Philadelphia Skyline

A Story About the Practical Implications of the Protections of the New Owner’s Use Rules Under the 2019 STPA

July 5, 2019

The Story

I hesitated over writing this story. Why? Well, it’s long. And, frankly, I am proud of this particular work. We saved a person’s home. So, it just seemed like this story deserved better than my usual blogpost sarcasm. Thus, this post-idea remained on my “to be written” list for over six months. Why write the story now? Now, it is very timely, in the wake of the Statewide Tenant Protection Act of 2019 (“STPA”). 

I represented the Rent Stabilized tenant, a single, middle-aged adult in a small building in one of the boroughs.[FN1]  It was an “owner’s use” case. The landlord asserted that she was taking over the apartment for her daughter, who would function as the building’s superintendent. 

By the time the case got to me (I was substituted in for tenant’s original lawyer), it had been going on for years and was in the post-deposition stage. A year before I was hired, landlord and tenant had put on the record in open court their intention to reach a settlement, and the case was marked off calendar for that purpose. Thereafter, there ensued almost a year of the parties’ lawyers going back and forth on the details, never agreeing on a final draft or entering into a settlement agreement. Nevertheless, based on the transcript of the court record, the landlord’s attorney somehow managed to obtain a warrant of eviction. 

Landlord’s position was that what had been put on the record a year ago, while tenant was represented by experienced counsel (not me at that point), was the settlement, and that the drafting and execution were mere details. The tenant’s (my new client’s) position was that no deal had been reached. Moreover, my client had discovered that the daughter whom the apartment was allegedly being taken for was a medical doctor and she had accepted a position at a hospital in another state. It is difficult to be located in New York City, shoveling snow, plunging toilets, and taking out the garbage, typical superintendent tasks, while simultaneously functioning as a full-time physician far away in another state. (And there’s the sarcasm…) Still, the matter would likely turn on what did, or did not, constitute a settlement when parties go on the record in open court, each represented by counsel, outlining broad parameters of a deal. 

An “agreement to agree” which leaves material terms for future negotiation, is unenforceable. 2004 McDonald Ave Realty, LLC v. 2004 McDonald Avenue Corp., 50 AD3d 1021, 1023 (2nd Dept 2008). In the case that is the subject of this story, there were a number of essential issues which were not discussed on the record, all of which were material. Counsel agreed that a stipulation would have to be drafted, finalized, and executed by the parties. That never happened. In subsequent email exchanges, in fact, landlord’s counsel was suggesting that tenant should agree that the DHCR rent history was not inflated, a position with which tenant did not agree. Furthermore, the parties could not come to any agreement as to what would happen if landlord’s doctor-superintendent-daughter never actually moved into the apartment. Again, no agreement on this important term was reached.

We won the motion seeking to open the case up (kudos to my husband and law partner, who argued it for me), vacate the warrant of eviction, and put the case back on the trial calendar. In the meantime, however, the over-confident landlord had transferred the building out of the name of the individual owner, into the name of a corporation. Only an individual (human) owner may petition the court for permission not to renew a Rent Stabilized lease on account of owner’s intended use. Therefore, landlord was now completely incapable of trying and winning the case, and, thus, the case was discontinued. But that wasn’t quite the end of the story.

The 2019 STPA Changes to the Owner’s Use Law

Thereafter, presumably hoping to come after my client again on yet another owner’s use case, landlord transferred the building from the new corporate owner, back into the name of the former individual owner. Really! Perhaps next time, the owner would put forward another adult child who was not working in another state. Maybe the owner hoped that my client, who would not have qualified for Legal Aid, would weary of paying my (or any) lawyer’s fees for more years of litigation. 

Here is where the STPA of 2019 comes in. The STPA changes NYC Admin Code § 26-511(c)(9)(b) by limiting the owner to a single unit of rent regulated housing stock for use by owner or owner’s immediate family. 

In this matter, owner had previously evicted at least two other Rent Stabilized families from other apartments in the tenant’s building, on the grounds of owner’s use, although at the time this matter was pending, neither of those apartments were being used by owner’s family. 

This case was a prime example of how the owner’s use provision of the law was often being misused. To give you an idea of the problem with the owner’s use jurisprudence pre-dating the STPA, below I offer my standard response, which I developed over the years, to landlords asking me about doing an owner’s use case:

Owner’s use cases are tough, and you need to know these things about them:
(1) Most importantly – Owner’s use is a temporary exemption. Temporary. The next tenant you install is legally Rent Stabilized. There is no getting around that. Owner’s Use does not liberate you from regulation. 
(2) You must own the building in your own name. Not in an LLC. Get extra insurance. 
(3) The only way you have a prayer of the case succeeding is if you are being 100% absolutely honest. I will not work on a case where the landlord is making it up. The tenant will get to depose you under oath and whichever family members and their spouses who you claim are moving into the tenant’s apartment. Then everyone will have to testify again, credibly and consistently, at trial. Before I take one of these cases I make sure to interview all the witnesses. If you cannot convince me, you will not be able to convince the court.
(4) You can ONLY start these cases in the Renewal Period – between 90 and 150 days before the end of a Rent Stabilized lease. Therefore, the lease must have been properly renewed and you must wait to get within that period.
(5) If the tenant or her spouse is over 62 years old, then you must relocate the tenant upon putting yourself or your family into the apartment. You must relocate them to ANOTHER Rent Stabilized apartment at the same rent in the same neighborhood. If you cannot do that, the eviction will not happen.

Those problems existed for landlords everywhere, before the new law, yet these barriers never resulted in a shortage of illegitimate owner’s use cases. Now that we are adding the “only one apartment” objection to the list, I think you will see fewer fraudulent cases. This new barrier is not one of proof or procedure. It’s a clear one-bite-of-the-apple for a landlord in a building where this kind of case has never been used before, and an absolute prohibition for any other case like this where owner’s use has previously been employed. 

What’s the Lesson?

What’s the lesson? The lesson is that here we were dealing with a landlord who was clearly abusing the owner’s use provision of the law in order to evict Rent Stabilized tenants from her building. Through good lawyering, I was able to help my tenant-client dodge that bullet, this time. The other Rent Stabilized families previously evicted on owner’s use cases where the owner never used the unit for her family, were not so lucky. Indeed, the transfer of the building back into the name of the individual owner, demonstrated that landlord was gearing up for another try against my client. 

I know the STPA is controversial. And this post is not intended to be an exhaustive discussion of the topic. But this particular provision regarding owner’s use cases is going to justly protect a lot of tenants, including my client. 

Suggestions for Individual’s Legitimately Looking to Buy, Renovate, and Live In a Small Apartment Building as a Single Family Residence

Let’s balance this post out a little. 

For those prospective owners who are legitimately looking for a small apartment building, such as a converted townhouse, to occupy as a single family home, greater care will have to be taken to ensure that:

(a) there is no more than one Rent Stabilized tenant in the building (as always, I suggest Rent Stabilization Due Diligence for small buildings; see FAQ #14); and/or

(b) that there have not been any owner’s use cases filed by previous individual owners. Here, I would suggest an extensive litigation search, and drafting representations about this kind of thing into a sales contract (and having such representations survive closing). 

Keep in mind, however, that I am not a transactional lawyer, and that last idea will need to be hammered out by the closing attorneys. 

Respectfully submitted,

Michelle Itkowitz

FN1. Some of the details have been muted or changed to protect the innocent.

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Just Under the Wire – The Last Tenant Buyout Before the Statewide Tenant Protection Act of 2019

June 16, 2019

Last fall, I began representing a Rent Stabilized tenant.[FN1]  Landlord was a new owner of the building and had offered tenant a $125k buyout. Tenant wanted to leave the apartment but was not sure she was getting a good deal. Thus, I was hired by tenant to do a Tenant Buyout Analysis

I did the analysis and found that the building had been illegally deregulated during a J-51 tax abatement, then re-regulated. I did not agree that the rent was correctly set when the building was re-regulated, thus, I believed that landlord actually owed tenant a rent overcharge. Using this as leverage, I wrote a letter to landlord, asking for more money. The offer quickly increased by $50k; landlord was now offering tenant $175k.

This is where I often get into trouble on this work. Tenant was so impressed and delighted that I was able to get landlord to increase the offer by 40% with a letter, that surely, she insisted, another letter would get her even more. As anyone who does this work regularly will tell you, it almost never works that way. Nevertheless, I eventually sent landlord a heartfelt and well-reasoned email, and after several months, got my tenant-client another $25k – for a total of $200k. This was now unsatisfactory to my client, and both parties stepped back and ceased negotiations for a handful of months. 

The winter turned into spring, and we all knew the rent laws were going to change in Albany. Although no one knew how they would change. This put pressure on landlords and tenants everywhere to resolve their buyout negotiations. This particular landlord informed us that the deal would have to be done by June 14, 2019, the day before the rent laws were set to expire. One of my colleagues here at the firm, Isaac Tilton, and I told our client that it was time to decide, and that the deal may not be there on June 15 or ever again, depending on what the legislature did. Because this buyout was, ostensibly, worth a premium to the landlord because it might be one of the last it would ever do, my colleague Isaac Tilton successfully negotiated for another $10k for our tenant-client. Thus, the deal was struck. Therefore, we were suddenly faced with getting the final paperwork done and signed and the tenant moved out, before the governor signed the law in three days’ time.  

The very next day, the State Legislature passed the Statewide Tenant Protection Act of 2019 (“STPA”), which took away the incentive for a landlord of a Rent Stabilized unit to seek a vacancy. There is no longer a rent-increase pathway to deregulation. Moreover, the legislature severely limited a Rent Stabilized landlord’s ability to increase the rent as a result of a vacancy. Read my blog post on the new laws here

It was a frenetic three days. Both parties knew there was no wiggle room – the deal had to get done. We conducted the surrender ceremony literally within hours of the governor signing the law. The tenant was happy, she had plans to move out anyway. 

What’s the lesson? The lesson is, as I have written in these pages before, when you think the law is in flux, it is seldom my advice that either side should wait around, counting on being the beneficiary of the change. In this case, had we not completed the deal before June 14, 2019, the tenant would have lost her buyout forever and the landlord may have lost a market-rate apartment. You simply never know what’s happening next, much less how such changes will play out. 

There is no doubt that the 2019 STPA will preserve Rent Stabilized housing by discouraging landlords from seeking tenant turnover. As I have opined elsewhere, the law did what it needed to do. An unintended loser under the new laws, however, are those individual tenants who were counting on selling their positions in their units someday. By far, such tenants are not the majority of tenants. But I mention them here, because many such tenant have been my clients over the years. For tenants who were intending on moving anyway (for a job in another city, to follow a spouse with a job in another city, to buy a home, or after retirement), tenant buyouts often represented once-in-a-lifetime opportunities. There are still some opportunities for tenant buyouts, but they will be far fewer than before the STPA. And that’s life in the big city. 

Respectfully submitted,

Michelle Itkowitz

[FN1] Some of the details have been changed to protect the innocent. 

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Claw Back of Free Rent for Defaulting Commercial Tenant Backed by Venture Capital

May 5, 2019

In this story, I represented a large commercial landlord in a dispute with its tenant, a growing business that had received several big infusions of venture capital. It was early in the relationship, yet tenant was swiftly falling behind. [FN1]  

It is not unusual for start-ups to fail and fail early. It is also not unusual, that when start-ups get big infusions of other-people’s-money (“OPM”), they overspend on Manhattan premises, especially on fancy build-outs. Often, landlords give tenants generous periods of free rent in order to achieve such build-outs. This makes sense for a commercial landlord who thinks she is getting an above-market rate for a lease that will last 10 to 15 years. It is also not unusual for the guarantors of these leases to be other companies, subsisting on the same OPM, which always makes me skeptical that such guaranty is worthwhile. When such tenants fail, therefore, it’s a big disaster for the landlord. 

In these situations, when I am the landlord’s lawyer, the first thing I try to do is claw back the free rent. I find this achieves several objectives. One objective is that it startles the tenant’s principals. Start-up principals are often not seasoned business people who pay close attention to the fine print of their commercial leases. Such principals often never figured on ever having to pay rent for that initial tenancy period. When they receive my claw-back notice, they not only need to tell their investors that they owe some rent, they need to tell their investors that they suddenly owe a ton of rent. This gets the powers-that-be behind the tenant focused on the default and a possible settlement.

It worked in this case. Someone swept in and gave the ailing tenant...more money. The landlord was paid. All is well that ends well. 

What’s the lesson? The lesson is that renting to start-ups is always going to be risky, and a landlord’s and tenant’s leasing counsel (which I am not, I do not do leasing) should be very careful about free-rent clauses, particularly by setting up clear mechanism for recovery of the free rent if the tenant defaults. 

Respectfully submitted,

Michelle Itkowitz

FN1. Some of the details have been changed to protect the innocent.

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You Don’t Need to Throw in the Kitchen Sink – Pre-Paid Rent is Held in Trust for the Tenant

April 7, 2019

In today’s story, I represented a residential tenant who sublet a co-op for a rent of $15,000 per month and paid all that rent for the year ahead of time, for a term spanning January 1, 2018 through December 31, 2018.[1]

In June of 2018, however, the board of the co-op accused my client’s children of having dangerous and un-permitted parties on the building’s roof. The board threatened to default the shareholder, who served my subtenant-client with a notice to terminate the subtenancy prematurely. For what it is worth, I am almost positive that the allegations were false. My investigation revealed that it was likely some other shareholder’s kids who were causing the trouble, and my client, a year-long subtenant just passing through, was unjustly blamed.

Nevertheless, the process of defending against such a claim on the merits would be time-consuming, a hassle, and expensive for my client, who had better things to do. Fortunately, there were obvious and devastating procedural defenses available to my subtenant-client. Did you spot them in the first paragraph? You did!? Good!

Yes, my client had paid all the rent in advance. So, when the shareholder attempted to terminate the tenancy in June 2018, it should have returned the pre-paid rent for any periods after the termination date. Acceptance of rent after the date of termination vitiates the termination notice. If rent is accepted after service of a notice of termination but prior to a proceeding’s first court date, then the termination notice will be vitiated. Oppenheim v. Spike, 107 Misc.2d 55 (App. Term, 1st Dept. 1980).

The shareholder failed to return the pre-paid rent. When I raised this defense in my answer, shareholder’s lawyer went nuts. She did a motion to strike my affirmative defenses and tried to argue that rent pre-paid for a period after the termination date was different than rent tendered and accepted after a termination date. Oh really?!

In fact, any rent paid by a tenant in advance remains the tenant’s property, held by the landlord as a trustee, until applied to the rent when it accrues. General Obligations Law § 701(1); Eujoy Realty Corp. v Van Wagner Communications, LLC, 22 N.Y.3d 413 (2013) (“[A]ny rent paid by a tenant in advance remains the tenant’s property, held by the landlord as a trustee, until applied to the rent when it accrues.”)

Here, the subject lease did not suggest that the rent for the sub-tenancy was $180k annually. The lease explicitly said that the rent was $15k per month, and that all 12 months were due ahead of time in December 2017.

Thus, here, even though tenant paid all the rent in December 2017, as per the General Obligations Law and Court of Appeals case law, such rent continued to be the property of tenant and was in trust for shareholder, who was not allowed to deposit monthly rental payments rent into their bank account until due. Therefore, such monthly rental payments were, indeed, by operation of law, tendered by subtenant and accepted by shareholder after the termination date.

We settled on excellent terms for my client.

What’s the lesson? To me, the lesson is that not all procedural defenses are created equal. I do not like to toss in everything, including the kitchen sink, as a defense when representing a tenant. I prefer to employ only use-it-or-lose it defenses and meaningful defenses. That requires a vigorous early analysis of a matter. Here, that kind of approach made all the difference for my client.

Respectfully submitted,

[1] Some of the details have been changed to protect the innocent.

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Queue Ominous Music…the Co-Op Subtenant Who Would Not Pay or Leave

March 20, 2019

In this epic saga, my client was a shareholder in what used to be an affordable co-op in Queens.[1] We will call him “Shareholder”.

A few years ago, another shareholder on the same floor as the building, we will call her “Subtenant”, was getting divorced. Subtenant told Shareholder that she was in the process of buying another apartment within the complex. Shareholder was not in the apartment (he had gotten married and moved to Los Angeles), and Subtenant needed a temporary place to stay, so it seemed like a good match. Thus, Shareholder let Subtenant into his co-op apartment. Shareholder never made a written sublease with Subtenant. Queue ominous music, because our story is about to take a dark turn.

The problem was that Subtenant stopped paying Shareholder and refused to leave. In fact, Subtenant refused to leave, even long-after the co-op board (“the Board”) began assessing Shareholder a forty percent (40%) surcharge because the sublet approval period had run out. Subtenant, you see, became embroiled in a litigation (having nothing to do with the apartment we are talking about in this story) with the Board and her ex-wife regarding another apartment in the very same complex. Subtenant did not want to leave the building while her big litigation was going on, and the costs of that battle in her life meant she did not have enough left over for things like paying the sub-rent to Shareholder.

By the way, the sub-rent that Shareholder and Subtenant agreed on orally was a unclear. First it was the full maintenance payment. Then it was the maintenance plus half the surcharge. Then there was some formula the two of them had come up with regarding the electric bill. To make matters way worse (legally), the Subtenant paid rent at irregular intervals and always in different amounts.

By the time Shareholder contacted me, Subtenant had not paid Shareholder anything at all in five months.

When I sat down to analyze the case, I had to go through months of texts, emails, and letters, whereby Shareholder kept telling Subtenant, “You better pay me, or I will take legal action.” By the way…Every time one party tells the other party that they will “take legal action”, and then they do not take legal action, that just sends the message loud and clear to your adversary that you are afraid to take legal action. But I digress…

My challenge as the Shareholder’s lawyer here was two-fold. First, I had to decide whether the occupant really was a subtenant, or whether the proper legal designation for her was a tenant-at-will, since the rent was not typically paid monthly, there was no real agreed upon term, and there was no written lease. I decided that because Shareholder told me that the original agreement was for the Subtenant to pay monthly, and because Subtenant did do so for awhile in the beginning, that Subtenant was a subtenant with a month-to-month tenancy. In retrospect, I am still not sure that was the right decision (but – spoiler alert – it worked, so I guess it was the right decision). I always say when I teach a continuing legal education class on basic landlord and tenant law, that the hardest decisions are the very first ones you make in the case.

Once I decided that the Subtenant was a month-to-month tenant, then I had to decide whether it would be better to terminate her tenancy, or whether to sue her for the rent. I decided that the rent was too much of a moving target, so I just went with terminating the month-to-month tenancy pursuant to Real Property Law § 232-a.

By the way, the lack of a written lease gave rise to at least two other problems. Shareholder had no ability to recover legal fees from Subtenant. Generally, a litigant in New York State is not entitled to recover his or her attorneys’ fees in the absence of a statute that establishes such entitlement (and very few do), or a contract wherein the parties to the contract have agreed as such. Leases, on the other hand, often do call for attorneys’ fees under certain circumstances. Shareholder had no lease; thus, he couldn’t recover legal fees against Subtenant, even if Shareholder won.

Moreover, most leases contain a waiver of the right to a trial by jury, which is enforceable. No lease meant that Subtenant could ask for a jury in Housing Court. This could add considerable time and expense to what should be a simple proceeding.

We these challenges before us, we started the holdover proceeding. Queue more ominous music. You will recall that Subtenant was involved in a large litigation with the Board and her ex-wife. Subtenant, of course, had expensive private counsel in that case. Subtenant shows up in our holdover proceeding, however, with a Legal Aid attorney! How, I asked, did that happen? Turns out the co-op was in a zip code where every tenant gets a free attorney. It was so incongruous. Here was a wealthy, savvy occupant, who was engaged in litigation with private counsel over ownership of an apartment, in Housing Court with a Legal Aid attorney fighting over an apartment in the same building that she was freeloading in while fighting her case. Anyway…Legal Aid was not so sure what to do with the case, because there really were not any defenses. There was no argument that the unit was subject to Rent Stabilization and they were not finding any technical defects with my proceeding. Nevertheless, the entrance onto our stage of Legal Aid slowed things down by three adjournments while they got themselves together.

Ultimately, it was better that I had an experienced counsel on the other side to work with, and we settled the case and there was a vacate date on the horizon. Queue more ominous music. This case really was like one of those Netflix shows where they just throw one crisis at you after the next and the protagonist is always running from explosions and monsters. You get tired of it. But unlike binge-watching, my client and I could not turn this situation off.

Right before the vacate date, the Subtenant had a break down and was hospitalized. My client was compassionate, and when the family of Subtenant showed up on the scene asking for more time, we contacted Legal Aid and offered the time, as we simultaneously contacted Adult Protective Services. But, of course, three adjournments of the eviction date later, we had to insist that the family wrap it up, and they did. It was like a Netflix show that should have ended after three seasons, but went on for five.

What’s the lesson? There are several:

·  Never sublet your apartment without a written lease.
·         If a subtenant is not paying and/or leaving, do not wait six months to seek legal help.
·         Ensuring that everyone in a zip code has representation is great, but Legal Aid should have the ability to opt out if they find themselves representing someone that already has private counsel and who has no defenses; so that they can apply their resources to protecting people who really need Legal Aid's help to save their homes.
·         There are certain delays baked into the Housing Court process that it gives no ROI to fight about. Examples include adjournments for tenant to get a lawyer who is up to speed and adjournments of an eviction if a tenant is truly in crisis. Therefore, landlord’s counsel should be ready at other times, so that no delay is occasioned by landlord’s delay.
·         If you hate the fourth season of a Netflix show, do not watch it. Put down your phone and get some exercise instead.

Respectfully submitted,

[1] Some of the details have been changed to protect the innocent.

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