal fees incurred with respect to an ordinary action against the landlord for money damages, declaratory relief or an injunction, its purpose is to give residential tenants the same right to recovery of attorney's fees as the landlord is given. Thus, any attempt to expand coverage of the attorney's fee provision in favor of the landlord might well result in the same expanded coverage for shareholders who prevail in litigation against the co-op.
Mr. Cholst is a partner at Rosen & Livingston, a Manhattan law firm specializing in the representation of co-op and condo boards.
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