Adam Leitman Bailey's Blog, page 14

Residential Building Laws & the COVID-19 Pandemic

By Adam Leitman Bailey and John M. Desiderio

The Covid-19 pandemic has confronted owners, managers and boards of New York City multifamily buildings with operational challenges not seen for a hundred years, since the so-called Spanish Flu pandemic of 1918 swept across the globe. The social distancing rules and restrictions imposed by governments at all levels have raised questions from boards and residents alike about the responsibilities and duties of both the managers and occupants of residential buildings.

In an effort to look at the short- and long-term legal implications and issues affecting multifamily living during the current pandemic — and shed light on how past generations coped with similar circumstances — we researched and analyzed court cases handling similar issues from the past, including the aforementioned Spanish Flu, as well as the Scarlet Fever epidemic of the mid-1800s and today’s COVID-19-related executive orders and federal and state case law and legislation.

Protecting the Health of Building Occupants

New York multifamily residential dwellings generally fall into three categories: rental, condominium, and cooperative apartment buildings. The primary responsibility of building managers, whether they be owners of rental buildings or the board members or managers of co-ops or condos, is to maintain the health and safety of their buildings and their occupants. According to Torres v. Ragonesi, 83 Misc.2d 84, 370 NYS2d 779 (NYC Civil Court, New York County 1975), the statutes and regulations governing residential buildings in the city provide that “…it is the responsibility of the owner of residential buildings to maintain the building, remove violations and insure that the tenants have habitable premises in which to live.”

Ownership or management is therefore required to maintain building common areas in compliance with the public health code. (See NYC Administrative Code §17-133 [Penalties] which states, “Every person, corporation, or body that shall violate or not conform to any provisions of the health code of the City of New York, or any rule or sanitary regulation made, shall be liable to pay a penalty not exceeding the maximum amount allowed by the health code of the City of New York.”).

In the context of the COVID-19 pandemic, the duty of owners and managers is to maintain the building and implement all necessary and appropriate precautions to protect its occupants and prevent the spread of disease. This duty was recognized long ago in Majestic Hotel v. Eyre, 53 AD 273, 65 NYS 745 (1st Dept. 1900) — a case involving an epidemic of scarlet fever where the Court declared:

“We doubt not, if the landlord was guilty of affirmative negligence, or negligently suffered acts to be done by which a contagious disease was introduced into a thickly-populated hotel or tenement house, or, upon the breaking out of a contagious disease upon the premises, if he, retaining and exercising a general control over the public parts of the house, should negligently omit to take precautions to prevent the spread of the epidemic, or otherwise to protect the tenants from contagion, when the means lay within his power so to do, a case might be made which would avail as a justification for the surrender of the premises.” (Emphasis added)

The Rights and Obligations of Occupants

Tenants, shareholders, unit owners, and other occupants residing or otherwise present in buildings within the zone of the pandemic are necessarily subject to all of the federal, state, and local social distancing guidelines and mandatory directives that restrict their activities.

In New York State, the primary restrictions on personal freedom of  movement and social interaction emanate from the executive orders of the Governor, under the authority given to him to declare a disaster emergency and — according to Executive Law §§28 and 29-a — to “issue any directive during . . . [an] epidemic, disease outbreak” that “must be necessary to cope with the disaster and may provide for procedures reasonably necessary to enforce such directive.” (Emphasis added).

Accordingly, between March 7 of this year and the date this article was written, Governor Andrew Cuomo has issued 20 executive orders impacting the operations of the hundreds of thousands of buildings in New York City. The orders have mandated the closing of bars and restaurants operating as commercial tenants throughout the City — many of them in apartment buildings — as well as all gym facilities, including amenity gyms within residential buildings, until further notice.

Leases for tenants in rental buildings and proprietary leases for shareholders in cooperative buildings — as well as § 339-d of the Condominium Act, Article 9-B of the Real Property Law — generally provide that lessees will comply with all laws, ordinances, orders, rules and regulations of the Federal, State and City governments, along with their various departments and bureaus. Fortifying this is case law like Crayton v. Larabee, 220 NY 493 (1917), which held that powers conferred by the Legislature upon local health officials to enforce a quarantine are liberally construed.

The upshot of this is that building managers and administrators must exercise all reasonable effort to comply with the Governor’s orders aimed at slowing the spread of the novel coronavirus and protecting the health and safety of all building occupants; both management and building residents alike are subject to enforcement of those orders by all local law enforcement authorities.

Potential Lawsuits Against Boards

While residents may chafe at being denied use of amenities like gyms, playrooms and public spaces, or at being compelled to observe pandemic-related restrictions on their movement and behavior, the Condominium Act and the law undergirding gubernatorial executive orders mean that any claims that these measures are in breach of the warranty of habitability or contract will likely fail in court.

Some boards have gone a step beyond simply shutting down fitness rooms and other common spaces, and banned all non-residents (with the exception of medical and other emergency personnel) from entering their buildings. In contrast to amenity-related lockdowns, these situations may present a cause of action, as blanket bans on all visitors may go beyond the breadth of the Governor’s orders. Even if they are legally actionable however, these visitor bans would have to result in demonstrable damages or harm to earn a significant monetary number. Any other argument to reinstate rights or reopen amenities will face the same test of A.) proving that ownership or management went beyond the powers granted them by the executive order(s), and B.) that damages occurred as a result of breaching this contractual right or warranty of habitability.

Looking to the Past to Clarify the Present

While the current pandemic has been called ‘unprecedented,’ there are in fact court rulings from generations ago that provide some insight into how cases arising out of the COVID-19 experience may be dealt with when social distancing eases and the courts fully “reopen for business.”

For example, the lessons taught so long ago by the Majestic Hotel v. Eyre, supra suggest that residents who left their “uninhabitable” New York City apartments to ride out the coronavirus pandemic in second homes upstate or in the Hamptons and have been hoping for an abatement or forbearance on their lease, maintenance, or common charges obligations, are going to find themselves disappointed. In the Majestic Hotel v. Eyre decision can be found the following comments, addressed to a tenant who abandoned his New York City apartment to ride out that era’s scarlet fever epidemic elsewhere:

“So far as physical surroundings were concerned, the apartments were as habitable when the defendant voluntarily vacated them as when they were leased. It is also clear that after the fever was discovered the usual precautions known to science were taken to isolate the cases and prevent the spread of the disease. There were about 400 persons occupying apartments under lease in the hotel at the time of the breaking out of the fever; and for the most part [they]…continued to remain and occupy their apartments, without detriment to either health or comfort. The defendant abandoned his apartments on account of the fear of contagion to himself and family. We are, therefore, to see if this is sufficient to excuse the payment of rent. We know of no ground upon which the payment of rent can be successfully resisted. ”

Other issues surrounding this pandemic involve the constitutionality of the Governor’s actions, and whether they will withstand legal attacks in the years to come. Can the courts be closed, except for a select list of emergency actions? Can a governor close down a city and require its citizens to be forced to stay inside their homes? The current public health and economic crisis have raised these and countless other complex questions at both macro and micro levels of governance and community administration. In Part II of this examination, we will explore how privacy, personal agency, and the Federal Fair Housing Act (FHA) intersect in the post-COVID multifamily landscape, and raise issues that boards and managers should have on their radar as we move forward into the ‘new normal.’

Adam Leitman Bailey is the founding partner of New York City-based law firm Adam Leitman Bailey, P.C. and John M. Desiderio is a Partner of the Firm’s Real Estate Litigation Group. This advisory is offered as a service to clients and friends of Adam Leitman Bailey, P.C. and The Cooperator and is intended as an informal summary of certain recent legislation, cases, rulings and other developments. This advisory does not constitute legal advice or a legal opinion and is not an adequate substitute for the advice of counsel.

This article was originally published on The Cooperator on 5/7/20.

Demolition: One of the Last Ways to Deregulate a Building

With the June 2019 passage of the Housing Stability and Tenant Protection Act (HSTPA), owners are desperately seeking ways out of rent regulation in an attempt to recapture the profitability their buildings previously had. Two such exit strategies are “substantial rehabilitation,” available only to deteriorated buildings, and “demolition,” generally available to rent-stabilized buildings regardless of their condition.

Administering Rent Regulation

Governing the demolition process is the DHCR’s Operational Bulletin 2009-1. This bulletin deals with demolition applications for three scenarios: rent control, rent stabilization, and non-New York City rent stabilization. The rules are radically stricter for rent-controlled apartments than for New York City rent stabilization. In these matters, the courts grant extreme deference to the DHCR. Under its administration, the DHCR has worked without a specific definition of “demolition,” but an intent to gut the interior of the building, while leaving the walls intact, has been held as sufficient. Use of the process is mandatory; self-help is prohibited. The building need not be razed to the ground.

Stipends

An essential part of the entire process is the system of stipends. The landlord has not only to be prepared to pay the stipends, but to prove to the DHCR it has the ability to do so.

Each tenant who is being evicted is entitled to receive from the landlord the tenant’s reasonable moving expenses. This means that in order to make the application, the landlord is going to have to come up with estimates as to what the moving expenses will be. Landlords can and must obtain from a moving company estimated costs based on room count for a move entirely within NYC. The moving expenses are in addition to the other stipend discussed below.

There are provisions for reducing the stipends, but these are based on tenant conduct, and the application process must assume that each tenant will receive the full stipend to which he is entitled. The deduction cannot be known at the time of the initial application because it consists of a reduction of one-sixth for each month the tenant stays past the time allowed under the order (and lease) to remain in the premises, a figure unknowable until the order has actually been issued.

In the stipending system, the landlord has three options:

Moving the tenant to a new apartment at the same or lower regulated rent near or in the building being built. For such tenants, the stipend is $5,000. This option entails the landlord finding the new apartment.
Moving the tenant to a more expensive apartment where the landlord prepays six years’ worth of the difference in rent. This option also entails the landlord finding the new apartment.
Using the stipend chart from the Operational Bulletin, where the landlord pays the tenant for a minimum of three rooms, the difference between the current rent and the chart’s stipend amount as adjusted by the RGB increases issued since the Operational Bulletin ($639.21 in 2019), multiplied by the number of rooms and further multiplied by 72. This, the most popular option, entails the landlord having no obligation to find the new apartment.

Tenants who would lose governmental benefits because of the stipends may waive them.

Special Consideration for Rent Control

Demolition is only a ground for removal from rent control if the landlord is putting up a new building that has at least 20 percent more apartments than the old building, except if the cost of repairing the violations in the building exceeds the assessed value of the building. Then it need not be more than one more apartment in the new building, unless the building is already largely vacant. The landlord must move the rent-controlled tenants to a new apartment. The building permits must already be in place. The landlord must demonstrate that there is no reasonable possibility that the landlord can make a net annual return of 8.5 percent of the assessed value of the subject property and that lower return is not the landlord’s fault.

The Steps

Not all buildings are well suited for a demolition application. Unlike “substantial rehabilitation,” there is no requirement that the building be in deteriorated condition in order to qualify for a demolition application. If a building is genuinely eligible for demolition treatment, the DHCR does not have the discretion to refuse the application.

Landlords will want to buy out rent-controlled tenants before anyone knows demolition is in the air. However, landlords must exercise extreme caution in these buyout negotiations as they can readily run afoul of the anti-harassment provisions of the law such as those found in the New York City Administrative Code.

It is not necessary to pre-approve loans, but the owner has to be able to demonstrate that either the deed owner of the building or a closely related entity has the wherewithal for the project, if not necessarily cash on hand. The DHCR examines not only the ability to pay for the tearing down of the building, but all of the other expenses associated with the project. The DHCR specifies in its publications what these expenses should minimally include.

The Application

The application is actually a fairly simple form to which one attaches such additional documents as appear useful. The agency’s discretion lies in determining whether to authorize a refusal to offer lease renewals based on whether:

The applicant has established financial ability to demolish building;
Plans for the undertaking have been approved by the appropriate agency; and
The applicant has complied with statutory provisions for the relocation of rent-stabilized tenants, reimbursement of moving expenses, and payment of stipends.

Neither the DHCR nor the courts will allow extensive discovery. Various proofs of financial ability are possible. If the financing is through a closely related entity, the landlord’s application should be explicit in setting forth that relationship.

Enough copies of the application must be provided to the DHCR for them to serve each tenant. Since the attachments can get lengthy, this can mean significant printing expenses. It is not necessary that the actual building permits be attached to the application as it takes so much time for the DHCR to go through its procedure in approving the application that the permits would become stale. However, where applicable, Certificates of No Harassment must be pulled as prerequisites to the permits and they too can become stale if pulled too soon. Such certificates are themselves a lengthy procedure, the details of which are outside the scope of this article. Any Golub or eviction notices already issued should be attached to the application. The application should include engineering and architectural plans with the financials including specific reference to those specific plans.

Once the application has been filed, the owner can immediately stop renewing leases. This requires issuing Golub notices to all the tenants. These are served in the normal rent stabilization methods, either by regular or certified mail.

The DHCR has exacting requirements for the contents of the Golub notice which drafters must precisely follow.

Rents cannot be increased for any reason during the pendency of the application. If the application is denied, the owner loses the increases that could have been charged and lease renewals are made on the usual 90-day notice to the tenants, with rents frozen until the offer is accepted. The DHCR will direct such other proceedings as it determines, which could even include evidentiary hearings, but will not necessarily include such hearings. The DHCR has historically taken an inordinately long time to process the application, but there are ways to facilitate the process.

The landlord selects apartments if using the two methods for calculating the stipends that entail selecting apartments. The tenant has a right to challenge the suitability of the selected apartment.

The landlord pays the stipends when the tenants move. Tenants’ delay or refusal to move reduces or eliminates their entitlement to the stipend and subjects them to eviction proceedings. Tenants have until the later of the expiration of their lease or the date set forth in the DHCR’s order to move out. If they do not move out on their own, the actual eviction of the tenants is by way of an ordinary holdover eviction proceeding in Civil Court. However, if the owner has a favorable decision from the DHCR, there is nearly nothing to prove in that proceeding, making it amenable to summary judgment.

Demolition proceedings before the DHCR are extremely technical and require precise adherence to the exacting requirements of the various laws. Expect these applications to take years and be battled in the courts. However, they are also one of very few options rent-regulated landlords have left to restore profitability to their properties and deregulate buildings with rent-regulated apartments in the aftermath of the new draconian laws.

 

This article was originally published on ApartmentLawInsider.com.

Third-Party Tenant Harassment Poses Dilemma For Landlords

By Adam Leitman Bailey and John Desiderio | April 07, 2020

New York common law has long shielded landlords from tort liability for intentional injury suffered by one tenant at the hands of another tenant, unless the landlord “has the authority, ability, and opportunity to control the actions of the assailant.” Britt v. New York City Housing Authority, 3 AD2d 514, 770 NYS2d 744, 745 (2d Dept. 2004).

The ‘Francis’ Decisions

However, this shield was recently pierced by the U.S. Court of Appeals for the Second Circuit in Francis v. Kings Park Manor, 944 F3d 370 (2d Cir. 2019) (Francis III), en banc review granted, 949 F3d 67 (2d Cir. Feb. 3, 2020), in which the court held that a landlord may be liable under Title VIII of the Civil Rights Act of 1968, the Fair Housing Act (FHA), 42 USC §3604(b), “for intentionally discriminating against a tenant based on the tenant’s race, where the landlord allegedly refused to take any action to address what it knew to be a racially hostile housing environment created by one tenant targeting another, even though the landlord had acted against other tenants to redress prior, non-race related issues.”

In addition, the court also held that such “post-acquisition conduct,” occurring after the initial rental transaction and during the period the plaintiff actually resided in the rental property, separately violated FHA §3617 which makes it “unlawful to coerce, intimidate, threaten, or interfere with any person in the exercise or enjoyment of, or on account of his having exercised or enjoyed, or on account of his having aided or encouraged any other person in the exercise or enjoyment of, any right granted or protected by section…3604.” 42 USC §3617.

In doing so, the Second Circuit majority opinion relied upon the Supreme Court’s “directive” that the FHA’s language has a “broad and inclusive compass,” see City of Edmonds v. Oxford House, Inc., 514 US 725, 731 (1995), and thus the court’s majority read the FHA’s text “broadly” to include the liability standard applied in employment discrimination cases adjudicated under Title VII of the 1964 Civil Rights Act, 42 USC §2000e-2(a)(1), which prohibits employers from creating or tolerating a hostile or abusive working environment, arising from discriminatory motives or actions, based on race, color, religion, sex, or national origin—whether or not the employer has himself engaged in the alleged harassment. See, e.g., Davis v. Monsanto Chemical Co., 858 F2d 345 (6th Circuit 1988).

In Francis III, the panel majority reaffirmed the holding of landlord liability that the court had previously declared in its March 4, 2019 decision in Francis v. Kings Park Manor, 917 F3d 109 (2d Cir. 2019) (Francis I), which, presumably in response to Judge Debra Ann Livingston’s eviscerating dissent of the majority opinion in that decision, was precipitously withdrawn by the order of the court just four weeks later, on April 5, 2019. See Francis v. Kings Park Manor, Inc, 920 F3d 168 (2d Circuit 2019)(Francis II).

Court Divided Over “Evidence” Necessary

Francis III creates a serious dilemma for housing landlords. As noted by Judge Livingston, in her dissent to the majority’s opinion, “any faithful application of the pleading standard employed today would appear to expose all landlords to suit for purposeful discrimination based on the wrongful conduct of one tenant vis-à-vis another so long as such landlords have ever responded to a lease violation.” (italics in original).

Thus, when a landlord demands overdue rent payments, thus “interven[ing] against…tenants…regarding non-race-related violations of their leases,” [citing the majority opinion] she assumes an ill-defined responsibility to intervene (and immediately commence an eviction proceeding?) whenever a tenant complains about the allegedly racially-motivated behavior of another tenant. Landlords in this Circuit may therefore face a choice between two lawsuits: one for violating the FHA, the other for wrongful eviction, with unforeseen consequences for those improperly accused of discrimination, not to mention those attempting to obtain housing on reasonable economic terms. (emphasis added, italics in original).

The plaintiff in Francis was an African-American who, in 2010, entered into a lease agreement with defendant Kings Park Manor (KPM) for an apartment unit in a complex owned by KPM. On several occasions, between February and September 2012, Francis’s next-door neighbor, Endres, engaged in highly offensive, racially-based, harassing rants directed at Francis, including, on one occasion, “I ought to kill you, you fucking nigger.” Francis filed police reports complaining of Endres’s abusive conduct in March and in May 2012. By letter dated May 23, 2012, Francis notified KPM directly about Endres’s racist conduct between March and May 2012. On Aug. 10, the Suffolk County Police Department arrested Endres for aggravated harassment in violation of New York Penal Law §240.30, and Francis sent a second letter to KPM advising of Endres’s continued racial slurs and of Endres’s arrest for harassment. He sent a third letter to KPM on Sept. 2 again complaining of Endres’s continued racial harassment.

KPM advised its property manager to “not get involved.” However, it is not alleged that Francis did actually, at any time, request KPM to take any action against Endres. Endres’s lease expired at the end of 2012, at which time KPM declined to renew the lease, and Endres vacated his unit at the end of January 2013. He later pleaded guilty to harassment in violation of New York Penal Law 240.26(1) and was also subjected to an order of protection prohibiting him from contacting Francis.

Livingston’s dissent noted that Francis’s brief on appeal did not contend that the complaint even plausibly alleged intentional discrimination by KPM, “but instead primarily urged this court to impose liability under the FHA for the ‘negligent failure to remedy a discriminatory [housing] environment.’” (Italics in original). Accordingly, KPM argued that, “even if a hostile housing environment claim were cognizable under the FHA,” Francis had failed to allege that KPM intentionally discriminated against Francis.

Moreover, the District Court had concluded that, “assuming without deciding that a ‘hostile housing environment’ claim is actionable against a landlord or property owner under FHA, a question unresolved at this time by the Second Circuit [before Francis III], such a claim would require allegations of intentional discriminatory conduct, or failure to intervene, by the landlord or property owner based on a protected category.” Francis v. Kings Park Manor, 91 F.Supp.3d 420, 433 (EDNY 2015). (emphasis added). The District Court held, therefore, that “naked assertions by plaintiffs that race was a motivating factor without a fact-specific allegation of a causal link between defendant’s conduct and the plaintiff’s race are too conclusory” (citation omitted), and the District Court thereupon found “on the facts in this case, that the plaintiff alleges no basis for imputing the allegedly harassment conduct to the KPM defendants as opposed to Endres, or that the KPM defendants failed to intervene on account of their own racial animus toward the plaintiff.” Id.

Nevertheless, the Francis III majority of the Second Circuit panel proceeded to consider “whether a landlord may be liable under the FHA for intentionally discriminating against a tenant by, as is alleged to have occurred here, choosing not to take any reasonable steps within its control to address tenant-on-tenant harassment of which it has actual notice that is specifically based on race, even though it chooses to take steps to address other forms of tenant misconduct unrelated to race.”

In response to the argument that Francis had failed to allege intentional discrimination, the majority said:

[W]e assume, without deciding that intentional discrimination is an element of an FHA violation and conclude that Francis’s complaint, viewed in the light most favorable to Francis plausibly and adequately alleges that the KPM Defendants engaged in intentional racial discrimination. (emphasis added).

In reply, the dissent argued that the majority had “conjur[ed] a plausible basis for inferring intentional discrimination” by “latch[ing] onto Francis’s conclusory statement in the complaint that the KPM Defendants ‘have intervened against other tenants at Kings Park Manor regarding non-race-related violations of their leases or of the law.’” The dissent further expounded that:

This amounts to the claim that because the KPM Defendants did something with regard to some incident involving some tenant at some past point, the alleged failure to intervene here must have been based on racial animus. But the majority cannot say (because the complaint does not allege) whether these other vaguely referenced interventions involved members of a protected class, intratenant relations, the heating system, or a shower curtain. (Italics in original).

The dissent further argued that “this ‘bland abstraction [ ]—untethered from allegations’ regarding any actual interventions in either tenant-on-tenant disputes specifically or even lease violations generally – is thus a very far cry from what [the Second Circuit has previously] required in the employment context to assert a plausible claim of purposeful discrimination.” (citing E.E.O.C. v. Port Authority of New York & New Jersey, 768 F3d 247, 257 [2d Cir. 2014]). Continuing, the dissent concluded, “[s]imply put, the ‘naked assertion’ on which the majority relies to once again revive this complaint (after over three years of review) does not plausibly support an inference of discriminatory intent, dooming [Francis’s claims].” In addition, citing the Supreme Court’s decision, in Ashcroft v. Iqbal, 556 US 662, 676-678 (2009), the dissent noted that “a complaint fails to state a claim ‘if it tenders naked assertions[s] devoid of further factual enhancement,’ and that pleading ‘purposeful discrimination requires more than…intent as awareness of consequences.’” (Emphasis added).

The New York Landlords’ Dilemma

Francis III not only held that the allegations against the landlord satisfied the racially-based motivation requirements of the FHA, but the court also held, citing Stalker v. Stewart Tenants Corp., 93 AD3d 550, 940 NYS2d 600, 602-03 (1st Dept. 2012), that the allegations of Francis’s complaint sufficiently alleged a violation of the New York State Human Rights Law, which “is substantially similar to” and which “like the FHA, prohibits housing discrimination” and makes it “‘an unlawful discriminatory practice for the owner, lessee, sub-lessee, assignee, or managing agent…[t]o discriminate against any person because of race…in the terms, conditions or privileges or the sale, rental or lease of any such housing accommodation or in the furnishing or facilities or services in connection therewith.’ N.Y. Exec. Law §296(5)(a)(2)” and §296(6), which prohibits aiding and abetting “any of the acts forbidden under this article.”

Francis III not only creates a dilemma for landlords from tenant-on-tenant racial discrimination, but Francis III may now also provide a basis for claims being made, under Executive Law §296(h), against landlords for tenant-on-tenant sexual harassment, even if the landlord has instituted the sexual harassment prevention policy for its employees now required under §201-g of the New York Labor Law.

The decision of the Second Circuit in Francis III, which may have been issued with good intentions, is nevertheless judicial legislation that, if not modified in the very rare en banc review ordered in the case on Feb. 3, 2020 (now scheduled for hearing on Sept. 24, 2020), will be precedent for many unintended consequences in New York’s housing industry. As a consequence of the majority ruling, Francis III potentially may have greater impact on New York housing than any other housing decision in recent memory. As the FHA makes no distinctions based on ownership, all forms of housing owners will need to update their leases and/or corporate documents. Leases will need to be amended to include default provisions that permit landlords to commence eviction proceedings for the uttering of discriminatory words or the commission of any conduct that violates the FHA. Cooperatives will need to amend their corporate documents and by-laws to include Pullman-like provisions, see 40 West 67th Street Corp. v. Pullman, 100 NY2d 147 (2003), that allow boards to evict and to cancel the shares of shareholder-tenants who make discriminatory comments or commit discriminatory conduct in violation of the FHA. Condominiums will need to make similar changes in their by-laws, and, in the first instance, they may elect to impose severe fines on tenant-on-tenant harassment, in obedience to the mandate of Francis III, before expending substantial amounts of capital funds on lawsuits in Supreme Court. Many rental properties may not impose fines upon their rent regulated tenants; as a consequence, landlords of those properties will be forced to sue to evict.

Conclusion

The Francis III decision requires that property owners protect themselves by implementing policies to ensure (a) that they can be made aware of the violation of the Fair Housing Act by one tenant against another, and (b) that they will have the opportunity to take appropriate action to stop the unlawful discriminatory harassment.  Nevertheless, the ruling in Frances III may not be the final word. The case is scheduled to be reheard, in a very rare en banc proceeding, before all of the judges of the Second Circuit.  And if those judges do not understand the impact that Francis III can have on the workings of the complex housing laws in New York, landlords will no doubt turn their eyes to the U.S. Supreme Court for relief.  But, in the interim, if property owners in New York do not follow the decisions of the appellate courts, disobedience will be painfully expensive.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is the managing partner of the firm’s Real Estate Litigation Group.

This article was originally published on ALBarticles.com on 04/7/20.

Q1 Features Roundup

Adam Leitman Bailey isn’t one to sit by the sidelines. Over the last several months, Bailey and his award-winning real estate law firm have achieved countless press mentions and earned mentions in publications such as The Real Deal, KivoDaily, and LawDragon. To read these articles in full, scroll through the below excerpts. 

 

Landlord-Tenant—Class Action Complaint Withstands Motion To Dismiss—Rent Overcharges—Motion for Class Certification

In this Realty Law Digest, notable commercial litigator and legal writer Scott E. Mollen offers his thoughts on two recent cases (“Maddicks v. Big City Properties,” and “Varley v. Elk.”) that may have significant implications for future decision-making in landlord-tenant law. Notably, Adam Leitman Bailey P.C. represented Elk in the latter case. 

Read the full article.

 

How Adam Leitman Bailey Became New York’s Top Real Estate Lawyer

“You can learn from every one, no matter how repulsive a person might seem to you—everyone.” 

In a new interview published by Kivo Daily, Adam Leitman Bailey reflects on his early career and offers advice that is in equal parts pragmatic, useful, and undeniably blunt. 

Read the full article.

 

The Real Deal’s Founders Share War Stories from Over the Years

In this retrospective, Real Deal co-founders Amir Korangy, Stuart Elliot, and Yoav Barilan look back on the big breaks and controversies that defined The Real Deal as one of the foremost real estate magazines of our time. During their conversation, Stuart reflects on a moment that he describes as “ingenious” — Adam Leitman Bailey’s strategic use of the Interstate Land Sales Full Disclosure Act during the housing crisis. 

Read the full article.

 

Even Broken Bones Can’t Stop Adam Leitman Bailey from Reaching for Success

“After breaking both arms and falling into a coma, most people wouldn’t wake up and decide to win all-county honors for their high school track team. Most people aren’t Adam Leitman Bailey.” 

This article takes a deep dive into the personal history and unquenchable determination that drove Adam Leitman Bailey to overcome towering economic barriers and become one of New York’s finest real estate lawyers. 

Read the full article.

 

Lawyer Limelight: Adam Leitman Bailey

What does it take to build the top real estate legal firm in New York City? In this exclusive interview with LawDragon, Adam Leitman Bailey provides a few insights on his journey towards success as a lawyer-entrepreneur. Here’s a highlight:

“Every day is exciting at Adam Leitman Bailey, P.C. Almost every case or deal comes with tremendous odds […] When litigating, someone is going to win, and someone is going to lose, and there is no room for second place with this much money on the line.” 

Read the full article.

 

Superstar Lawyer Adam Leitman Bailey Speaks About 20-Year Anniversary

Adam Leitman Bailey has dedicated his career to reshaping New York City’s real estate law sector for the better. For the last two decades, Bailey’s fierce persistence, hard-won expertise, and passion for justice have earned him a reputation for being one of the foremost real estate lawyers in New York City — and a stellar entrepreneur. In March, EntrepreneurshipLife marked the anniversary of ALBPC by interviewing Bailey on his approach to running a successful business. 

Read the full article.

 

Real Takk Podcast Episode 18: Adam Leitman Bailey, Top NY Attorney

Listen to the full podcast here:

https://www.podbean.com/ew/pb-2dcdy-d198bd

This is a quote I really love by Kobe Bryant. “How can others story impact others? The definition of greatness is to inspire people next to you.  How can you inspire one person then turn to inspire another person. Our challenge is for people, to figure out how our story can impact others, to motivate them to create greatness in others. – Kobe Bryant.  Adam Leitman Bailey may have a brash facade, he’s been written up in the NY Post, NY Times, & Huffington Post, perhaps not always as a hero, but to play on the team he’s hired to protect.  Adam’s story may inspire a few of you, as we dive into his younger years of his rough childhood, being a passenger of a terrible car accident, the growing pains he’s faced as a young adult. We then go into present date, where he shares his tremendous success story of suing Donald & Ivanka Trump, representing Linda Mackelowe in the most expensive divorce case in US history. (read about his bio below)

Bio:

Adam is one of the most distinguished real estate attorneys in America.  Born in Bayside Queens, he moved to California at the age of five, and later moved back to NJ where he graduated with honors from Rutgers, then obtained his law degree from Syracuse University College of Law.  Adam is an author of NYT’s best seller Finding The Uncommon Deal.”, he was selected by the Chambers & Partners publication as NY’s leading RE lawyers, and was named Super Lawyer by Law & Politics magazine.   Adam has a long list of notable cases, but to mention a few he’s represented Developer Sharif El Gamal, who proposed an Islamic mosque & cultural center near the ground zero site, where his opponents were the families affected by 9/11, politicians, and conservative media pundits. (long story short it turned into 45 park place. Adam was responsible for obtaining the largest residential condo settlement in the history of NY, as well as  successfully relieved purchasers from new developments like 20 pine, The Brompton, Trump Soho & Sky View Park.

 

Originally shared on ALBarticles.com

Improving Rental Buildings’ Profitability Through Demolition

With the passage in June, 2019 of the Housing Stability and Tenant Protection Act of 2019 (HSTPA), owners are desperately seeking ways out of rent regulation in an attempt to recapture the profitability their buildings had on the eve of HSTPA’s passage. Two such exit strategies are “substantial rehabilitation,” available only to deteriorated buildings and “demolition,” generally available to rent stabilized buildings regardless of their condition. Since the HSTPA enables municipalities throughout New York State to bring their housing stock under a form a rent stabilization, these questions are not only of renewed importance in New York City and its suburbs, but potentially statewide, under the administration of the New York State Division of Housing and Community Renewal (DHCR).

Administering Rent Regulation

Governing the demolition process is DHCR’s Operational Bulletin 2009-1. This bulletin deals with demolition applications for three scenarios: rent control, rent stabilization, and non-New York City rent stabilization (The Emergency Tenant Protection Act of 1974 “ETPA”). The rules are radically stricter for rent-controlled apartments than for New York City rent stabilization and ETPA. In these matters, the courts grant extreme deference to the DHCR (Peckham v. DHCR, 12 NY3d 424 (2009).

This includes when the DHCR decides it wants to reconsider matters on its own after a case has gone up for Article 78 review. Porter v. DHCR, 51 AD3d 417, 857 NYS2d 110 (1st Dept. 2008) Under its administration, the DHCR has worked without a specific definition of “demolition,” but “an intent to gut the interior of the building, while leaving the walls intact, has been held as sufficient,” Peckham, supra. Use of the process is mandatory; self-help is prohibited. Lawlor v. 543 Second Ave. LLC, 49 AD3d 449, 854 NYS2d 125 (AD1 2008). The building need not be razed to the ground. Jack LaLanne Biltmore Health Spa Inc.. v. Builtland Partners, 99 AD2d 705, 471 NYS2d 854 (AD1 1984).

Stipends

An essential part of the entire process is the system of stipends. As discussed below, the landlord has not only to be prepared to pay the stipends, but to prove to the DHCR the ability to do so.

Each tenant who is being evicted is entitled to receive from the landlord the tenant’s reasonable moving expenses. This means that in order to make the application, the landlord is going to have to come up with estimates as to what the moving expenses will be. While the landlord cannot know how much furniture and personal property is in the apartment or whether the tenant is actually going to be moving out of state, the landlord can and must obtain from a moving company estimated costs based on room count and the assumption that the move will be entirely within the City of New York. The moving expenses are in addition to the other stipend discussed herein.

There are provisions for reducing the stipends, but these are based on tenant conduct and the application process must assume that each tenant will receive the full stipend to which they are entitled. The deduction cannot be known at the time of the initial application because it consists of a reduction of one-sixth for each month the tenant stays past the time allowed under the order (and lease) to remain in the premises, a figure unknowable until the order has actually been issued.

In the stipending system, the landlord has three options:

The first option is moving the tenant to a new apartment at the same or lower regulated rent near or in the building being built. For such tenants, the stipend is $5000. This option entails the landlord finding the new apartment.

The second option is moving the tenant to a more expensive apartment where the landlord prepays six years worth of the difference in rent. This option also entails the landlord finding the new apartment.

The third option is using the stipend chart from the Operational Bulletin where the landlord pays the tenant for a minimum of three rooms, the difference between the current rent and the chart’s stipend amount, multiplied by the number of rooms and further multiplied by 72. This stipend is the same for rent control and rent stabilization. This option entails the landlord having no obligation to find the new apartment. It is also the option most landlords use.

The Operational Bulletin sets forth sample amounts for 2008 and directs that the stipend formula be adjusted by one year rent increases according to rent guidelines orders. Thus the 2008 figure has to be adjusted for the eleven rent increases since 2008. Those adjustments bring the amount from the 2008 figure of $526 to a 2019 figure of $639.21.

Thus the formula for a stipend is:

• Count the Number of Rooms in an apartment (but never less than 3) = NoR

• Multiply NoR by $639.21 (or the correct number for the year) = Max

• Subtract Max from the Current Rent = Monthly Allowance

• Multiply the Monthly Allowance by 72 = Total Stipend

• Tenants who would lose governmental benefits because of the stipends may waive them.

Special Consideration for Rent Control

Demolition is only a ground for removal from rent control if the landlord is putting up a new building.

The new building must have at least 20% more apartments than the old building, except if the cost of repairing the violations in the building exceeds the assessed value of the building, then it need not be more than one more apartment in the new building. This does not apply if the building is already largely vacant. The landlord must move the rent-controlled tenants to a new apartment. The stipends are the same as for rent-stabilized tenants. The building permits must already be in place. The landlord must demonstrate that there is no reasonable possibility that the landlord can make a net annual return of 8.5% of the assessed value of the subject property and that lower return is not the landlord’s fault. (Thus the landlord would not want to have the tax assessment reduced by means of certiorari proceedings prior to the demolition application.)

The Steps

Not all buildings are well suited for a demolition application. Unlike “substantial rehabilitation,” there is no requirement that the building be in deteriorated condition in order to qualify for a demolition application. If a building is genuinely eligible for demolition treatment, the DHCR does not have the discretion to refuse the application.

Landlords will want to buy out rent-controlled tenants before anyone knows demolition is in the air. Experience with cooperative conversions in the 1980’s has taught us that it takes very little to start rumors circulating and rumors inflate buyout prices, create tenant meetings and bring in attorneys willing to work on a contingency. However, landlords must exercise extreme caution in these buyout negotiations as they can readily run afoul of the Antiharassment provisions of the law such as those found in the New York City Administrative Code (See, New York City Administrative Code §27-2004(48)(f-1, f-2 et seq).

It is not necessary to pre-approve loans, but the Owner has to be able to demonstrate that either the deed owner of the building has the financial wherewithal for the entire project or a closely related entity does. It does not require cash on hand for the project. The DHCR examines not only the ability to pay for the tearing down of the building, but all of the other expenses associated with the project. These include:

• Engineering and architects’ fees.

• Permitting, including the fees for the permits as well as the normal business expenses associated with applying for them.

• Demolition costs.

• Construction costs.

• The stipends to which the tenants will be entitled (as more fully discussed below).

• The tenants’ reasonable moving expenses.

• Payment of the tenants’ rent in alternative accommodations, where applicable.

• Attorney and accountant fees.

The Application

The application is actually a fairly simple form to which the owner’s attorney attaches such additional documents as appear useful. The agency’s discretion lies in determining whether to authorize a refusal to offer lease renewals based on whether 1) applicant has established financial ability to demolish building, 2) plans for the undertaking have been approved by appropriate agency, and 3) applicant has complied with statutory provisions for relocation of rent stabilized tenants, reimbursement of moving expenses, and payment of stipends. 220 CPS “Save Our Homes” Assn. v. DHCR, 60 AD3d 593, 877 NYS2d 21 (AD1 2009). Neither the DHCR nor the courts will allow extensive discovery in the proceedings before the DHCR. Calamaras v. 23rd Second Ave., LLC, 305 A.D.2d 216, 758 N.Y.S.2d 803 (AD1 2003).

Proof of financial ability can include a letter of intent or a commitment letter from a financial institution, but other proofs of financial capability are possible. If the financing is through a closely related entity, the landlord’s application should be explicit in setting forth that relationship. Enough copies of the application must be provided to the DHCR for them to serve each tenant. Since the attachments can get lengthy, this can mean significant printing expenses. It is not necessary that the actual building permits be attached to the application as it takes so much time for the DHCR to go through its procedure in approving the application that the permits would become stale.

However, where applicable, certificates of no harassment must be pulled as prerequisites to the permits and they too can become stale if pulled too soon. Such certificates are themselves a lengthy procedure, the details of which are outside the scope of this article. Any Golub or eviction notices already issued should be attached to the application. The application should include engineering and architectural plans with the financials including specific reference to those specific plans.

Once the application has been filed, the owner can immediately stop renewing leases. This requires issuing Golub notices to all the tenants. These are served in the normal rent stabilization methods, either by regular or certified mail. It should not be return receipt requested. The post office receipt for the mailing together with an affidavit of service is sufficient proof of the mailing.

The Golub notice must:

• Indicate that it references a proposed demolition.

• Set forth that the owner has the financial capability above described.

• Set forth the plans above described.

• Set forth that the tenant may remain in occupancy during the pendency of the application.

• Advise the tenant that they need not move out until the DHCR has issued its order approving the application, giving the move out dates, stipends, and other conditions DHCR imposes.

• Advise the tenant that if the application is withdrawn or denied, they will be offered a lease renewal.

Rents cannot be increased for any reason during the pendency of the application. If the application is denied, the owner loses the increases that could have been charged and lease renewals are made on the usual 90-day notice to the tenants, with rents frozen until the offer is accepted. The DHCR will direct such other proceedings as it determines which could even include evidentiary hearings, but will not necessarily include such hearings. The DHCR , in the past, has taken an inordinately long time to process the application but this firm has created ways to facilitate the process which are beyond the scope of this article.

The landlord selects apartments if using the two methods for calculating the stipends that entail selecting apartments. The tenant has a right to challenge the suitability of such selected apartment.

The landlord pays the stipends when the tenants move. tenants’ delay or refusal to move reduces or eliminates their entitlement to the stipend and subjects them to eviction proceedings. Tenants have until the later of the expiration of their lease or the date set forth in the DHCR’s order to move out. If they do not move out on their own, the actual eviction of the tenants is by way of an ordinary holdover eviction proceeding in Civil Court. However, if the owner has a favorable decision from the DHCR, there is nearly nothing to prove in that proceeding, making it amenable to summary judgment.

Conclusion

Demolition proceedings before the DHCR are extremely technical and require precise adherence to the exacting requirements of the various laws. Expect these applications to take years and be battled in the courts despite the number of our comrades retiring from the practice of law or taking different jobs. However, they are also one of very few options rent-regulated landlords have left to restore profitability to their properties and deregulate buildings with rent regulated apartment in the aftermath of the most punishing anti-free market rent laws in American and New York history.

Adam Leitman Bailey and Dov Treiman are partners at Adam Leitman Bailey, P.C.

This article was originally published on New York Law Journal on 2/18/20.

Q&A: Subleasing a Co-op

Q. A co-op owner purchased her unit in 2005 and has been subleasing it to the same tenant since 2011. The co-op board recently passed an amendment to the bylaws that states an owner cannot sublease a unit for more than two years, and it applies retroactively. The board is forcing the sublease tenant to vacate in two months, despite having a lease that runs another seven months after that. Does the owner or tenant have rights in this case?

A. “The lease was signed before the new rule went into effect and the tenant and landlord depended on the rules of the co-op at that time,” says attorney Adam Leitman Bailey of the Manhattan firm Adam Leitman Bailey, P.C. “Because this rule is trying to impose a bylaw retroactively, it would be unjust and would not be a basis to annul a contract. This would be similar to the reasoning of the United States Constitution’s ban on ex post facto laws. The co-op would need to sue the shareholder and the tenant in housing court, and I do not predict a successful result.”

 

This article was originally published on The Cooperator in December 2019.

New Rules for Seeking Buyouts of Rent-Regulated Tenants

In their Rent Regulation column, Adam Leitman Bailey and Dov Treiman discuss how recent changes to the New York City Administrative Code along with a recent decision in the Appellate Term, First Department, have made landowners who seek to buy out the rights of tenants in occupancy face a minefield of requirements and restrictions.

These deals have seen tenants made into multi-millionaires and landlords given the ability to build high rise buildings after such buyouts. Now, this symbiosis of dreaming dreams and making them come true is under threat by existing case law and new laws already enacted and politically promised.

Under these threats, in the New York City real estate industry, both from landlords who seek to free their apartments from regulation and from tenants who wish to cash out the value of their apartments’ potential unregulated value, there is pressure to reach deals rapidly, before, if as promised in recent campaigns, the reasons for the deal are rendered obsolete.

However, between recent changes to the New York City Administrative Code and a recent decision in the Appellate Term, First Department, landowners who seek to buy out the rights of tenants in occupancy face a minefield of requirements and restrictions. Done properly, the landowner can recapture the apartment for other uses and seriously increase the rent. Done improperly, the landowner will still have the tenant, may face crippling fines, and, at least in certain parts of the city, may be prevented from effecting even the most benign improvements to the building where the apartment is located, having to surrender the building to considerably more rigorous regulation.

Buyout Agreements: Basic Rules

The most common form of regulation in New York City is Rent Stabilization. Under Rent Stabilization Code (RSC) §2520.13, waivers of protections under the Code are void as against public policy. Draper v. Georgia Props. Inc., 230 A.D.2d 455, 660 N.Y.S.2d 556 (1st Dept. 1997). While it is generally believed that §2520.13 allows for agreements, provided they are either before a court or the DHCR, in fact, the exception §2520.13 carves out is only for agreements where the tenant is represented by counsel and the agreement is withdrawing a complaint before the DHCR.

There is no generalized provision in the Code allowing for agreements to be enforced merely because they were before the court or the DHCR. Actual practice reveals, however, that the courts are more inclined to enforce agreements where there are attorneys on both sides and for this reason, landlord’s counsel seeking to negotiate a buyout agreement is well advised to insist on having a licensed attorney on the other side, even if the landlord has to pay for it.

On its face, it would appear that a tenant who agrees to move out of a rent stabilized apartment at all would be bumping up against §2520.13. However, such is not the body of case law. Once the tenant moves out, the tenant is theoretically[1] no longer a “tenant” and therefore has no protections under the RSC to waive. However, tenants who remain in residence remain protected under the law to their last minute. The challenge to both landlord’s counsel and tenant’s is to devise agreement structures that are both enforceable and give word to the parties’ desires.

If there is a genuine dispute about entitlement to the apartment, or the tenant is actually in arrears, this is readily accomplished. Merwest Realty v. Prager, 264 A.D.2d 313, 694 N.Y.S.2d 38 (1st Dept. 1979). The landlord can bring an eviction proceeding that can be settled on terms that actually include the eviction. Draper, supra. RSC §2520.13 by its terms make court-supervised surrender agreements fully enforceable, but only as to the tenant who is involved in the negotiations, not as to any subsequent tenant.

While under current law, a current tenant whose rent is below the deregulation threshold receives a path to perpetual regulation if the tenant consistently takes one year lease renewals, the opportunity for deregulation between tenancies remains landlords’ principal motivation to buy tenants out of their tenancies. (Bailey & Treiman, “Altman” Alters Vacancy Deregulation, NYLJ, May 2, 2018)

Absent a genuine controversy between the parties other than how much the landlord is willing to pay to recapture the apartment, an agreement calling for eviction may not be enforceable. The lower courts take the authority from Draper to examine whether the agreement was coercive in nature and their resultant findings are not necessarily predictable.

Without certainty that the court will enforce the deal, the agreement must contain incentives sufficient to entice the tenant to comply with the contractual obligation to vacate. These incentives therefore make substantial up-front payments ill advised. On failure of the tenant to vacate, the courts may render a money judgment for the return of any funds the landlord advanced, but even that modest relief to the landlord is not assured.  Grasso v. Matarazzo,  180 Misc.2d 686, 689, 694 N.Y.S.2d 837 (App. T. 2d Dept. 1999) holds that where the landlord has acted seriously coercively, the courts will not even direct return of the funds.

Landlord’s counsel are therefore advised to keep up-front payments small or tied to securing the services of movers and to keep the bulk of the funds to be remitted upon departure, with or without escrowing of the vacatur funds in the meantime. Tenants’ counsel wisely require the landlords’ counsel escrow the vacatur funds and notify tenants’ counsel early in the period from execution of the deal until actual surrender of the apartment that the funds have reached the escrow account. If the escrow agent is a reputable firm, there is no need that the actual remittance to the tenant be in certified funds.

New “Harassment” Laws

Lumped into the definition of “harassment” in New York City’s Administrative Code (§27-2004(a)(48)), are specific regulations, nearly all of them effective within the past year, regarding the having of buy-out conversations with tenants. In a list of activities explicitly set forth as not being exclusive, activities prohibited include:

(1) Reaching out to the tenant to make a buyout offer within six months after the tenant has informed the landlord in writing not to unless revoked in writing or a court orders otherwise; NYC Admin. Code §27-2004(a)(48)(f-1);

(2) Reaching out to the tenant to make a buyout offer without informing the tenant (at least every six months) (a) the reason for reaching out; (b) the tenant can turn the landlord down harmlessly; (c) the tenant can seek legal counsel and should go to a city maintained website; (d) that it is the landlord reaching out; (e) that the tenant has the rights outlined in (1) above; NYC Admin. Code §27-2004(a)(48)(f-2);

(3) Making the buyout offer while (a) threatening, intimidating, or using obscene language; (b) initiating communication at odd hours or in an (undefined) abusive or harassing manner; (c) initiating communication at the tenant’s job without prior written consent; (d) lying; NYC Admin. Code §27-2004(a)(48)(f-3); and

(4) Repeatedly contacting the tenant on weekends, holidays, outside normal banking hours unless the tenant previously approved outside-work-hour contact in writing, or in an (undefined) abusive or harassing manner. NYC Admin. Code §27-2004(a)(48)(f-4).

Particularly noteworthy is the last paragraph of these requirements in which a landlord is mandated to limit its contacts with the tenant for buyout purposes to those times when the tenant is least likely to be at the apartment.

While some of these behaviors are clearly “harassment” in any dictionary understanding of the term, some of these are more in the nature of strict liability. Take for example, the requirement that a landlord not initiate a buyout conversation with a tenant for 180 days after the tenant has advised in writing not to. In the dictionary understanding of harassment, there is no actual difference between contacting the client on day 179 or day 181. But, although there is, as yet, no appellate case law construing these provisions, it can be assumed that the deadlines will see strict enforcement, including such things as 180 days, prohibited initiated contact during the ordinary business day, and lying, where the regulation prohibits “knowingly falsifying or misrepresenting any information.”

Since it is “falsifying or misrepresenting,” courts, under the doctrine that every word must be accorded a meaning, Centennial Restorations Co. v. Wyatt, 248 A.D.2d 193, 669 N.Y.S.2d 585 (1st Dept. 1998) will likely find a distinction between “falsifying” and “misrepresenting.” Perhaps that distinction will be between those things that are demonstrably false—falsifying—and those things that are merely speculative or impossible for the landlord to know if true—misrepresenting. Perhaps, instead, the distinction can be drawn at falsifying being the creation of a forgery and misrepresenting being lying about a situation.

Location, Location

The rules described in this article apply exclusively to the entire city of New York. They are not part of the suburban counties that enforce the Emergency Tenant Protection Act of 1974 or the other statewide counties that have rent control. However, under the city’s Local Law 1 of 2018 (LL1) the fact that these rules are part of the definition of “harassment,” carries significance both in rent regulated housing where there are special penalties for harassment and in seeking and receiving building permits which throughout the city requires non-harassment in Single Room Occupancy (SRO) buildings and under LL1 in certain specified neighborhoods of the city, any targeted residential multiple dwelling, regardless of whether it is an SRO.

The rules for buying out tenants are the same throughout New York City, but LL1 targets specific buildings within specific neighborhoods for stiffening the penalties for violating those rules.

LL1 states “The purpose of this local law is to provide for the implementation of such a program as a geographically targeted and time-limited pilot program to allow an evaluation of the program’s accuracy and efficacy in targeting and addressing harassment in particular buildings.”

LL1, effective Sept. 27, 2018[2], occupies some 6,000 new words of the Administrative Code at §27-2093.1. Under it for Bronx Community Districts 4, 5 and 7; Brooklyn Community Districts 3, 4, 5, and 16; Manhattan Community Districts 9, 11, and 12; and Queens District 14 all buildings and selected buildings throughout the City, neither construction nor the issuance of certificates of occupancy can take place until certain further procedures are in place. The lack of a certificate of occupancy in a residential building means the landlord cannot sue for rent. MDL §302.

These further procedures entail employing the now familiar “Certificate of No Harassment” (CONH) procedure, previously applicable only to SRO buildings and described at length in Bailey and Treiman, Understanding Single Room Occupancy Laws, NYLJ Feb. 10, 2016. Under LL1, a finding of “harassment” will deny the CONH and potentially prevent a building from getting building permits, a certificate of occupancy, and collecting rent.

Thus, aside from the fines, penalties, and litigation entailed in a finding of harassment, if a building is inside this pilot project, a single finding of harassment by breaking the rules with regard to buyouts can result in a building’s complete loss of its income stream.

However, the DOB  will  issue building permits in targeted buildings if the landlord “cures” the harassment. However, the “cure” is not a cure at all. It is instead a coerced entry into a more restrictive form of regulation. Under the Administrative Code provision, the landlord must enter and record an agreement to provide within the community district housing square footage devoted to low income housing of at least 25 percent of the target building’s square footage. The rents for such unit are set at maxima described in NYCRR HPD Rules §53-12.

The expenses associated with constructing such housing may not, under the program, receive 421-a benefits, but it is clear that the low income housing provided under this program is intended to be like that of 421-a. There is no provision in the anti-harassment statute for what happens if there is nowhere available where such construction could take place.

However, since, under the pilot program, a building may pass in and out of being targeted for these provisions, lenders may become reticent about lending in these designated community districts or may require affidavits of no harassment from the tenants as a prerequisite to closing on a loan at the time of sale of the building.

As to harassment, regardless of whether it takes place where the pilot program is in effect, Administrative Code §27-2115 imposes fines for harassment at a minimum of $2,000 and a maximum of $10,000. If the court finds there was any harassment under these Administrative Code provisions, it is compelled to impose the $2,000 minimum, without the discretion to waive it completely. ABJ Milano LLC v. Howell, 61 Misc.3d 1037 (Civ. Ct. NY Cty. 2018). Since harassment under these provisions is a violation of the New York City Housing Maintenance Code, Civil Court Act §110(a) empowers the New York City Civil Court to enjoin further violations of these provisions.

With Whom To Negotiate

In Hui Zhen Wei v. 259 E. Broadway Assoc. LLC, 57 Misc. 3d 136, the Appellate Term for the First Department upheld the claim of the wife of the tenant of record in a lockout proceeding brought under RPAPL §713(10). The landlord had, upon the surrender of the apartment to the landlord, simply changed the locks to the apartment without any court proceeding. According to the court, without stating any other facts, “the hearing evidence showed that petitioner’s husband, the sole record tenant, formally agreed to surrender the apartment in exchange for compensation, petitioner was not a party to the agreement, and was in China visiting her family when the agreement was executed and possession surrendered.”

The court held that the lockout of the non-tenant wife was improper because “owner was previously advised by [the wife] that she was asserting possessory rights and that respondent, in fact, made several buyout offers directly to [her], the most recent such offer [having been] made only the month before she left on her trip.”

Thus, like the lease, the husband and not the wife was a party to the surrender agreement. Had the landlord actually brought a summary proceeding, it could have been brought successfully against only the husband without naming the wife. Immediate family members living with the tenant of record by virtue of their family relationships are not necessary parties to summary proceedings. Flak v. Kaye, , Dec. 9, 1991, 28:2, 19 HCR 718B (App.T 1st Dept. 1991). Yet, under Hui Zhen Wei they are necessary parties to surrender agreements. Absent their participation in the agreement, the landlord cannot count upon reliably cutting off any claim they may have to possession.

Under Hui Zhen Wei this class of persons whom the landlord will need to join the agreement includes all persons who could claim succession to the apartment. Under rent regulation, even minors can validly assert (or have asserted on their behalf) valid succession claims, Doubledown Realty Corp. v. Harris, 13 HCR 83A, 128 Misc2d 403, 494 NYS2d 601, NYLJ, April 4, 1985, 5:4 (AT1 1985). Thus, even minors have to be added to these agreements and that could conceivably entail the need for an infant’s compromise proceeding for a court to approve the agreement (CPLR 1207, 1208).

Further, these authors’ understand that offers of payment to persons with dubious claims do not necessarily mean that their claims are actually taken seriously and the industry often uses small buyoffs of dubious tenancy claims. However, under Hui Zhen Wei, one makes such trivial offers only at one’s peril.

Conclusion

For the past several years, landlords and tenants have had a shared interest in having the landlord buy the tenant out of the value the tenant is sitting on in the apartment.  Navigating the highly restrictive new landmines and curtailments on these negotiations will not only affect the actual agreements but treatment by lenders, government agencies and officials. Practitioners and their clients must tread carefully.

1. This theory is almost completely swallowed by its exceptions.

2. The implementing rules appear at Chapter 53 of the Rules of the Department of Housing Preservation and Development.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman is a partner at the firm.

This article was originally published on Apartment Law Insider.

Rules Governing Anticipatory Repudiation of Contracts

In the practice of real estate law today, very few legal issues are getting as much attention and at the same time being applied incorrectly by practitioners as anticipatory repudiation (or breach) of contract. To test this thesis, we ran a Westlaw search using the search term “anticipatory repudiation in the real property practice area,” and, since 2008, 30 decisions have been rendered compared with a total of 58 decisions from 1920–2007. This article attempts to deliver the rules of anticipatory repudiation and to discard the myths and mistruths.

This is tricky legal territory. Whether a party has anticipatorily breached the contract is not always easy to determine, and, in some cases, the tables may be turned with the court dismissing a party’s allegations of anticipatory breach by the other party to the contract, but finding instead that it was the party’s own conduct that constituted a prior anticipatory repudiation of the contract, thereby entitling judgment to be entered in favor of its adversary. The judgment in each case is more often based upon the specific facts of the matter and not solely upon the elements prescribed by law.

Anticipatory Breach Defined

As the New York Court of Appeals has succinctly stated, “[a]n anticipatory breach of contract by a promisor is a repudiation of [a] contractual duty before the time fixed in the contract for…performance has arrived.”1 Clearly, “an anticipatory breach cannot be committed by a party already in material breach of an executory contract.”2

As further explained by the First Department, “[i]t is well settled law that a contract is not breached until the time set for performance has expired.”3 Or, as the court has stated another way, “[a]n anticipatory breach of a contract is one that occurs before performance by the breaching party is due.”4

What Constitutes an Anticipatory Breach

An anticipatory breach of a contract—also known as an anticipatory repudiation—“can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.’”5

For an anticipatory repudiation to be deemed to have occurred, “the expression of intent not to perform by the repudiator must be ‘positive and unequivocal.’”6 With even more emphasis, the First Department has stated that “[i]t is clear that there must be a definite and final communication of the intention to forgo performance before the anticipated breach may be the subject of legal action.”7

As the Court of Appeals has noted, if “the apparently breaching party’s actions are equivocal or less certain, then the nonbreaching party…is presented with a dilemma, and must weigh hard choices and serious consequences,”8 such as:

If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying non-performance. If, on the other hand, the promisee continues to perform after perceiving apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid expenses as part of a reasonable effort to mitigate damages after the repudiation.9

Repudiation Found Definite and Final

Courts have found a party’s repudiation to be a “positive and unequivocal” and/or a “definite and final” expression of its intent to not perform its contractual obligations in the following circumstances:

•Where a defendant vendor refused to close title, the court held this refusal “constituted an anticipatory breach of the contract obviating a need by the plaintiff to tender performance prior to the commencement of the instant action.”10

•Where a seller refused to schedule a closing and sent a letter to the purchasers stating that seller was “unable to fulfill its obligations under the contract” due to “irreconcilable differences,” the seller’s letter constituted an anticipatory breach of the contract.11

•Where a purchaser of real estate who, upon learning of a cloud on seller’s title, scheduled a Time of the Essence Closing (TOE) law date and demanded return of its down payment, knowing that it was impossible, prior to the TOE closing, for seller to cure the title cloud within the seller’s allotted 90- day cure period (the First Department held that the “peremptory denial of the sellers’ opportunity to cure constituted an anticipatory repudiation of the contract by the prospective buyer”).12

•Where a party attempted to terminate a contract pursuant to conditions to the transaction that were not provided for in the contract.13

•Where a seller declared a contract void and “stated its intention to entertain offers from other buyers.”14

•Where a landlord sent to a tenant, who wanted to rent more square feet, correspondence, containing new terms to the lease, including increased annual rent, stating “if these provisions are not acceptable, I suggest we terminate our arrangement.”15

•Where a party sent a letter stating that, if the other party did not grant an extension on the contract’s mortgage contingency clause, the party would deem the contract cancelled.16

•Where a tenant sued for wrongful eviction, after closing its restaurant business, ceasing all operations, and being locked out by the landlord.17

Repudiation Not Definite and Final

There are also cases where the courts hold that what at first glance may appear to be an anticipatory breach is not a repudiation at all.

The Unclear Holding in Princess Point

In Princess Point, the latest decision by the Court of Appeals on anticipatory breaches, the court addressed the question of whether “the commencement of an action, particularly one seeking rescission, is itself an anticipatory breach.”18 The court held that “where the amended complaint seeks, among other things, reformation of the amendments to the contract and specific performance of the original agreement, there was no positive and unequivocal repudiation.”19 In so holding, the court likened an action for rescission, which seeks to nullify the terms of the contract, to a declaratory judgment action which “would produce a ruling as to the rights of the parties under the terms of the contract.”20 The court reasoned that “[a]t bottom, both actions seek a judicial determination as to the terms of the contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.”21

While it is true, as the court opined, that both forms of action “seek a judicial determination as to the terms of the contract,” it is difficult to conceive of a more unequivocal, positive, definite, and final expression of a party’s intention to repudiate a contract than by seeking to rescind the contract.22

Nevertheless, in finding no contract repudiation in Princess Point, the similarities the Court of Appeals perceived in actions for declaratory judgment and rescission, may ultimately be limited to the “context” of the facts in Princes Point, where, as the court itself twice noted, the “context” included the plaintiff’s amended complaint which sought, among other things, reformation of the amendments to the contract and specific performance of the original agreement—remedies that, in and of themselves, did not bespeak the plaintiff’s intention to rescind and terminate the entire contract. Whether courts in future cases will distinguish Princess Point on this ground or follow the literal holding of the case without regard to this significant factor remains to be seen.

A somewhat similar situation occurred in Coney Island Exhaust v. Mobil Oil Corp., where Coney Island Exhaust, a tenant of one part of landlord’s premises, had sued to enjoin landlord form excavating the other part of its property to construct a gas station.23 The parties entered into a stipulation which required the landlord to install a concrete barrier or tire stop across the premises. The stipulation was subject to approval by the company that was to supply the gasoline.

The tenant who was to operate the gas station contended that the stipulation was a unilateral modification of its lease and that it constituted an anticipatory repudiation of the lease. The court held that the stipulation did not constitute an anticipatory repudiation of the lease because “the stipulation depended upon the consent of…the proposed oil supplier before it became operative,” and, therefore, “the stipulation was not an unequivocal, definite, and final repudiation of the lease agreement.”24

In addition, “mere expression of difficulty in tendering the required performance, for example, is not tantamount to a renunciation of the contract.”25 In Children of America, prior to the commencement of the lease, tenant sent an email to the landlord advising that tenant was experiencing financial difficulties and offered certain options for modifying the terms of the lease. The landlord stopped the construction it was performing at the premises pursuant to the lease, and ultimately terminated the lease.

The tenant commenced an action for the landlord’s breach of the lease, and the landlord counterclaimed, to recover damages arising from the tenant’s alleged anticipatory repudiation of the lease. The court held that the email “did not constitute an anticipatory repudiation because it was not an unequivocal, definite, and final expression of the tenant’s intention not to perform its obligations under the lease.”26

Retracting Without Liability

A party who has repudiated its obligations under the contract may nevertheless retract its repudiation until the other party has elected to terminate the contract or has materially changed its position in reliance on the repudiation.27 In Dembeck v. Hassler, the seller had wrongfully repudiated the contract based upon the buyer’s failure to obtain a mortgage commitment, but upon learning that the buyer had subsequently obtained its mortgage commitment, the seller retracted its repudiation of the contract.28 The court held that the seller had “effectively retracted” its repudiation, explaining that, “[t]he effect of the seller’s wrongful repudiation was an anticipatory breach that did not put the contract out of existence but merely relieved the buyer of her future obligation to perform, and entitled her to a remedy if her position materially changed before the retraction had been issued.”29 The court noted that there was no issue of fact as to whether the buyer’s position had changed, and unanimously upheld summary judgment dismissing the buyer’s complaint. However, in order to be effective, the retraction of the repudiation must be found to be both timely and bona fide.30 Election of Remedies In Princess Point, the Court of Appeals noted that it has previously “taught that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid,” and that “a wrongful repudiation of the contract by one party before the time for performance entitles the non-repudiating party to immediately claim damages for a total breach.”31

However, in order to be effective, the retraction of the repudiation must be found to be both timely and bona fide.30 Election of Remedies In Princess Point, the Court of Appeals noted that it has previously “taught that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid,” and that “a wrongful repudiation of the contract by one party before the time for performance entitles the non-repudiating party to immediately claim damages for a total breach.”31

As further explained by the Second Department, in AG Properties of Kingston v. Bestcorp-Empire Development:

When confronted with this attempted [repudiation], the [non-repudiating party] had to choose between two options. It could either (1) treat the termination as an anticipatory breach, consider the agreement at an end and seek damages, or (2) ignore the anticipatory breach, continue to perform the agreement, wait to see if the [repudiating party] would perform when required by the terms of the agreement and, if it did not do so, then bring suit on the subsequent breach. *** In determining which election the non-breaching party has made, “the operative factor…is whether the non-breaching party has taken an action (or failed to take an action) that indicated to the breaching party that [it] had made an election.”32

Nevertheless, “[t]here is no particular time within which the non-breaching party must make the election,…He may refuse, for a time, to acquiesce in the repudiation, and urge the repudiator to perform without waiving any of his rights,” [and] “[t]he repudiator may retract his repudiation until the other party has elected to terminate the contract or has materially changed his position in reliance on the repudiation.”33

As further explained in AG Properties Where a non-repudiating party affords the repudiating party an opportunity to repent, but [the repudiating party] does not do so, the non-repudiating party’s subsequent failure to perform is not a breach….The injured party does not change the effect of a repudiation by urging the repudiator to perform in spite of his repudiation or to retract his repudiation. (Internal quotations and citations omitted).34

However, as the First Department, in Rachmani Corp., has also noted:

Once a party has indicated an unequivocal intent to forego performance of his obligations under a contract, there is little to be gained by requiring the party who will be injured to await the actual breach before commencing suit, with the attendant risk of faded memories and unavailable witnesses.35

Conclusion

As noted at the beginning of this article, cases involving claims of anticipatory breach or repudiation of contract obligations are varied in nature and often involve complex analytical application of straightforward legal principles to convoluted facts, particularly in real estate transactions. Practitioners therefore need to be very careful in how they plead their clients’ causes, whether as plaintiff or defendant, to avoid the pitfalls latent in the facts of all such cases.

This article was originally published on N.Y. Real Property Law Journal.

New Rules of Substantial Rehabilitation to Remove Units from Rent Regulation Part II

Assuming the criterion that the building is substandard or deteriorated has been met, this means that it has conditions that are in violation of law. In New York City, this creates an automatic right by the landlord to have access to the apartment for purposes of curing these violations, that is, to perform the rehabilitation. NYC Administrative Code § 27-2008. While that provision does not specify where, how or at whose expense the tenant should be housed during the renovations, owners are better advised to provide alternate accommodations such as another apartment or hotel space.

The tenants do not have any real choice about allowing this access. Failure to do so is grounds for eviction.

Paths to Substantial Rehabilitation

Those landlords who decide to substantially rehabilitate a building have two avenues they can take, getting DHCR’s opinion on a particular construction project [RSC §2520.11(e)(8)], or conducting the work and hoping that DHCR and the courts agree.

As to the judicial determinations, the rules of collateral estoppel hold that with the landlord being the only party who would be involved both in DHCR and judicial proceedings, the landlord would be bound by an adverse finding in either path so as to estop an assertion of the regulation-free status in the other path.

However, neither the DHCR, a court, or another tenant would be bound by an affirmative finding of exemption made through a path in which that tenant did not participate, except that future tenants are bound by earlier DHCR decreed exemptions. [OB95-2(VI)].

OB 95-2(II) encourages owners “to apply for an advisory prior opinion at or about the time that they seek appropriate governmental approval for the rehabilitation work.” In 885 Park Ave. Brooklyn, LLC v. Goddard, 55 Misc.3d 74, 53 N.Y.S.3d 794, 795 (App. Term 1st Dept. 2017), the court reconfirmed that seeking an advisory opinion is at the discretion of the landlord, and the prior opinion is not needed to prove substantial rehabilitation.

No Immediate Effect

Substantial rehabilitation will often, but not always immediately, move the building completely out of regulation. Sometimes, a substantial rehabilitation in the building’s history can take years or even decades eventually to cause the deregulation. For example, as a building through the normal passage of time, exits the tax-benefit-for-construction-and-voluntary-rent-stabilization J51 and 421-a programs, questions often arise whether the building upon exit from the program is nonetheless subject to rent stabilization.

Generally speaking, if there was a substantial rehabilitation after 1974 but before entry into one of these programs, the building will be exempt and indeed, the very construction that historically brought the building within the program could be the one that eventually takes it out of stabilization.

The Unsuccessful Landlord

Where the landlord is relying on a post-OB95-2 substantial rehabilitation, elements for qualification are to be strictly construed, and solid records are imperative for success in a claim for exemption from rent stabilization. Cassorla v. Foster, 2 Misc.3d 65, 774 N.Y.S.2d 901, 903 (App. Term 1st Dept. 2004); Pape v. Doar, 160 A.D.2d 213, 553 N.Y.S.2d 344, 346 (1st Dept. 1990).

The OB95-2 mandated records must show that “all ceilings, flooring and plasterboard or wall surfaces in common areas must have been replaced; and ceiling, wall, and floor surfaces in apartments, if not replaced, must have been made new as determined by DHCR.” OB95-2(I)(A). In Cassorla v. Foster, 2 Misc.3d 65, 774 N.Y.S.2d 901, 903 (App. Term 1st Dept. 2004), the First Department held that the landlord did not meet the requirements for substantial rehabilitation where although the “landlord replaced kitchens, bathrooms and intercoms, the plumbing, heating and electrical systems were not materially changed; the roof, fire escapes, interior stairways and most of the floors were not replaced; and only portions of the apartment ceilings and plastered surfaces were replaced.”

Major Capital Improvements

Where, however, the project does not meet the criteria for substantial rehabilitation, it could still qualify as a major capital improvement which enables the owner to apply to the DHCR to have portions of the costs the work the owner incorporated into the tenants’ permanent rent. Copeland v. New York State Div. of Hous. and Community Renewal, 164 Misc.2d 42, 623 N.Y.S.2d 505, 509 (N.Y. Sup. Ct. 1994) (“Section 8626(d)(3)’s provision for rental increases based on ‘major capital improvements’ also appears to allow landlords to pass “substantial rehabilitation” costs on to tenants.”) “RSC section 2522.4(a)(2) permit(s) owners to apply for an increase in legal regulated rents, based upon the proven costs of building-wide major capital improvements.” OB95-2(V). A landlord “may file an application to increase the legal regulated rents of the building or building complex on forms prescribed by the DHCR.” [RSC §2522.4(a)(2)].

Conclusion

A pair of new decisions from the Appellate Term, First Department have toughened the standards under which a landlord may claim a substantial rehabilitation exemption from rent stabilization. However, since these toughened standards apply exclusively to construction work that took place prior to the promulgation of OB95-2, the landlord either has these records or does not.

Nothing can be done to bring them into existence at this point in history. The effect of these decisions may be to bring back into stabilization many buildings whose owners believed in good faith that their buildings were not regulated. This can have substantial ripple effects both through litigation and due diligence studies of supposedly exempt buildings up for sale.

This article was originally published on Mann Publications on 6/3/2019.