Landlord & Tenant

Illusory Tenancy Defense Applicable to Loft Tenancy

545 Eighth Avenue Associates, L.P. v. Shanaman

NYLJ 2/4/04, p. 21, col. 3

Civil Ct., N.Y. Cty

(Schneider, J.)

In a nonprimary residence holdover proceeding, loft landlord sought summary judgment on its motion to dismiss subtenant's illusory tenancy defense. The court denied landlord's motion, holding the defense applicable to loft tenancies.

Loft landlord rented the subject apartment to tenant, who has not lived in the apartment since at least 1989. Tenant sublet the apartment to subtenant's predecessor in that year, and sublet the apartment to current subtenant in 1996. Subtenant paid tenant $1300 per month in rent, more than twice the legal rent set by the Loft Board. Tenant's relatives apparently held two other apartments in the building as prime tenants, and apparently had similar arrangements with other subtenants with respect to those apartments. When landlord brought this proceeding against tenant and subtenant to recover possession, alleging that tenant did not maintain the apartment as her primary residence, tenant settled with landlord, but subtenant raised an “illusory tenancy” defense: because the prime tenancy was a sham, subtenant stepped into the prime tenant's shoes and enjoyed the rights of a prime tenant. Landlord moved to dismiss, arguing that the illusory tenancy defense was not applicable to occupants of buildings subject to the Loft Law.

In denying landlord's motion, the court held that even though the Loft Law makes no explicit provision for illusory tenancies, the Loft Law should be read “in pare materia” with the Rent Stabilization Law with respect to subletting. The court emphasized in particular that if landlord had completed legalization of the subject building, the apartment would have been subject to rent stabilization, and the illusory tenancy defense therefore would have been available. The court concluded that it would make sense to deprive subtenant of the illusory tenancy defense merely because landlord had not completed legalization of the building.

COMMENT

The illusory tenancy doctrine allows a resident subtenant to step into the nonresident prime tenant's shoes, often when there is collusion between prime tenant and landlord to evade either the rent stabilization laws or the voting requirements with respect to co-op conversions. In a classic illusory tenancy scenario, the prime tenant is a straw man for the landlord, profiting both parties and, frequently, subverting rent regulation laws. See Hutchins v. Conciliation and Appeals Board, 125 Misc2d 809, 813, describing this scenario. Courts have expanded the doctrine to cases where tenant has engaged in profiteering without any collusion with landlord. For example, in Avon Furniture Leasing v. Popolizio 116 A.D.2d. 280, the Appellate Division held that a subtenant was entitled to the rights of the prime tenant, when the prime tenant had charged the subtenant far above the regulated rent.

545 Eighth Avenue extends the illusory tenancy doctrine to the regulated loft context by applying the doctrine that various rent regulation statutes should be read in pare material. The Appellate Division applied the doctrine in BLF Realty v. Kasher 299 A.D.2d. 87, where a prime tenant had sublet a loft for rent in excess of the lawful rent. The court held that the prime tenant had engaged in illegal profiteering even though the Loft Law does not expressly prohibit such a sublet. The Kasher court reasoned that the Loft Law was enacted for the same reason as the rent control and rent stabilization laws: to respond to New York City's housing shortage. As a result, the same profiteering rules should be applied to tenancies in each context.

Landlord Who Evaded Rent Stabilization Not Entitled to Equitable Relief

Haberman v. Singer

NYLJ 2/13/04, p. 18, col. 1

AppDiv, First Dept

(Opinion by Ellerin, J.)

In landlord's action in equity seeking use and occupancy on a theory of unjust enrichment, landlord appealed from Supreme Court's grant of tenant's summary judgment motion. The Appellate Division affirmed, holding that landlord's effort to frustrate the rent stabilization laws precluded intervention of equity on landlord's behalf.

In 1983, the Conciliation and Appeals Board determined that landlord had been overcharging tenant for the subject apartment, and directed landlord to roll back the rent and to refund past overpayments or to credit them against future rent. Rather than complying with the CAB's directives, landlord brought a holdover proceeding against tenant, which was subsequently dismissed. When tenant tendered rent checks in December 1984 and January 1985, landlord refused to accept them. He also ignored tenant's offers to pay the legal rent. Then, in 1991, landlord brought an action seeking rent arrears for the period between 1983 and 1991, and then brought an eviction proceeding for nonpayment of rent. Housing Court awarded tenant summary judgment, concluding that landlord was not in compliance with the Rent Stabilization provisions regarding security deposits and lease renewals. In 1995, landlord finally offered tenant a renewal lease and returned tenant's excess security deposit. The parties executed a 1-year lease to begin on March 1, 1996. Tenant timely tendered rent for March and April 1996, but landlord did not cash the checks until February 1997, when he deposited them along with other checks from tenant that landlord had received and never cashed. In 1998, landlord brought an action for rents accruing subsequent to the filing of his earlier 1991 action. The Appellate Division concluded in that case that landlord was not entitled to back rent pursuant to the Rent Stabilization Law, but left open the possibility that landlord could recover back rent on a quantum meruit basis. Then, in 2000, landlord brought this action in equity seeking all rent from 1983 through 1991. The tenant sought summary judgment dismissing the claims in both the 1991 and 1998 actions, and Supreme Court dismissed the complaints.

In affirming, the Appellate Division emphasized landlord's consistent refusal to comply with rent stabilization obligations, including refusal to offer a renewal lease or to return the excess security deposit for more than 13 years. The court also noted landlord's apparently deliberate effort to hold onto tenant's checks for long periods of time before cashing them, in the hope that the checks would then bounce. The court concluded that landlord was attempting to manipulate the tenant, and held that landlord's actions militated against the intervention of equity on his behalf. As a result, the court held that tenant was entitled to summary judgment.

Landlord Enjoys Priority in Security Deposit over Judgment Creditor

Automatic Data Processing v. York Hunter Inc.

NYLJ 2/5/04, p. 18, col. 1

Civil Ct., N.Y. Cty

(Singh, J.)

Judgment creditor petitioned to compel bank to turn over a security deposit held in the name of judgment debtor and judgment debtor's former landlord. The court dismissed the petition, holding that landlord enjoyed priority in the security deposit, even over a judgment creditor.

On Jan. 31, 2003, landlord entered into a stipulation settling a summary proceeding it had brought against judgment debtor. On June 9, 2003, landlord entered a money judgment of $200,000 against judgment debtor when debtor did not post a lease bond required by the stipulation. The following month, judgment debtor was evicted from the premises. In August, judgment creditor obtained a default judgment for $21,534,91. In September, judgment creditor served an information subpoena on the bank, which acknowledged holding a security deposit in the name of judgment debtor and landlord. The bank, however, refused to turn over the money without a court order. Judgment creditor then sought to compel the bank to turn over the security deposit.

In dismissing the petition, the court acknowledged that a security deposit generally remains the property of a tenant, and constitutes a trust fund in the landlord's hands. At the same time, however, the court emphasized that the security deposit put the landlord into the status of a secured creditor with respect to claims for unpaid rent or other damages. The court rejected judgment creditor's argument that the deposit cannot be a security interest because the landlord never followed the filing requirement of UCC article 9. Instead, the court held that landlord had priority to use the security deposit as an offset, even against a judgment creditor.

Acceptance of Rent Check Vitiates Notice of Termination

Growth Management Co., LLC v. Caviedes

NYLJ 2/18/04, p. 24, col. 1

Civil Ct., Queens Cty

(Badillo, J.)

In landlord's holdover proceeding, tenant moved to dismiss based on landlord's acceptance of a rent payment after the termination date in the notice of termination. The court dismissed the proceeding, holding that acceptance of the rent check vitiated the notice of termination, and issuance of a check to tenant did not revive the notice.

After serving tenant with a notice of termination, landlord received the July 2003 rent check from tenant. Landlord cashed the rent check, which was for a period after the termination date specified in the notice of termination, but later, on Aug. 4, 2003, issued a check to tenant for the funds represented by the check landlord had erroneously cashed. Landlord then brought this holdover proceeding, and tenant moved to dismiss.

In granting tenant's motion, the court distinguished this case from those in which landlord had inadvertently accepted rent checks and returned them uncashed without delay. In this case, landlord could not revive a termination notice by re-issuing a check more than 30 days after tenant had tendered payment. Moreover, the court held inapplicable a lease provision indicating that receipt of rent with knowledge of breach “of any covenant of this lease” would not be deemed a waiver of the breach. The court noted that this language merely protected landlord against contentions that he had waived default under the lease, not that he had waived the termination notice.

Illusory Tenancy Defense Applicable to Loft Tenancy

545 Eighth Avenue Associates, L.P. v. Shanaman

NYLJ 2/4/04, p. 21, col. 3

Civil Ct., N.Y. Cty

(Schneider, J.)

In a nonprimary residence holdover proceeding, loft landlord sought summary judgment on its motion to dismiss subtenant's illusory tenancy defense. The court denied landlord's motion, holding the defense applicable to loft tenancies.

Loft landlord rented the subject apartment to tenant, who has not lived in the apartment since at least 1989. Tenant sublet the apartment to subtenant's predecessor in that year, and sublet the apartment to current subtenant in 1996. Subtenant paid tenant $1300 per month in rent, more than twice the legal rent set by the Loft Board. Tenant's relatives apparently held two other apartments in the building as prime tenants, and apparently had similar arrangements with other subtenants with respect to those apartments. When landlord brought this proceeding against tenant and subtenant to recover possession, alleging that tenant did not maintain the apartment as her primary residence, tenant settled with landlord, but subtenant raised an “illusory tenancy” defense: because the prime tenancy was a sham, subtenant stepped into the prime tenant's shoes and enjoyed the rights of a prime tenant. Landlord moved to dismiss, arguing that the illusory tenancy defense was not applicable to occupants of buildings subject to the Loft Law.

In denying landlord's motion, the court held that even though the Loft Law makes no explicit provision for illusory tenancies, the Loft Law should be read “in pare materia” with the Rent Stabilization Law with respect to subletting. The court emphasized in particular that if landlord had completed legalization of the subject building, the apartment would have been subject to rent stabilization, and the illusory tenancy defense therefore would have been available. The court concluded that it would make sense to deprive subtenant of the illusory tenancy defense merely because landlord had not completed legalization of the building.

COMMENT

The illusory tenancy doctrine allows a resident subtenant to step into the nonresident prime tenant's shoes, often when there is collusion between prime tenant and landlord to evade either the rent stabilization laws or the voting requirements with respect to co-op conversions. In a classic illusory tenancy scenario, the prime tenant is a straw man for the landlord, profiting both parties and, frequently, subverting rent regulation laws. See Hutchins v. Conciliation and Appeals Board, 125 Misc2d 809, 813, describing this scenario. Courts have expanded the doctrine to cases where tenant has engaged in profiteering without any collusion with landlord. For example, in Avon Furniture Leasing v. Popolizio 116 A.D.2d. 280, the Appellate Division held that a subtenant was entitled to the rights of the prime tenant, when the prime tenant had charged the subtenant far above the regulated rent.

545 Eighth Avenue extends the illusory tenancy doctrine to the regulated loft context by applying the doctrine that various rent regulation statutes should be read in pare material. The Appellate Division applied the doctrine in BLF Realty v. Kasher 299 A.D.2d. 87, where a prime tenant had sublet a loft for rent in excess of the lawful rent. The court held that the prime tenant had engaged in illegal profiteering even though the Loft Law does not expressly prohibit such a sublet. The Kasher court reasoned that the Loft Law was enacted for the same reason as the rent control and rent stabilization laws: to respond to New York City's housing shortage. As a result, the same profiteering rules should be applied to tenancies in each context.

Landlord Who Evaded Rent Stabilization Not Entitled to Equitable Relief

Haberman v. Singer

NYLJ 2/13/04, p. 18, col. 1

AppDiv, First Dept

(Opinion by Ellerin, J.)

In landlord's action in equity seeking use and occupancy on a theory of unjust enrichment, landlord appealed from Supreme Court's grant of tenant's summary judgment motion. The Appellate Division affirmed, holding that landlord's effort to frustrate the rent stabilization laws precluded intervention of equity on landlord's behalf.

In 1983, the Conciliation and Appeals Board determined that landlord had been overcharging tenant for the subject apartment, and directed landlord to roll back the rent and to refund past overpayments or to credit them against future rent. Rather than complying with the CAB's directives, landlord brought a holdover proceeding against tenant, which was subsequently dismissed. When tenant tendered rent checks in December 1984 and January 1985, landlord refused to accept them. He also ignored tenant's offers to pay the legal rent. Then, in 1991, landlord brought an action seeking rent arrears for the period between 1983 and 1991, and then brought an eviction proceeding for nonpayment of rent. Housing Court awarded tenant summary judgment, concluding that landlord was not in compliance with the Rent Stabilization provisions regarding security deposits and lease renewals. In 1995, landlord finally offered tenant a renewal lease and returned tenant's excess security deposit. The parties executed a 1-year lease to begin on March 1, 1996. Tenant timely tendered rent for March and April 1996, but landlord did not cash the checks until February 1997, when he deposited them along with other checks from tenant that landlord had received and never cashed. In 1998, landlord brought an action for rents accruing subsequent to the filing of his earlier 1991 action. The Appellate Division concluded in that case that landlord was not entitled to back rent pursuant to the Rent Stabilization Law, but left open the possibility that landlord could recover back rent on a quantum meruit basis. Then, in 2000, landlord brought this action in equity seeking all rent from 1983 through 1991. The tenant sought summary judgment dismissing the claims in both the 1991 and 1998 actions, and Supreme Court dismissed the complaints.

In affirming, the Appellate Division emphasized landlord's consistent refusal to comply with rent stabilization obligations, including refusal to offer a renewal lease or to return the excess security deposit for more than 13 years. The court also noted landlord's apparently deliberate effort to hold onto tenant's checks for long periods of time before cashing them, in the hope that the checks would then bounce. The court concluded that landlord was attempting to manipulate the tenant, and held that landlord's actions militated against the intervention of equity on his behalf. As a result, the court held that tenant was entitled to summary judgment.

Landlord Enjoys Priority in Security Deposit over Judgment Creditor

Automatic Data Processing v. York Hunter Inc.

NYLJ 2/5/04, p. 18, col. 1

Civil Ct., N.Y. Cty

(Singh, J.)

Judgment creditor petitioned to compel bank to turn over a security deposit held in the name of judgment debtor and judgment debtor's former landlord. The court dismissed the petition, holding that landlord enjoyed priority in the security deposit, even over a judgment creditor.

On Jan. 31, 2003, landlord entered into a stipulation settling a summary proceeding it had brought against judgment debtor. On June 9, 2003, landlord entered a money judgment of $200,000 against judgment debtor when debtor did not post a lease bond required by the stipulation. The following month, judgment debtor was evicted from the premises. In August, judgment creditor obtained a default judgment for $21,534,91. In September, judgment creditor served an information subpoena on the bank, which acknowledged holding a security deposit in the name of judgment debtor and landlord. The bank, however, refused to turn over the money without a court order. Judgment creditor then sought to compel the bank to turn over the security deposit.

In dismissing the petition, the court acknowledged that a security deposit generally remains the property of a tenant, and constitutes a trust fund in the landlord's hands. At the same time, however, the court emphasized that the security deposit put the landlord into the status of a secured creditor with respect to claims for unpaid rent or other damages. The court rejected judgment creditor's argument that the deposit cannot be a security interest because the landlord never followed the filing requirement of UCC article 9. Instead, the court held that landlord had priority to use the security deposit as an offset, even against a judgment creditor.

Acceptance of Rent Check Vitiates Notice of Termination

Growth Management Co., LLC v. Caviedes

NYLJ 2/18/04, p. 24, col. 1

Civil Ct., Queens Cty

(Badillo, J.)

In landlord's holdover proceeding, tenant moved to dismiss based on landlord's acceptance of a rent payment after the termination date in the notice of termination. The court dismissed the proceeding, holding that acceptance of the rent check vitiated the notice of termination, and issuance of a check to tenant did not revive the notice.

After serving tenant with a notice of termination, landlord received the July 2003 rent check from tenant. Landlord cashed the rent check, which was for a period after the termination date specified in the notice of termination, but later, on Aug. 4, 2003, issued a check to tenant for the funds represented by the check landlord had erroneously cashed. Landlord then brought this holdover proceeding, and tenant moved to dismiss.

In granting tenant's motion, the court distinguished this case from those in which landlord had inadvertently accepted rent checks and returned them uncashed without delay. In this case, landlord could not revive a termination notice by re-issuing a check more than 30 days after tenant had tendered payment. Moreover, the court held inapplicable a lease provision indicating that receipt of rent with knowledge of breach “of any covenant of this lease” would not be deemed a waiver of the breach. The court noted that this language merely protected landlord against contentions that he had waived default under the lease, not that he had waived the termination notice.