In most instances, decisions of a cooperative board are reviewed by courts under the business judgment rule. The business judgment rule provides that a court should defer to a cooperative board’s determination so long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith. But where a provision of a proprietary lease provides that the cooperative board’s consent “shall not be unreasonably withheld,” the board cannot justify its refusal to provide consent simply by arguing that it exercised “business judgment” in reaching its determination. Rather, the board must specify its objections and lay them open to scrutiny before the court.

By its December 20, 2016 decision in Estate of Helen Del Terzo, Michael Del Terzo and Robert Julius Del Terzo v. 33 Fifth Avenue Owners, Corp. __ N.E.3d __ (2016), the Court of Appeals affirmed this concept by holding that a board’s denial of a transfer application breached the controlling provision within the subject proprietary lease, which provided that a transfer from a deceased shareholder’s estate to a financially responsible family member “shall not be unreasonably withheld.”

The Estate of Helen Del Terzo sought to transfer shares allocated to two apartments within the building and the related proprietary lease to the sons of the deceased shareholder, Michael and Robert Del Terzo. The board denied the application even though its president admitted that the Del Terzo family had been good citizens in the building community for almost 60 years; that the family had never been late for even one maintenance payment; and that Michael, a wealthy doctor, was financially responsible.

The board sought to justify the denial on the ground that Robert was not financially qualified and that Michael’s continued residence in Pennsylvania would violate the board’s policy that apartments be owner-occupied. However, those justifications were unreasonable because the board did not respond to Michael’s written offer to guarantee Robert’s financial obligations under the lease; Michael and Robert would be jointly and severally liable for all financial obligations under the terms of the lease; and the board regularly allowed shareholders to sublease their apartments in violation of the board’s owner-occupancy policy.

Smith, Buss & Jacobs commenced an action on behalf of the Del Terzo family against the cooperative in Supreme Court, New York County alleging that the board’s denial of the transfer application was a breach of the proprietary lease. The trial court granted summary judgment to the family holding that the board’s denial of the application was unreasonable, and issued a judgment directing the board to approve it. The cooperative appealed. By a 3-2 decision, the Appellate Division, First Department affirmed, and additionally ruled that the cooperative was liable to the Estate for the attorneys’ fees the Estate had incurred in the dispute under a provision within the proprietary lease. The Court of Appeals unanimously affirmed the First Department’s decision.

The Court of Appeals’ decision makes it crystal clear that where a provision within a proprietary lease requires a board to act “reasonably,” the board must identify viable reasons that support its decision in the event the decision is challenged in court.