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.

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