New York Business Litigation Lawyer Blog

New York’s highest court has ruled that the tax benefit program’s exemptions and abatements did not extend to the cooperative’s commercial tenant. In Barnan Assoc. v. 196 Owners Corp., the commercial-tenant Barnan Associates entered into a lease in 1979 with the then-landlord Robert Olnick Associates requiring the commercial tenant to pay 14.5% of the increase in real estate taxes paid over and above the base real estate taxes. After the lease was executed, Robert Olnick Association sponsored the building’s cooperative conversion and by 1981, the corporation was the building’s owner and landlord. More than a decade later, New York State enacted certain tax benefits targeting cooperative tenant-shareholders.

Since the 1998-1999 tax year, the tenant-shareholders have benefitted from a certain tax program under Real Property Law §§ 425 and 467-a, which come in the form of tax abatements and exemptions. In 2005, Barnan became aware that since the 1998-99 tax year, its yearly 14.5% share of the building’s billable taxes included the tenant-shareholder’s tax abatements and exemptions. Barnan claimed that it had been overcharged in tax rents as the corporation failed to deduct the tax abatements and exemptions paid to the tenant-shareholders from its proportionate tax liability and ultimately commenced this action to obtain reimbursement.

The Court of Appeals ruled that the terms of the lease determined whether Barnan was entitled to deduct the relevant tax abatements and exemptions from its tax rents. The Court found that the tax escalation clause “unambiguously states that the additional tax charged to Barnan applies to ‘any increase in such real estate taxes’ on the land greater than the ‘base amount of real estate taxes.’” The Court noted that the base amount is determined with reference to the defined term “base amount of real estate taxes,” which the lease required to be calculated “without regard or giving effect to any exception or abatement.”

The Court, therefore, ruled that it would be “illogical” to give effect to exemptions or abatements in calculating “the ‘increase in such real estate taxes’ and the resulting escalation.” The Court further noted that the tax benefit program did not decrease the corporation’s tax liability. Thus, the Court of Appeals reversed the appellate court and ruled that the corporation “properly increased Barnan’s rent pursuant to the tax escalation by 14.5% of the increase in real estate taxes, including the amount the corporation was required to pay the eligible tenant-shareholders pursuant to the tax benefit program.”

By Katherine Zalantis

The Appellate Division, Second Department in Di Fabio v. Omnipoint Communications, Inc., relied upon its 2006 first-impression decision (in Carter v. Nussbaum, 36 A.D.2d 176 [2d Dep’t 2006]) to dismiss a condominium unit’s owners lawsuit against his condominium board based upon the board’s decision to enter into a lease permitting Omnipoint to construct and erect a cellular telephone antenna on the condominium’s roof.

A Condominium unit ownership is a “hybrid from of real property, created by statute” as unit owners hold a real property interest in their units with an exclusive right of possession, as well as, an undivided interest in the condominium’s common element. After establishing that the relevant New York statute (Real Property Law § 339-dd) did not preclude an individual unit owner from suing a condominium sponsor or board for wrongs to unit owner’s interest or unit, the Carter court found that it was an “open question” in New York as to whether a unit owner could sue for damages to the common interest.

Ultimately, the Carter court found that individual unit owners lacked standing to sue individually for injury to common elements or finances. Such a suit, the Court reasoned, would open the door to “duplicative piecemeal litigation” (since each unit owner only has a fractional interest in the common areas) and would “engender potential conflicts” (between suits started by the condominium board and those by condominium unit owners).

Nonetheless, the Court ruled that condominium unit owners did have standing to bring a derivative action on behalf of the condominium. The Court likened the situation to a corporate entity in that a condominium board owes a “fiduciary duty” to the individual unit owners and therefore, condominium units are entitled to the same consideration afforded by Courts to other types of litigants allowed to bring derivative suits.

Applying Carter’s rationale, the Di Fabio Court dismissed the complaint against the board members based upon plaintiff’s lack of standing, but specifically ruled that the plaintiff was not precluded from starting a new litigation in a representative capacity on behalf of the condominium.

SZPITFALL This action highlights a potential pitfall for unit owners in redressing grievances over actions by condominium owners.

By Katherine Zalantis