New bill could give co-ops free reign over attorney fees

New York co-op shareholders who value their rights should be very concerned about proposed New York state legislation to exempt co-operative housing corporations from a new law prohibiting landlords from charging attorney fees to tenants, except pursuant to a court order.

The new law apparently applies to co-ops as well, but Gov. Kathy Hochul — in signing the bill into law on Dec. 21 — asserted in a memorandum her expectations the bill will be amended to “clarify” that co-ops “can impose legal fees on shareholder.”

I oppose the proposed amendment.

Exempting co-ops from a law prohibiting landlords from charging attorney fees to tenants without a court order would suggest that co-ops may charge such fees to shareholders — and that suggestion conflicts with current law. Let me explain.

Litigants are generally required to pay their own attorney fees unless otherwise provided by law or contract. The courts have held, however, that co-op proprietary leases — as well as other types of contracts — that provide for attorney fees to be awarded to one particular party in litigation regardless of the court outcome are “unconscionable” and unenforceable on the grounds that enforcing such provisions “would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation, and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default,” according to a 2018 decision, Krodel v. Amalgamated Dwellings.

An attorney fees claim associated with co-op-shareholder litigation is required to be adjudicated by a presumably impartial court based on a legal determination as to whether requiring one party to pay another party’s attorney fees is mandated by law or by the lease — to the extent that enforcement of the lease is not deemed unconscionable, and the amount of fees is deemed reasonable.

The proposed legislation — which could be read as giving co-ops carte blanche to unilaterally determine their entitlement to attorney fees and the amount thereof — conflicts with the legal principles articulated in Krodel v. Amalgamted Dwellings.

Given the one-sidedness of typical co-op leases, co-op shareholders need the legal protection afforded by those principles. There is, for example, an inartfully drafted attorney fees clause commonly used in New York co-op leases that appears to say that a co-op can collect litigation-related attorney fees from a shareholder if the lawsuit is related to “default” by the shareholder — regardless of whether the co-op actually prevails.

In addition, because the clause only requires that fees be “incurred” — as opposed to “paid” — co-ops can easily inflate their attorney fee claims. Taking this clause literally can result in an extremely unfair outcome.

For example, if a co-op sues to evict a shareholder based on one late maintenance payment without following prerequisite pre-eviction procedures and loses in court, the co-op can claim under the proprietary lease that it is entitled to attorney fees because the shareholder was in “default” by being late with one maintenance payment.

Such a result, thankfully, would be deemed unconscionable and unenforceable.

The passage of this particular bill into law, however, could embolden a co-op to posit that because no court order is necessary, it can charge attorney fees to a shareholder simply because it can — regardless of whether its claim to attorney fees would be deemed unconscionable or otherwise meritless by a court of law. And the shareholder would, in a practical sense, be powerless to legally challenge an attorney fee charge devoid of any legal basis.

If, as Gov. Hochul stated in her memorandum, the new law “will protect tenants from increasingly expensive and unwarranted fees,” why shouldn’t co-op shareholders be accorded the same protection? Passing a law that suggests that co-ops can, at will, charge attorney fees would unfairly and severely impinge on the ability of shareholders to sue co-ops, and to defend themselves against co-op lawsuits.

Although the vast majority of co-op shareholders will never be involved in litigation with their co-ops, giving co-ops the perception of unfettered right to charge attorney fees potentially affects all co-op shareholders in New York state in that it renders the power dynamic between the co-op and the shareholder intenably lopsided in favor of the co-op.

If you share my concerns, I urge you to contact your elected state representatives.

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