When Is a Settlement Not a Settlement?

In April 2006, setting off in a new direction, the Appellate Division held that settlement agreements that favor a tenant can be unenforceable. Drucker v. Mauro 814 NYS 2d 43 (1st Dept. 2006). There was a two-justice dissent, but the appeal to the Court of Appeals was recently dismissed due to non-finality. Thus, Drucker needs to be looked at to gauge when a settlement is indeed a settlement in landlord-tenant disputes.

The Case

In Drucker, landlord sought a declaration from the Division of Housing and Community Renewal (DHCR) that the Drucker apartment was not rent-stabilized. While the DHCR case was pending, the parties negotiated an out-of-court settlement that raised tenants' rent, but guaranteed lease renewals in perpetuity at rates tracking rent stabilization guideline increases. Shortly after the settlement agreement, the DHCR ruled that the apartment was rent-stabilized. The parties went on without incident for about 7 years until the landlord sought to deregulate the apartment, this time based on luxury deregulation, as the rent had reached $2000 per month.

When DHCR deregulated the apartment based on luxury deregulation, landlord argued that the part of the settlement allowing renewals in perpetuity should not be enforceable. The lower court found that the settlement agreement, including the renewal rights, was enforceable.

In reversing, the Appellate Division looked at the many cases prohibiting landlords from unlawfully deregulating apartments by virtue of, for example, non-primary leases. Drucker first found that alleged renovations to the apartment provided a 'flimsy premise' for the rent increase. Since the rent-stabilization code prohibits (in certain circumstances) a tenant from waiving its protections, the Druckers could not waive their right to a timely renewal lease. That was a 'sufficient basis for voiding the agreement.'

Rent Stabilization Code ' 2520.13 provides that a tenant's waiver of a benefit of any provision of the RSL or this code is void; provided, however, that based upon a negotiated settlement between the parties and with the approval of the DHCR, or a court of competent jurisdiction, or where a tenant is represented by counsel, tenant may withdraw, with prejudice, any complaint pending before the DHCR.

Commonly before the DHCR are disputes over rent overcharges and setting a proper rent. Thus, since a tenant is allowed to withdraw an overcharge complaint, which could leave a rent that was an overcharge, the setting of unlawful rents is not clearly prohibited by this code section. Moreover, nothing requires a tenant to complain about an unlawful rent, and tenants are often barred from filing such complaints under a 4-year statute of limitations. As for landlords, there is no Code limit on waiving rights. An example is that a landlord is free to waive its right to charge a full regulated rent.

The Court's Concerns

Nonetheless, the Drucker court was concerned that permitting parties to stipulate to a rent that exceeds the lawful amount can adversely affect the status of a unit for future occupants. The consequences of this 'enhanced rent,' the court wrote, was to prematurely subject the premises to luxury decontrol. The lease rider that allowed the tenant renewals if the apartment was not stabilized violated the 'express statutory language deregulating' rent-stabilized apartments. As the court put it, the 'enforcement of the lease and rider would preclude luxury decontrol of the unit, even after the rent exceeded $2000, because the landlord can only charge the rent provided in the agreement, not fair market value, in perpetuity.' However, under luxury deregulation, after an apartment is deregulated, it simply becomes a market lease where parties are free to agree to any rent that they want. Nothing in the Code prohibits a landlord from offering a tenant a lease below market value, or in perpetuity.

The outcome of the case left the Druckers without their renewal rights and living in a deregulated apartment for which the landlord will now likely get market value. Having received the benefit of the first part of the settlement agreement raising the rent, this outcome, as the dissenting justices noted, does not seem fair.

The Dissent

The dissent pointed out that: 1) there was either a legitimate claim, or at least a dispute, over whether the rent could lawfully be raised to the amount agreed upon; 2) settlements are favored and encouraged absent any bad faith or overreaching; 3) unlike previous cases holding agreements unenforceable, nothing in the Drucker agreement 'explicitly or implicitly deregulated the apartment in question'; and 4) the rider did not waive any of the tenant's protections (even if the rent increase was unlawful, the rest of the rider should have been enforceable since the rider said that if any term was illegal the rest would remain in force). The majority's fear that a prospective future tenant would have to pay more rent was unlikely, if not impossible, because the apartment had been luxury deregulated. In the end, the dissent looked to previous principles of voiding settlements that were whether there was bad faith or collusive effort to avoid rent stabilization.

Other Cases

Shortly after Drucker was decided, Justice Edward Lehner, in Century Realty v. Hyatt (Index No. 115724/1996, Sup. NY. 2006) voided a stipulation, but not because it deregulated an apartment while there was a legitimate dispute over rent stabilization coverage. Rather, since the settlement agreement included a misrepresentation of fact, the court found that the 'integrity of the judicial system is at stake when judicial mandates are procured by the submission of fraudulent representations.'

Before Drucker was Riverside Syndicate v. Munroe (Sup. NY County, Gische, J., Index No. 109491/04), which upheld a court-ordered stipulation that had settled a dispute over a tenant's right to become the tenant of record of a rent stabilized apartment. Ten years after the agreement, the landlord attempted to renege. The landlord contended that it had unlawfully raised the rent and wanted to undo its deed. However, with that undoing the landlord did not offer to disgorge the benefits it had already received for its decade of self-described overcharges, nor did it allege that it would return the apartments to rent stabilization.

These cases perhaps provide some contrast to determine the rules. First, in Riverside, the agreement concerned an apartment that the landlord did not recognize as the tenant's lawful apartment. The settlement made Munroe the tenant of record on certain conditions, with which the tenant complied. Second, Riverside was a court-ordered stipulation in an undisputedly contested litigation (i.e., not a collusive settlement, nor one with a 'flimsy premise'). Last, in Century the misrepresentation to the court was the undoing of the settlement.

Over the last couple of decades courts have voided landlord's schemes to extricate themselves from rent stabilization. That case law is now being used by landlords to undo deals when luxury deregulation provides a better financial plan. To work fairly and not be misused, Drucker needs to be distinguished from court ordered stipulations in legitimate disputes where there are no misrepresentations to the court.

Darryl M. Vernon practices in Manhattan with the firm of Vernon & Ginsburg LLP. The author's firm represented the tenants in Riverside, which is on appeal to the Appellate Division.

In April 2006, setting off in a new direction, the Appellate Division held that settlement agreements that favor a tenant can be unenforceable. Drucker v. Mauro 814 NYS 2d 43 (1st Dept. 2006). There was a two-justice dissent, but the appeal to the Court of Appeals was recently dismissed due to non-finality. Thus, Drucker needs to be looked at to gauge when a settlement is indeed a settlement in landlord-tenant disputes.

The Case

In Drucker, landlord sought a declaration from the Division of Housing and Community Renewal (DHCR) that the Drucker apartment was not rent-stabilized. While the DHCR case was pending, the parties negotiated an out-of-court settlement that raised tenants' rent, but guaranteed lease renewals in perpetuity at rates tracking rent stabilization guideline increases. Shortly after the settlement agreement, the DHCR ruled that the apartment was rent-stabilized. The parties went on without incident for about 7 years until the landlord sought to deregulate the apartment, this time based on luxury deregulation, as the rent had reached $2000 per month.

When DHCR deregulated the apartment based on luxury deregulation, landlord argued that the part of the settlement allowing renewals in perpetuity should not be enforceable. The lower court found that the settlement agreement, including the renewal rights, was enforceable.

In reversing, the Appellate Division looked at the many cases prohibiting landlords from unlawfully deregulating apartments by virtue of, for example, non-primary leases. Drucker first found that alleged renovations to the apartment provided a 'flimsy premise' for the rent increase. Since the rent-stabilization code prohibits (in certain circumstances) a tenant from waiving its protections, the Druckers could not waive their right to a timely renewal lease. That was a 'sufficient basis for voiding the agreement.'

Rent Stabilization Code ' 2520.13 provides that a tenant's waiver of a benefit of any provision of the RSL or this code is void; provided, however, that based upon a negotiated settlement between the parties and with the approval of the DHCR, or a court of competent jurisdiction, or where a tenant is represented by counsel, tenant may withdraw, with prejudice, any complaint pending before the DHCR.

Commonly before the DHCR are disputes over rent overcharges and setting a proper rent. Thus, since a tenant is allowed to withdraw an overcharge complaint, which could leave a rent that was an overcharge, the setting of unlawful rents is not clearly prohibited by this code section. Moreover, nothing requires a tenant to complain about an unlawful rent, and tenants are often barred from filing such complaints under a 4-year statute of limitations. As for landlords, there is no Code limit on waiving rights. An example is that a landlord is free to waive its right to charge a full regulated rent.

The Court's Concerns

Nonetheless, the Drucker court was concerned that permitting parties to stipulate to a rent that exceeds the lawful amount can adversely affect the status of a unit for future occupants. The consequences of this 'enhanced rent,' the court wrote, was to prematurely subject the premises to luxury decontrol. The lease rider that allowed the tenant renewals if the apartment was not stabilized violated the 'express statutory language deregulating' rent-stabilized apartments. As the court put it, the 'enforcement of the lease and rider would preclude luxury decontrol of the unit, even after the rent exceeded $2000, because the landlord can only charge the rent provided in the agreement, not fair market value, in perpetuity.' However, under luxury deregulation, after an apartment is deregulated, it simply becomes a market lease where parties are free to agree to any rent that they want. Nothing in the Code prohibits a landlord from offering a tenant a lease below market value, or in perpetuity.

The outcome of the case left the Druckers without their renewal rights and living in a deregulated apartment for which the landlord will now likely get market value. Having received the benefit of the first part of the settlement agreement raising the rent, this outcome, as the dissenting justices noted, does not seem fair.

The Dissent

The dissent pointed out that: 1) there was either a legitimate claim, or at least a dispute, over whether the rent could lawfully be raised to the amount agreed upon; 2) settlements are favored and encouraged absent any bad faith or overreaching; 3) unlike previous cases holding agreements unenforceable, nothing in the Drucker agreement 'explicitly or implicitly deregulated the apartment in question'; and 4) the rider did not waive any of the tenant's protections (even if the rent increase was unlawful, the rest of the rider should have been enforceable since the rider said that if any term was illegal the rest would remain in force). The majority's fear that a prospective future tenant would have to pay more rent was unlikely, if not impossible, because the apartment had been luxury deregulated. In the end, the dissent looked to previous principles of voiding settlements that were whether there was bad faith or collusive effort to avoid rent stabilization.

Other Cases

Shortly after Drucker was decided, Justice Edward Lehner, in Century Realty v. Hyatt (Index No. 115724/1996, Sup. NY. 2006) voided a stipulation, but not because it deregulated an apartment while there was a legitimate dispute over rent stabilization coverage. Rather, since the settlement agreement included a misrepresentation of fact, the court found that the 'integrity of the judicial system is at stake when judicial mandates are procured by the submission of fraudulent representations.'

Before Drucker was Riverside Syndicate v. Munroe (Sup. NY County, Gische, J., Index No. 109491/04), which upheld a court-ordered stipulation that had settled a dispute over a tenant's right to become the tenant of record of a rent stabilized apartment. Ten years after the agreement, the landlord attempted to renege. The landlord contended that it had unlawfully raised the rent and wanted to undo its deed. However, with that undoing the landlord did not offer to disgorge the benefits it had already received for its decade of self-described overcharges, nor did it allege that it would return the apartments to rent stabilization.

These cases perhaps provide some contrast to determine the rules. First, in Riverside, the agreement concerned an apartment that the landlord did not recognize as the tenant's lawful apartment. The settlement made Munroe the tenant of record on certain conditions, with which the tenant complied. Second, Riverside was a court-ordered stipulation in an undisputedly contested litigation (i.e., not a collusive settlement, nor one with a 'flimsy premise'). Last, in Century the misrepresentation to the court was the undoing of the settlement.

Over the last couple of decades courts have voided landlord's schemes to extricate themselves from rent stabilization. That case law is now being used by landlords to undo deals when luxury deregulation provides a better financial plan. To work fairly and not be misused, Drucker needs to be distinguished from court ordered stipulations in legitimate disputes where there are no misrepresentations to the court.

Darryl M. Vernon practices in Manhattan with the firm of Vernon & Ginsburg LLP. The author's firm represented the tenants in Riverside, which is on appeal to the Appellate Division.