Philadelphia Skyline

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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Owner Runs into a Series 1 Problem When it came Time to Evict a Long-Time Bar Tenant So the Building Could Be Sold; and Commercial Tenant Rips Store Front Off During Eviction

March 23, 2018

Obviously, I couldn’t decide which blog post title to go with above – so I went with both. The first one is the more boring of the two, but not if you are a reader who owns real estate in New York in a Series 1 company. The second title is more fun, but it’s really just about some interesting color at the end of the story.

Let’s set the stage: Commercial building in Brooklyn; Long-owned by the same family who are now out of state; Time to sell; Main tenant was a night club; It gets referred to me to get it vacant for the sale. This is a typical day at work for me. But, as I always say, cases are like snowflakes, no two are ever alike.

The twist here was that the deed holder was a Series 1 entity, a creature of Delaware law that protects holding companies. The problem was that a Series 1 company is not recognized as a legitimate owner of real property in New York State, except in very limited circumstances. Thus, the entity was not authorized to do business in New York State, according to the New York Secretary of State. I, therefore, would not bring a case on behalf of the entity. I told referring counsel that she was free to hire another landlord and tenant counsel, who would be willing to bring the technically-defective case. Counsel stuck with me, however, and took the time to transfer the property into a regular limited liability company. Once that happened, I could confidently commence a nonpayment proceeding by service of a rent demand. The parties stipulated to let the bar have another ten months. Tenant’s promise to vacate was backed up by a judgment of possession and a warrant of eviction.

Lest that successful conclusion not be dramatic enough, I offer the following. The tenant didn’t leave gracefully. We had to get Marshal Renzulli out there to conduct the eviction. The tenant left the place a complete mess with debris and garbage strewn throughout. Tenant destroyed much of the interior, including taking down the walls to the bathroom. Strange choice. But that wasn’t the biggest problem. The biggest problem was the tenant tore off the storefront. The premises couldn’t be secured. It was wide open. The situation was exacerbated by the fact that there was graffiti painted on the outside of the building saying, “Free Candy”, with a huge arrow pointing to the big gaping hole in the front of the building where the store front used to be. Also, the remaining plate glass window was decorated with a collage of condoms. You can’t make this stuff up. We needed to get an emergency crew in to board the place up. It took until midnight.

What’s the lesson in this one?...Ok…

Don’t hold New York State real estate in a Series I and always have a good contractor on speed dial in case your dive-bar-departing-tenant decides to rip the front of your building off.

Respectfully submitted,

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When to Write a “Lawyer’s Letter” Versus When to Serve a Notice to Cure Default Under Lease; Or When to Order a Donut Versus When to Order a Danish

February 24, 2018

The subject tenant in this story was a donut shop in Northern Manhattan. I represented the commercial landlord.

Tenant was scheduling deliveries through the lobby of my client’s building. Tenant’s vendors were not just wheeling boxes of merchandise, food, and beverages through the front entrance of the building, but they were leaving these deliveries on the floor of the lobby. Stacks of boxes were sometimes left for hours, right in the middle of a weekday. It was as if the lobby was tenant’s storage room. Needless to say, the lobby was obstructed, pedestrian traffic was impeded, fire codes were likely being violated, and it made the building look sloppy. All of this was prohibited by the lease.

The landlord wanted me to reach out to the tenant and get the behavior to stop. Obviously, I started by asking what the interactions between landlord and tenant had been already. The landlord forwarded me the typical email chain that happens between a landlord’s personnel and a tenant’s. 

The question, for me, was simply this – do I send a letter first or do I go straight to a notice to cure the lease default. Here are the pros and cons of each choice.

It would make more sense for me to send a letter if my investigation revealed that landlord had already made a decent attempt to solve the problem. Here, I was skeptical. The landlord was a big landlord, and had lower level people handling tenant communications, yet not an outside managing agent. The donut people were, actually, also a multi-layered organization. There was a principal somewhere who owned a bunch of donut franchises. The email chain I had been shown was between minions of the landlord and minions of the donut empire. I hate to jump in with a formal default notice if I feel like the parties have not really yet communicated. Also, a formal notice to cure lease default is necessarily a formulaic document and leaves little room for a constructive tone and it cannot end with an assurance that the landlord is invested in the tenant’s success and wishes to find a mutually beneficial solution. A letter is often a better way to open up a dialogue. 

On the other hand, I generally dislike “lawyer’s letters”. Anyone can write a letter. So what? A formal notice to cure a lease default is more aggressive and it moves the ball along in case the situation cannot be resolved and the landlord wants to terminate the lease and proceed with a holdover proceeding.

Then again, one must never forget that a commercial notice to cure lease default invites a Yellowstone injunction. A Yellowstone injunction application consists of a declaratory judgment complaint in New York State Supreme Court, accompanied by a stay application (which is routinely granted, at least in the form of a temporary restraining order, pending a hearing on a preliminary injunction), which seeks a trial outside of landlord and tenant court on the issue of whether the tenant is indeed in violation of the lease. This procedure is designed to toll the time the tenant would ordinarily have to cure a lease violation of a valuable commercial lease while the court resolves the issue of whether the tenant is indeed in violation and/or has cured the violation. If the court finds the tenant in violation, then by virtue of the stay of the notice to cure, the tenant still has the opportunity to cure the violation before the cure period ends. This process can buy the tenant significant time as the resolution of the proceeding can take months, if not years. See e.g., Jemaltown of 125th Street, Inc. v. Leon Betesh/Park Seen Realty Assocs., 115 A.D.2d 381 (1st Dept. 1985); Fratto v. Red Barn Farmers Market Corp., 144 A.D.2d 635 (2nd Dept. 1988).

Thus, a notice to cure lease default seemed like overkill for the situation. I opted to write a strong letter, but one that ended on a positive note, expressing my sincere and not-crazy hope that the situation could be resolved. In other words, I went with a plain old donut, not a strawberry cheese danish. It turned out to be the right call. The actual principal of tenant called me and emailed me immediately upon receipt of the letter, assured me the situation would be immediately corrected, and it was. No more lobby deliveries. 

Writing this post makes me want a strawberry cheese danish. 

Respectfully submitted,

Michelle Itkowitz

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A Tale of an Illegally Deregulated Apartment and the Elephant in the Room

January 25, 2018

In this chronicle, I represent a residential tenant[1]. I’ve been thinking for a while about how to present this story. The truth is, it’s a very routine and boring story. A tenant needed repairs. He was having trouble scheduling the repairs with the landlord. The landlord sent my tenant-client a scary letter, telling him they were coming into the apartment, one way or another, on a certain date and time. My client was very upset because on that date he had to attend a medical appointment with his sick, elderly mother. I, therefore, sent a letter to the landlord. The landlord backed down, my office helped to schedule access, the landlord accommodated the tenant, the work got done, the story is over. But…not really.

In the course of my representation of the tenant, I discovered that this was an illegally deregulated Rent Stabilized tenancy, being treated as free market. I see these every day. I estimate there are 250,000 illegally deregulated Rent Stabilized apartments out there. I, of course, informed the tenant. I apprised the tenant of his options for enforcing his rights, which are actually many in this situation, and the pros, cons, costs, time frames, and risks of each. I let the tenant know that he was likely being overcharged on the rent. 

The tenant told me, however, that he did not wish to pursue his right to a Rent Stabilized lease and an overcharge. In fact, he forbid me to mention my discovery in any way in any of my communications with landlord. The landlord wasn’t moving to evict him, he was comfortable with his rent, he had a long and generally good relationship with the landlord, he wasn’t a litigious fellow, his mother was sick. His position was simply – if it aint broke, don’t fix it. 

I couldn’t argue with that, and it wouldn’t matter if I did. It was the client's choice. I have witnessed this odd form of détente between landlords and tenants before in illegally deregulated apartments. Rent regulatory status is the elephant in the room that neither landlord nor tenant ever invokes against the other. For now anyway…

If a developer buys the building and sees tenant’s apartment on the rent roll as “Free Market” and then refuses to renew tenant’s next lease, I am guessing that tenant will be emailing me.

Respectfully submitted,

Michelle Itkowitz

[1] Details changed to protect people’s privacy.

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