Philadelphia Skyline

Building Owner Absorbs Tenant's Co-Working Subtenants and Business

June 10, 2018

Here, we represented a commercial landlord who had a lease with a company that licenses space to various subtenants for their small business needs. When the tenant was unable to keep up with its rental obligations, it surrendered the space to the landlord.

The landlord then had to decide what to do with all of the subtenants in the space. Evicting each subtenant would take a significant amount of time and money. Then again, it’s not every landlord that wants to take over a defaulting tenant’s co-working business.

The subtenants were actually making timely rental payments to the master tenant under their various subleases. Therefore, the landlord decided to completely take over the tenant’s business. The landlord created a new entity and assigned each license from the previous tenant to its new entity. Our office helped make the transition as smooth as possible by handling the agreements and assignments of the deal. We had to make sure that each subtenant was properly notified of the assignment, that the security was carried over properly, and that the landlord was as protected as possible from any liability that could have been incurred by the previous tenant. We also had to engage in a due diligence project to ensure that the tenant had the right to assign each license and all of the equipment and fixtures related thereto.

This story began with landlord suffering a defaulting tenant, but the story ends with the landlord not only getting the rent it wanted per square foot, but it got a new business venture as well. 

Respectfully submitted,

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Long Predicate Notices Make for Short Landlord and Tenant Litigations

May 27, 2018 

This is a story about a non-primary residence case where we represented the landlord. The tenant had long ago moved out, and was only using the apartment for her brownstone landscaping business[1]. The apartment had been reduced to an office and a warehouse.

The notice of non-renewal we prepared and served was 19 pages long. It included: data from the tenant’s business website; anticipated testimony of the managing agent about his observations; pictures; the results of a private investigator’s report (demonstrating that tenants owned a home, had registered cars, and voted in another state); the post-mark on the monthly rent statement that always came from the other state; and, of course, the camera data (we never do one of these cases without a camera). The camera showed that the tenant was only at the apartment 35% of the time, and, when she was, it was only to haul supplies in and out. My notice included the excel spreadsheet where we analyzed the camera data and still from the footage. There is a picture of tenant standing outside of her apartment door, fumbling for keys, surrounded by contractor bags and a leaf blower.

Once the tenant received the notice, she very quickly realized that she needed to hand in the keys. Her problem was that the landscaping business made sense in New York City when her overhead was the rent for a Rent Stabilized apartment, as opposed to a real commercial rent. I actually felt bad for her. My landlord-client, however, was not shedding any tears. And it really was not cool that she was storing chemicals in the apartment. In any event, tenant was nice about it and we did a quick settlement and avoided litigation.

Preparing a detailed, thorough, and comprehensive predicate notice can make all the difference in the success of a landlord and tenant case. This tenant was a business woman. My notice let her know that the game was over, that it was not worth hiring a cheap tenant lawyer and trying to hold on for another six months, through the summer landscaping season. Yes, my landlord-client paid me a lot for the preparation of the notice of non-renewal. But he got the apartment back without litigation. My last three non-primes have gone that way. This is, of course, not only shameless self-promotion, but its legal advertising, which I hope works.

It is worth ending the story by saying that this landlord-client was not a developer-sort. She was going to do some renovations to the apartment, but the unit was going to remain a Rent Stabilized unit for its next occupant.

Respectfully submitted,

[1] Some details changed to protect the innocent.

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You Got to Know When to Hold ‘Em - Buyouts on the Eve of the Altman Case

May 13, 2018

I was representing a tenant in a buyout case. My strongest argument for getting the tenant a healthy buyout was based upon the ill-fated Altman case. If Altman remained the law of the land, my client would be able to demand a lot of money from her landlord in exchange for her apartment. If, however, the case went down in flames, I still had some arguments, but they were not as nearly as potent. The attorney for the landlord faced the same dilemma I did. The second Altman came down, one of us would be a big winner and one a big loser. I don’t love those positions, I don’t find them exciting. The law shouldn’t be a game, and, when stakes are high, people’s futures hang in the balance.

The week that the ruling was due out, I convinced my client to take a conservative number. Well, landlord’s counsel did not find the number “conservative”, she thought it was high. Let’s just say the number was lower than we wanted and higher than landlord wanted. In any event, it didn’t take much convincing, because my client didn’t love rolling the dice either. She packed everything, put her stuff in storage, and rented an Airbnb. She arrived at my office with luggage as we went to the surrender ceremony to get her check.

The very next morning, the Altman case, and my best arguments…a lot of people’s best arguments…went away. I was so very glad that I had convinced my client to take the dollars on the table. I kept walking around all day humming that old Kenny Rogers tune, the Gambler:

You got to know when to hold ‘em,
Know when to fold ‘em
Know when to walk away,
Know when to run,
You never count your money when yer sitting at the table,
There’ll be time enough for countin’ when the dealin’s done.

Every gambler knows that the secret to survivin',
Is knowin' what to throw away and knowin' what to keep,
'Cause every hand's a winner, and every hand's a loser,
And the best that you can hope for is to die in yer sleep.

Respectfully submitted,

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Sometimes a Restaurant is Like a Hot Potato

April 29, 2018

Sometimes a restaurant is like a hot potato (or a hot dish of Aloo Gobi), passing from one tenant to the next, until someone is left holding the burning spud.

We recently had a case like that where arrears started building in 2015. Then the restaurant was assigned to a new group (Tenant 2, for our purposes), and then it was assigned again (Tenant 3), and then again (to Current Tenant). Current Tenant fell deeper into arrears. Indian food. Which pains me, because that’s my favorite.

Current Tenant agreed to a payment plan in a Stipulation of Settlement, which provided for the issuance of a judgment of possession and warrant of eviction. These two enforcement devices - the judgment of possession and warrant of eviction - act kind of like a guillotine, with a continued failure to comply resulting in the ax falling and ending the tenancy without the need for a trial. Upon a default, there is no need to go back to court and a marshal comes to evict the tenant.

Slight twist – Tenant 3, who had conveyed his interest to Current Tenant, filed bankruptcy. The filing was within six months of the assignment to Current Tenant. That meant, so long as a bankruptcy stay was in effect for the individual Tenant 3 (while his bankruptcy case was processed), the bankruptcy court maintained jurisdiction not only over his assets, but any assets that had been recently transferred! How crazy is that? Current Tenant was not in bankruptcy. The last tenant, Tenant 3, was. Yet owner, our client, had to request the permission of the bankruptcy court to proceed with the eviction against Current Tenant.

Thankfully, once we made an application to the bankruptcy court to lift the automatic stay, the stay was lifted so the owner could proceed with eviction. Thank you to my husband and law partner, Jay B.Itkowitz, who handles the bankruptcy aspects of my landlord and tenant practice. Good work, Jay.

As a result of the bankruptcy stay being lifted, the owner was free to make a deal with a new restaurateur, Tenant 5! Good luck Tenant 5 – we are all rooting for you!

Respectfully submitted,

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“New Perimeter Deregulation” from Rent Stabilization

April 12, 2018

A big part of my consulting practice involves conducting Rent Stabilization Due Diligence for Multi-Family Buildings and doing Rent Stabilization Coverage Analysis for Tenants. Therefore, I am often tasked with answering the question – Is this apartment subject to Rent Stabilization? Ninety percent of the time, the answer (in my practice anyway) is YES, the apartment was NOT deregulated and is subject to Rent Stabilization.

The simple truth is that there are very, very few ways to legally and properly deregulate a Rent Stabilized apartment. That is why we see so many illegal deregulations, which is a topic for another day (soon!). 

This post concerns probably the least well-known way an apartment can leave the auspices of the Rent Stabilization Law, and that is through a process that I call “New Perimeter Deregulation”. I recently engaged heavily with the concept when I did a Rent Stabilization Due Diligence Analysis on a building in Manhattan. The main subject of our inquiry was one Apartment 8D. 

1. Apartment 8D

The rear of the eighth floor had a terrace, which was shared by Apartments 8C and 8D. While Apartment 8C occupants had direct access to the roof terrace from within the apartment, Apartment 8D occupants had to walk through a means of egress in the building’s common area hallway in order to reach the terrace. As part of the building’s redevelopment plan, the owner decided to convert the terraces into bedrooms.

Owner filed plans and obtained permits from the New York City Department of Buildings, allowing it to transform part of the terrace space into internal space within Apartment 8D. By doing this project, owner increased the livable square footage of Apartment 8D by approximately 146 Square Feet, a 36% increase. 

2. The New Perimeter Rule

DHCR Fact Sheet #5 states:

"If an apartment is a newly constructed unit or a new apartment because its previous outer dimensions were substantially altered, the owner may be entitled to set a first (negotiated) rent.":

That policy has been upheld by appellate case law. In 300 West 49th Street Associates v. DHCR, 212 A.D.2d 250 (AD 1st, 1995):

"The mechanism pursuant to which a landlord may charge a “first” or “free market” rent is an administratively created policy implemented by DHCR in its capacity as the administrative agency which regulates residential rents. The policy applies only when the perimeter walls of the apartment have been substantially moved and changed and where the previous apartment, essentially, ceases to exist, thereby rendering its rental history meaningless. If the rental history of a stabilized apartment is no longer applicable due to the creation of a new unit with completely different perimeter walls, there would be no rational method which DHCR could utilize to calculate the legal rent since the stabilized rent is based upon a continuous chain of rental history. By way of example, such allowance might be granted if a two-bedroom apartment were split into two studio apartments or two smaller dwellings were consolidated to form one large apartment. In either circumstance, the rental history of the prior units would be inapplicable to the newly created apartment for the purposes of determining the stabilized rent as the former unit or units no longer remain." [Emphasis supplied.]

3. Cases Where First Rent Allowed

In Dixon v. 105 West 75th Street LLC, 2015 WL 4744404 (Sup. Ct. NY Cty 2015) the court held that the owners were:

"entitled to [a] first rent without rent stabilization restrictions because the documentary evidence established that the Apartment was vacant prior to the renovations; was a newly created duplex apartment which did not previously exist; the C of O prior to the work being conducted showed that no roof-top livable space existed, nor was there a duplex apartment; the DOB work permits and subsequent C of O’s showed that the Owners created additional livable space….[and] Here, the documentation submitted by the Owners showed that the Apartment was converted from a one floor apartment to a duplex apartment which included additional living space, installation of an internal staircase, and additional roof-top penthouse. This created a new unit obliterating the existing apartment thereby rendering its rental history meaningless. [Thus] Owners were entitled to deregulation of the Apartment’s rent stabilization status."

In 446-450 Realty Co., L.P. v. Higbie, 30 Misc.3d 71 (App. Term 1st 2010) the court held that a landlord that made significant dimensional changes to a single floor apartment to create a new, duplex apartment prior to tenant’s occupancy was entitled to charge a free market or “first rent.”

In Polyak v. DHCR, 2001 WL 36405730 (Sup. Ct. NY Cty 2001), the court upheld a finding from DHCR that the apartment first occupied by the tenant and her family ceased to exist; that it had been combined with the adjacent apartment to create an entirely new unit, which, therefore, passed out of Rent Control and into Rent Stabilization. 

4. Cases Where No First Rent Allowed

In Velasquez v. DHCR, 130 A.D.3d 1045 (2nd Dept. 2015), the court held that a new unit was NOT created by simply unsealing a doorway that led to two additional bedrooms. 

In Devlin v. DHCR, 309 A.D.2d 191 (1st dept. 2003), the court held that a landlord who merely altered one bedroom wall in Rent Stabilized apartment, in order to enlarge a neighboring apartment, was not entitled to charge tenants “first rent”.  

Replacement of certain kitchen and bathroom fixtures and the addition of 27-square-foot closet did not allow a landlord to charge a “first rent” on the basis of there having been a “newly created unit.” Roker Realty Corp v. Gross, 163 Misc.2d 766 (App. Term 1st 1995).  

Installation of kitchen and bathroom fixtures and reduction of apartment size by removal of two closets (resulting in reduction in apartment size) did not create a new apartment entitling the landlord to a “first rent” because “[t]here was no significant change or rehabilitation of the existing apartment, nor was a new housing accommodation created in space previously used for nonresidential purposes.” Cedot Realty Corp v. Estwanik, 3/24/95 N.Y.L.J. 28, col. 6 (App. Term 1st Dep’t).

5. If the “First Rent” for the new-perimeter apartment is above the Deregulation Threshold, then is the new apartment deregulated? 

If the “First Rent” for the new-perimeter apartment is above the Deregulation Threshold, then is the new apartment deregulated?

I found case law and a DHCR Opinion Letter that supports the result that a new-perimeter apartment with a “First Rent” above the Deregulation Threshold is, in fact, deregulated.

In Rubin v. Decker Associates LLC, 52 Misc.3d 1208(A) (Sup. Ct. NY Cty. 2016), the court held:

"Apartment 8F is not subject to rent regulation under the ETPA. A landlord may charge “first” or “free market” rent “when the perimeter walls of the apartment have been substantially moved and changed and where the previous apartment, essentially, ceases to exist.” (Matter of 300 W. 49th St Assoc. v. N.Y. St. Div. of Hous. & Community Renewal, Off. of Rent Admin., 212 A.D.2d 250, 253 [1st Dept 1995].) Plaintiff's argument that unit 805 and apartment 8F are the same unit is without merit. Unit 805 was combined in 1997 with four other units to create apartment 8F. Apartment 8F is five times the size of unit 805.

The perimeter walls of apartment 8F were substantially moved when defendant created apartment 8F. Because the perimeter walls were substantially moved, defendant was permitted to charge a “first” rent for the newly formed apartment. The ETPA excludes from rent regulation units with legally regulated rent over $2000. Defendant has proven that the first rent charged after apartment 8F was created was $6995…A New York State Housing and Community Renewal opinion letter provides that “if the first rent, negotiated between owner and tenant, is $2000 per month or more, ...the combined apartment would be high-rent vacancy decontrolled.” (N.Y. St Div of Hous & Community Renewal Opinion Letter Jan 25, 2001 [citing 9 NYCRR 2520.11(r)(10) ] .) Because the first rent defendant charged exceeded $2000, apartment 8F is expressly decontrolled from rent stabilization."

[Emphasis supplied.]

I actually managed to dig up the DHCR Opinion Letter dated January 25, 2001, which states:

"January 25, 2001…

Your inquiry is as follows:

A tenant currently residing in Apt. A at a rent stabilized rent of $961 per month. Apt. B has become vacant. The last regulated rent for Apt. B was $1,007.86. The tenant in Apt. A has requested that the landlord combine Apt. A and Apt. B, and that the combined apartments be renovated. The tenant in Apt. A will then occupy Apt. AB and is willing to agree that the new apartment is not rent stabilized and that the rent for the new apartment shall be a fair market rent.

Does the Division agree that the tenant [now] in Apartment A will no longer have rent stabilization status after the apartments are combined? Does the Division agree that the landlord will be entitled to charge a fair market rent for the apartment?

At the outset it should be noted that the regulatory status of an apartment is not determined by agreement of the parties, but rather by the provisions of law and regulation. In this regard, Rent Stabilization Code (RSC) Sec. 2520.13 provides that, with certain exceptions not relevant to the situation as you described it, any waiver by a tenant of rights guaranteed by the rent laws or regulations is void.

If the combination of apartments which is proposed occurs, the owner would appear likely to qualify for a "first rent." "First rents" are based on significant alterations to the outer dimensions of a housing accommodation such that the subject apartment did not, in effect, exist on the base date of rent stabilization (generally 1969 or 1974). Therefore, where two or more housing accommodations are combined, the owner is entitled to a “first rent”, negotiated with the tenant. The first rent becomes the new base rent upon which future stabilized increases are to be computed.

Sec. 2520.l(r) (10) was recently added to the RSC by amendment effective December 20, 2000, … and reads as follows: "where an owner substantially alters the outer dimensions of a vacant housing accommodation, which qualifies for a first rent of $2,000 or more per month, exemption pursuant to this subdivision i.e., [high-rent vacancy decontrol] shall apply."

Therefore, if the first rent, negotiated between owner and tenant, is $2,000 per month or more, it appears that the combined apartment would be high-rent vacancy decontrolled."

6. Seventy-Five Percent (75%) Chance of Deregulation 

I gave the owner a Seventy-Five Percent (75%) chance that, if tested by a court or DHCR, owner would ultimately be allowed to charge a “first rent”, i.e. a market rent, for Apartment 8D. 

I based my opinion on the law and the following facts. There was no case exactly on point. The terrace outside Apartment 8D, however, did NOT even belong to 8D before the project. In that regard, this was not about converting outdoor space into indoor space. The extra 146 SF were not previously associated with 8D. Apartment 8D truly has a brand new perimeter and it is growing in size by almost thirty-five percent. To me, it seems like a new unit. 

Respectfully submitted,

Michelle Itkowitz

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