Philadelphia Skyline

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.

Labels: , , ,

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.

Labels: , , , ,

Where There Is Smoke There Is Not Always Fire – Occasionally a Preferential Rent is Done Correctly

February 24, 2019

Our story today, wherein I represented a residential landlord, concerns not one, but two, unicorns.[1] First, we have a Preferential Rent for a Rent Stabilized apartment that was properly discontinued and, Second, we have a parking space that really could be eliminated and not considered an essential service.

Most Preferential Rents are just B.S. and do not stand up to scrutiny.[2] If the legislature kills Preferential Rents in June of this year, I say good riddance to them. Usually Pref’s are used as a ploy to illegally deregulate an apartment. Typically, the Preferential Rent is, at the very best, the Legal Rent in disguise. Or if a Preferential Rent is really what it purports to be, it usually is not properly structured to last for only one lease term, rather it will typically last for the life of the tenancy.

Here, however, everything was shockingly in order. There was no rent overcharge on the Legal Rents. Preferential Rents had never before been utilized. The DHCR rent history was in no way sloppy or suspicious. The lease for the subject tenant had a rider that could not have been clearer, check this out:

Notwithstanding the rent reserved on the face page of the Lease, the tenant shall only be required to pay the Preferential Rent of $1,650.00 per month for the 2-year term of the Lease, expiring on June 30, 2018.

The Legal Rent is $2,434.00. The tenant acknowledges that the subject apartment will be registered with the…DHCR… at the Legal Rent of $2,434.00 reserved in this lease. 

The landlord reserves the right to resume charging tenant the Legal Rent of $2,434, plus any lawful increases, when the term of this lease ends on June 30, 2018.

Nothing ambiguous there.

Then we had the parking spot. There were two parking spots in front of each of the ten buildings, in this horizontal multiple dwelling. There were curb cuts from the street allowing people to park in these spots. Landlord rented the spots out, some to people who lived within the ten buildings and some to outsiders. There are more apartments in the buildings then there are parking spaces and the parking spaces were never assigned to individual units. In other words, the spots do not go along with the apartments. The subject tenant rented a parking spot, in front of one of the ten buildings, not the one he lived in. Tenants had a separate contract for the parking spot, independent of the lease, with a different beginning date. The rent the tenant paid for the parking spot was not included in his rent. [See 110-15 71st Road Associates, LLC v. DHCR, NYLJ, 9/8/08, p. 32, col. 1 (App. Div. 2 Dept.), LVT Number: #20722, 18 years in to a Rent Stabilized tenancy, tenant rented a parking space from landlord for the first time, where there were 40 parking spots for a 74-unit building. Landlord won when the appellate court decided that parking wasn't an ancillary building-wide service.] But back to our story…

Here’s where it gets crazy. All my landlord client wanted to do was to raise the rent that tenant was paying a little. My client was not asking to go back to the Legal Rent. My client was willing to do another, slightly higher, Preferential Rent. Nor did my client want the parking spot back.

Nevertheless, this tenant had resources and hired once of my erstwhile competitors, who enthusiastically and preemptively sued the landlord in Supreme Court for a declaratory judgment regarding both the status of the Preferential Rent and the parking space that we were not looking to recover. Just like that, the dispute turned into global-thermal-nuclear war.

So silly.

We went all the way through discovery – the exchange of paper documents and a deposition. I gave tenant’s zealous counsel absolutely everything he asked for. Did he want the deed, which was online as a public record – HERE! Did he want the old leases for the apartment going back to 1942, which took landlord’s secretary all day to scan – HERE! Did he want my client’s management records for the unit, which I could have objected to as irrelevant – TAKE ’EM ALL! Live it up. None of it changes the fact that the plain-language of the lease goes my way in this matter.

I, however, did not ask for discovery on my routine counterclaims. I had everything I needed with that lease clause, and a healthy DHCR Rent Roll and leasing history. I tried to keep my client’s fees and expenses low by taking the path of least resistance. I was Rocky letting Apollo Creed exhaust himself. Well, in my analogy Rocky really doesn’t get hurt.

On the eve of trial, tenant’s counsel called up contrite and wanted to settle. Which we did. On exactly the terms my client had proposed 18 months earlier. If my client was not a nice man and a reasonable businessperson, this tenant could have ended up losing his apartment.

What’s the lesson? There are several:

  •          Preferential rents are controversial and troublesome, even when done correctly.
  •          Leases should always be written in plain language and should be clear.
  •          People litigate too much; most problems can be solved outside of court, if the lawyers take the time to analyze their cases thoroughly at the beginning so they understand their strengths and weaknesses.

Respectfully submitted,

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

[2] This is my “Story” blog, not my “Teaching” blog, therefore we are not going to go in to all the in’s and out’s of Preferential Rents here. See Rent Stabilization Code § 2521.2.

Labels: , , ,

Regular Monitoring of Guaranty Litigation is Critical

February 3, 2019

1. Most guarantors are just as broke as the single-asset restaurant corporation that was the defunct tenant.

2. If the guarantors are not broke, the amount owed is not worth pursuing in a New York Court if it is under $100,000.

3. I questioning the wisdom of a post-possession collection effort against many guarantors.

But I will counter that somewhat here in the Our Stories blog by giving a recent example from my practice of how to do Good Guy litigation successfully.

My healthy skepticism of this type of legal work prompts me to keep a careful watch on such litigation. I track each matter I work on with a spreadsheet such as this[1]:

Here are the important things to look for in these situations. Each case on the sample spreadsheet took a year. That’s not bad. On XYZ Case, the client made, even after paying legal fees, 67 cents on the dollar and on ABC Case, even after legal, the same client made 12 cents on the dollar. The average over the two cases was about 35 cents on the dollar. Again, not bad. Moreover, notice that what my firm was paid in legal fees was LESS than what the client netted. That, too is important. These cases should not exist for a lawyer to make out better than a client.

What’s the lesson? Regular monitoring of these matters, including the legal fees spent and the likelihood of success as these guaranty matters unfold, is critical.

Respectfully submitted,

[1] This is an example of a spreadsheet I made for an actual client, but with details slightly changed.

Labels: ,

No Matter How Many Times You Ask, the Answer is the Same

January 16, 2019

We defeated a plaintiff-mortgagee’s summary judgment motion in a mortgage foreclosure case in Kings County. Our defendant-client, the mortgagor, steadfastly denied at depositions that he signed the mortgage documents in question. The court found that the denials were consistent throughout the client’s examination before trial and, therefore, presented a material question of fact.

What’s the lesson? The lesson is that an attorney can ask the same question of a deponent at a deposition one hundred different ways, but doing so does not mean he will get a different answer. In this case, asking over and over only reinforced deponent's version of events and made his testimony stronger.  

Respectfully submitted,

Labels: , ,

Go to older posts

Copyright by Itkowitz PLLC.

Sitemap   |   Disclaimer