When Is a Settlement Binding?

On April 5, 2007, the Court of Appeals voided a decade-old court-ordered stipulation that had settled a contested litigation over a rent-stabilized apartment. The landlord in Riverside Syndicate Inc. v. Munroe, et al. 10 N.Y.3d 18, was allowed to renege on a settlement on the theory that the stipulation violated public policy and unlawfully waived the tenant's rights. The ramifications of this ruling are extraordinary. A party to a court ordered settlement can reap the benefits for as long as is opportune (the court ruled that there is no applicable statute of limitations). The abiding party is left to try to recoup those benefits that it gave under the agreement ' in the Riverside case a decade of rent and substantial improvements to the apartment. And both parties will be left to undo all that occurred based on a now voided settlement.

The Case

In 1995, Riverside sought to evict the tenants from a rent-stabilized apartment they were subletting, allegedly illegally. The apartment that was next door to tenants' rent-stabilized apartment, and tenants had been subletting this contiguous apartment for several years with the written permission of Riverside. When the legal sublet ended, Riverside let the tenants remain and took rent for another two years without objection. In response to landlord's petition, tenants moved for summary judgment, relying in part on the 'illusory tenant' doctrine and asserting a right to remain as rent stabilized tenants. While the motion was pending, the case was settled, in court, with counsel for Riverside and the tenants, and with the judge before whom the motion was pending so ordering the stipulation.

The stipulation settling the case recognized the tenants as the lawful rent stabilized tenants of the neighbor's apartment at a rent of $2,000 per month, which the tenants agreed they would not later challenge. The stipulated rent was significantly higher than either party contends was the previous legal rent (a fact that proved significant in the Court of Appeals' decision). While the landlord would later claim that the settlement rent was illegal, the tenant argued that the rent could lawfully be raised for many reasons, and moreover that the legislature put in a four-year statute of limitations that made almost all rents legal once four years elapsed. The court order provided that the waiver of any right to challenge the rent would be 'effective as a court stipulation by two sides represented by counsel and so ordered by a judge of competent jurisdiction.' If the apartments were ever deregulated, it was agreed that the tenants would get renewals at 8% every two years. Also among the 17 paragraphs in the stipulation was one that said that the tenants could remain as the rent stabilized tenants 'regardless of their primary residence.' There was no issue about primary residence at the time. But there was an issue about how rent could be set for an illusory tenant rising up to rent-stabilized status. As will be seen when we discuss the Appellate decisions, this was an issue for the courts, too.

The Lower Court Decision

Everyone abided by the stipulation for many years. The apartment that was obtained in the 1995 litigation was luxury deregulated in 2001. The tenants didn't object since there was a court order prohibiting any challenge. The tenants paid the rent and spent some $150,000 improving and combining the apartments as was allowed under the agreement. But in 2003, the landlord brought a non-primary residence case against the tenants, seemingly in direct violation of the stipulation. The tenants defended based on the stipulation and the case was dropped.

In 2004 the landlord sued in Supreme Court for a declaration voiding the stipulation. The landlord claimed that it had illegally raised the rent, which led to premature luxury deregulation. Pleading that it must undo its wrong, the landlord urged that the tenants had unlawfully waived rights in violation of Rent Stabilization Code 2520.13. The landlord also said that the non-prime provision was an unlawful waiver of its rights. Both sides moved for summary judgment and the tenants won.

The lower court found disingenuous the landlord's claim that it was pursuing this case in the interest of the public and to save the city's stock of affordable housing. The stipulation was upheld as an enforceable settlement of a contested litigation with the court finding as follows. The landlord had reaped the benefits for years of the rent and the tenants' improvements. The apartments had been joined and were not recognizable as their original separate state. There was no collusion like previous cases that had voided collusive deals, nor was the landlord a victim of fraud or overreaching or mistake. And since landlords are not compelled by law to evict tenants on primary residence grounds, the agreement to indeed not do so was not unlawful (there are no rent-stabilization laws prohibiting landlords from waiving rights).

The Appellate Division reversed and found that the stipulation was an unlawful waiver of 2520.13 and violated public policy because its main objective was illegal.

The Court of Appeals Opinion

The Court of Appeals affirmed and held 'that an agreement to pay an illegal rent for a rent-stabilized apartment, in exchange for an agreement by the landlord to let the tenants use the apartment as a second home, is void and cannot be enforced by either party.' The application of 2520.13 was found to be 'straightforward' and a bar to the tenants' waiver of its right to pay a lower rent. Explaining away the part of 2520.13 that allows a waiver when there is court approval, the Court said that this only allows the withdrawal of a DHCR complaint. This part of the decision is troubling since tenants frequently give up rights in court ordered settlements when there is no pending DHCR complaint. The simplest examples are the countless cases where tenants surrender apartments ' and thus all of their rights ' for a buyout.

But the court did say that the 'argument for upholding the agreement would be stronger if, in 1996, the parties had had a dispute about the amount of the legal maximum rent, and had compromised at a figure above the tenants' and below the landlord's.' In Riverside itself, neither party persuaded the court that there was a plausible legal basis for the $2,000 stipulated rent, even though, in fact, it was not a simple issue as to how a rent is set when an apartment is obtained by an illusory tenancy claim ' especially when the landlord could have claimed that tenant had created a whole new apartment with improvements ' with the previous apartments 'no longer recognizable as such.'

As for the non-prime clause, the court upheld several Appellate Division cases that prohibited such agreements. But those previous decisions were based on the theory that allowing someone to use a rent regulated apartment as a second home would lead to underutilized affordable housing. With the advent of luxury deregulation, that theory was largely eviscerated because evicting someone on non-prime grounds did not keep the apartment in the stock of affordable regulated housing. Rather, evictions frequently lead to immediate deregulation. It is therefore hard to understand how the court went on to say that the voided stipulation and its kind 'distort the market.' Rent regulation distorts the market ' by definition, and arguably for good policy reasons. The agreement that the court voided did virtually nothing to distort the market.

In the end, to clarify the Appellate Division's holding that it was 'leaving the parties as they found them,' the court said that neither party may rely on the agreement; that the tenants may have a 'strong claim, subject to any statute of limitations defense that may exist, to recover the excess rent they paid; and they may have the right to rescind the deregulation order. The parties are now headed toward potentially years of disputes over the rent overcharges.

Darryl Vernon, a member of this newsletter's Board of Editors, practices law in Manhattan with the firm of Vernon & Ginsburg, LLP.

On April 5, 2007, the Court of Appeals voided a decade-old court-ordered stipulation that had settled a contested litigation over a rent-stabilized apartment. The landlord in Riverside Syndicate Inc. v. Munroe, et al. 10 N.Y.3d 18, was allowed to renege on a settlement on the theory that the stipulation violated public policy and unlawfully waived the tenant's rights. The ramifications of this ruling are extraordinary. A party to a court ordered settlement can reap the benefits for as long as is opportune (the court ruled that there is no applicable statute of limitations). The abiding party is left to try to recoup those benefits that it gave under the agreement ' in the Riverside case a decade of rent and substantial improvements to the apartment. And both parties will be left to undo all that occurred based on a now voided settlement.

The Case

In 1995, Riverside sought to evict the tenants from a rent-stabilized apartment they were subletting, allegedly illegally. The apartment that was next door to tenants' rent-stabilized apartment, and tenants had been subletting this contiguous apartment for several years with the written permission of Riverside. When the legal sublet ended, Riverside let the tenants remain and took rent for another two years without objection. In response to landlord's petition, tenants moved for summary judgment, relying in part on the 'illusory tenant' doctrine and asserting a right to remain as rent stabilized tenants. While the motion was pending, the case was settled, in court, with counsel for Riverside and the tenants, and with the judge before whom the motion was pending so ordering the stipulation.

The stipulation settling the case recognized the tenants as the lawful rent stabilized tenants of the neighbor's apartment at a rent of $2,000 per month, which the tenants agreed they would not later challenge. The stipulated rent was significantly higher than either party contends was the previous legal rent (a fact that proved significant in the Court of Appeals' decision). While the landlord would later claim that the settlement rent was illegal, the tenant argued that the rent could lawfully be raised for many reasons, and moreover that the legislature put in a four-year statute of limitations that made almost all rents legal once four years elapsed. The court order provided that the waiver of any right to challenge the rent would be 'effective as a court stipulation by two sides represented by counsel and so ordered by a judge of competent jurisdiction.' If the apartments were ever deregulated, it was agreed that the tenants would get renewals at 8% every two years. Also among the 17 paragraphs in the stipulation was one that said that the tenants could remain as the rent stabilized tenants 'regardless of their primary residence.' There was no issue about primary residence at the time. But there was an issue about how rent could be set for an illusory tenant rising up to rent-stabilized status. As will be seen when we discuss the Appellate decisions, this was an issue for the courts, too.

The Lower Court Decision

Everyone abided by the stipulation for many years. The apartment that was obtained in the 1995 litigation was luxury deregulated in 2001. The tenants didn't object since there was a court order prohibiting any challenge. The tenants paid the rent and spent some $150,000 improving and combining the apartments as was allowed under the agreement. But in 2003, the landlord brought a non-primary residence case against the tenants, seemingly in direct violation of the stipulation. The tenants defended based on the stipulation and the case was dropped.

In 2004 the landlord sued in Supreme Court for a declaration voiding the stipulation. The landlord claimed that it had illegally raised the rent, which led to premature luxury deregulation. Pleading that it must undo its wrong, the landlord urged that the tenants had unlawfully waived rights in violation of Rent Stabilization Code 2520.13. The landlord also said that the non-prime provision was an unlawful waiver of its rights. Both sides moved for summary judgment and the tenants won.

The lower court found disingenuous the landlord's claim that it was pursuing this case in the interest of the public and to save the city's stock of affordable housing. The stipulation was upheld as an enforceable settlement of a contested litigation with the court finding as follows. The landlord had reaped the benefits for years of the rent and the tenants' improvements. The apartments had been joined and were not recognizable as their original separate state. There was no collusion like previous cases that had voided collusive deals, nor was the landlord a victim of fraud or overreaching or mistake. And since landlords are not compelled by law to evict tenants on primary residence grounds, the agreement to indeed not do so was not unlawful (there are no rent-stabilization laws prohibiting landlords from waiving rights).

The Appellate Division reversed and found that the stipulation was an unlawful waiver of 2520.13 and violated public policy because its main objective was illegal.

The Court of Appeals Opinion

The Court of Appeals affirmed and held 'that an agreement to pay an illegal rent for a rent-stabilized apartment, in exchange for an agreement by the landlord to let the tenants use the apartment as a second home, is void and cannot be enforced by either party.' The application of 2520.13 was found to be 'straightforward' and a bar to the tenants' waiver of its right to pay a lower rent. Explaining away the part of 2520.13 that allows a waiver when there is court approval, the Court said that this only allows the withdrawal of a DHCR complaint. This part of the decision is troubling since tenants frequently give up rights in court ordered settlements when there is no pending DHCR complaint. The simplest examples are the countless cases where tenants surrender apartments ' and thus all of their rights ' for a buyout.

But the court did say that the 'argument for upholding the agreement would be stronger if, in 1996, the parties had had a dispute about the amount of the legal maximum rent, and had compromised at a figure above the tenants' and below the landlord's.' In Riverside itself, neither party persuaded the court that there was a plausible legal basis for the $2,000 stipulated rent, even though, in fact, it was not a simple issue as to how a rent is set when an apartment is obtained by an illusory tenancy claim ' especially when the landlord could have claimed that tenant had created a whole new apartment with improvements ' with the previous apartments 'no longer recognizable as such.'

As for the non-prime clause, the court upheld several Appellate Division cases that prohibited such agreements. But those previous decisions were based on the theory that allowing someone to use a rent regulated apartment as a second home would lead to underutilized affordable housing. With the advent of luxury deregulation, that theory was largely eviscerated because evicting someone on non-prime grounds did not keep the apartment in the stock of affordable regulated housing. Rather, evictions frequently lead to immediate deregulation. It is therefore hard to understand how the court went on to say that the voided stipulation and its kind 'distort the market.' Rent regulation distorts the market ' by definition, and arguably for good policy reasons. The agreement that the court voided did virtually nothing to distort the market.

In the end, to clarify the Appellate Division's holding that it was 'leaving the parties as they found them,' the court said that neither party may rely on the agreement; that the tenants may have a 'strong claim, subject to any statute of limitations defense that may exist, to recover the excess rent they paid; and they may have the right to rescind the deregulation order. The parties are now headed toward potentially years of disputes over the rent overcharges.

Darryl Vernon, a member of this newsletter's Board of Editors, practices law in Manhattan with the firm of Vernon & Ginsburg, LLP.