Court of Appeals Affirms Owner Occupancy Rights Under Rent Stabilization

In its June 3, 2008, decision in Pultz v. Economakis, the New York State Court of Appeals unanimously ruled that there is no limit on the number of rent-stabilized units an owner can attempt to recover for owner occupancy. The ruling was a major victory for rent stabilized landlords, and a sharp rebuke to tenant advocates who claimed that multiple recovery for owner occupancy violated the letter and spirit of the Rent Stabilization Law. Indeed, the case continues a recent trend of favorable Court of Appeals decisions for landlords.

In the interest of full disclosure, it is noted that the prevailing owner in Pultz was represented by the author of this article.

Facts

Alistair and Catherine Economakis own a 15-unit rent-stabilized building in the East Village. In 2003, they decided to seek to recover all 15 units so that they could turn the building into a single-family home for their own use. The owners settled with several tenants and commenced Civil Court holdover proceedings against other tenants as each stabilized lease expired.

The owners proceeded under '26-511(c)(9)(c) of the Rent Stabilization Law ('RSL'), which allows an owner to recover 'one or more' stabilized units for the owner's personal use. The implementing section of the Rent Stabilization Code ('RSC'), '2524.4(a), is to the same effect.

Several of the Civil Court tenants argued that the owners' plan to recover all of the remaining units for owner occupancy somehow violated the language and intent of the RSL. After Civil Court Judges Lydia C. Lai and Peter M. Wendt rejected such claims, the remaining tenants in the building ' those against whom holdover proceedings had not yet commenced ' brought an action in the Supreme Court seeking a declaration that the owners' plan was illegal, and demanding that the owners be permanently enjoined from attempting to evict the tenants in Civil Court. The tenants argued that where an owner seeks to recover an entire building for owner occupancy, the case is not an owner's use case, to be decided by Civil Court, but is a 'withdrawal from the rental market case,' to be approved by DHCR under RSC '2524.5(a)(1).

Supreme Court

In 2006, Justice Faviola A. Soto found for the tenants, declaring that the 'net loss of fifteen rent stabilized apartment units clearly exacerbates the 'emergency' described in the Rent Stabilization Law ' i.e., 'an acute shortage of dwellings. ' ” Justice Soto also adopted the tenants' argument that the owner occupancy case was really a 'withdrawal' case in disguise, such that the owners required DHCR prior approval to effectuate their plan. Notably, the 'withdrawal' provision of the RSC only applies where the owner is seeking to recover stabilized units for a business he or she owns, or where the cost of removing violations makes it economically infeasible to continue to run the property; neither scenario was presented in this case. Finally, Justice Soto permanently enjoined the owners from attempting to evict the tenants without DHCR approval.

The Appellate Division

On Feb. 15, 2007, the Appellate Division, First Department, reversed Justice Soto. The First Department, in a unanimous opinion authored by Justice Luis A. Gonzalez, ruled that the RSL provision allowing an owner to recover 'one or more' housing units for personal use meant just that: the owner could attempt to recover one, more than one, or all of the stabilized units in the building. The First Department also rejected the tenants' argument that an owner's attempt to recover all of the stabilized apartments in the building qualified as a 'withdrawal' application, and thus required DHCR pre-approval.

The Court of Appeals

The Court of Appeals granted the tenants leave to appeal on Oct. 23, 2007. Notwithstanding, the court unanimously affirmed the Appellate Division. In an opinion authored by Judge Theodore T. Jones, the court first rejected the tenants' 'withdrawal' claim:

Section 2524.5(a)(1)(i), by its plain terms, is triggered only when there is an attempt to withdraw any or all housing accommodation from the rental markets and where the owner requires the units for use in connection with a business he or she owns or operates, or because the cost of removing violations filed by government agencies is equal to or exceeds the value of the property. Where, as here, withdrawal from the rental market is not for one of those above-stated purposes, section 2524.5(a)(1)(i) does not apply. (italics in original).

The court next rejected the tenants' argument that the words 'one or more' did not mean what they said, or that their literal interpretation would somehow violate the intent of the RSL:

Plaintiffs' legislative intent argument presumes an ambiguity in the Rent Stabilization Code's owner-occupancy provisions with respect to defendants' actions. Of course, the Legislature intended to make more rental housing available, but it also intended to allow owners to live in their own buildings if they choose to do so. The unambiguous language of 9 NYCRR 2524.4(a) was chosen by the Legislature to reconcile these conflicting policies, and we give effect to the plain meaning of that language.

The court's decision seems unremarkable; reading the plain language of the RSL and RSC, the court ruled that there was no limit on the number of apartments a landlord could attempt to recover from owner occupancy, and that owner occupancy was not the equivalent of withdrawal from the rental market. What, then, is the significance of Pultz v. Economakis? A close reading of the decision provides the answer.

In Pultz, the Court of Appeals did not declare the RSL to be a tenant protection statute that must be interpreted in favor of tenants at all costs. Instead, the court saw the RSL as granting benefits to landlords and tenants alike. The court held that the benefits granted to landlords ' i.e., the right to live in one's own property and the right to recover an unlimited number of apartments ' were to be respected, not ignored in favor of amorphous 'legislative intent.' Put simply, the Court of Appeals did not view owner occupancy as a 'loophole' to the RSL, but as a fundamental part of the statute itself.

Tellingly, Pultz comes on the heels of another recent Court of Appeals decision favorable to landlords. In
its Feb. 7, 2008, determination in Riverside Syndicate, Inc. v. Munroe, the Court of Appeals held that a landlord's purported waiver of its right to evict a tenant based on non-primary residence was unenforceable as against public policy. The court ruled that under appropriate circumstances, permanent deregulation of a rent-stabilized unit was a good thing:

'It is the policy of the rent stabilization laws that apartments should either be rented at no more than the legal maximum or deregulated. Deregulation, when the conditions for it are met, serves public policy by increasing the availability of housing on the open market. Agreements like the one at issue here distort the market without benefiting the people the rent stabilization laws were designed to protect.'

Conclusion

Thus, Pultz continues a trend ' see also, IG Second Generation Partners L.P. v. New York State Division of Housing and Community Renewal (infra, page 6) wherein the Court of Appeals, on May 6, 2008, declared that DHCR was not empowered to forgive a rent-stabilized tenant's rental arrears based on 'equity' ' in which the Court of Appeals has interpreted the RSL so as to enforce owner rights and clamp down on tenant abuses. It remains to be seen whether this trend will continue.

Jeffrey Turkel, a member of this newsletter's Board of Editors, is a partner in the Manhattan real estate law firm of Rosenberg & Estis, P.C. He represented the prevailing owner in Riverside Syndicate, Inc. v. Munroe, and along with Todd A. Rose of Rose & Rose, represented the prevailing owners in Pultz v. Economakis.

In its June 3, 2008, decision in Pultz v. Economakis, the New York State Court of Appeals unanimously ruled that there is no limit on the number of rent-stabilized units an owner can attempt to recover for owner occupancy. The ruling was a major victory for rent stabilized landlords, and a sharp rebuke to tenant advocates who claimed that multiple recovery for owner occupancy violated the letter and spirit of the Rent Stabilization Law. Indeed, the case continues a recent trend of favorable Court of Appeals decisions for landlords.

In the interest of full disclosure, it is noted that the prevailing owner in Pultz was represented by the author of this article.

Facts

Alistair and Catherine Economakis own a 15-unit rent-stabilized building in the East Village. In 2003, they decided to seek to recover all 15 units so that they could turn the building into a single-family home for their own use. The owners settled with several tenants and commenced Civil Court holdover proceedings against other tenants as each stabilized lease expired.

The owners proceeded under '26-511(c)(9)(c) of the Rent Stabilization Law ('RSL'), which allows an owner to recover 'one or more' stabilized units for the owner's personal use. The implementing section of the Rent Stabilization Code ('RSC'), '2524.4(a), is to the same effect.

Several of the Civil Court tenants argued that the owners' plan to recover all of the remaining units for owner occupancy somehow violated the language and intent of the RSL. After Civil Court Judges Lydia C. Lai and Peter M. Wendt rejected such claims, the remaining tenants in the building ' those against whom holdover proceedings had not yet commenced ' brought an action in the Supreme Court seeking a declaration that the owners' plan was illegal, and demanding that the owners be permanently enjoined from attempting to evict the tenants in Civil Court. The tenants argued that where an owner seeks to recover an entire building for owner occupancy, the case is not an owner's use case, to be decided by Civil Court, but is a 'withdrawal from the rental market case,' to be approved by DHCR under RSC '2524.5(a)(1).

Supreme Court

In 2006, Justice Faviola A. Soto found for the tenants, declaring that the 'net loss of fifteen rent stabilized apartment units clearly exacerbates the 'emergency' described in the Rent Stabilization Law ' i.e., 'an acute shortage of dwellings. ' ” Justice Soto also adopted the tenants' argument that the owner occupancy case was really a 'withdrawal' case in disguise, such that the owners required DHCR prior approval to effectuate their plan. Notably, the 'withdrawal' provision of the RSC only applies where the owner is seeking to recover stabilized units for a business he or she owns, or where the cost of removing violations makes it economically infeasible to continue to run the property; neither scenario was presented in this case. Finally, Justice Soto permanently enjoined the owners from attempting to evict the tenants without DHCR approval.

The Appellate Division

On Feb. 15, 2007, the Appellate Division, First Department, reversed Justice Soto. The First Department, in a unanimous opinion authored by Justice Luis A. Gonzalez, ruled that the RSL provision allowing an owner to recover 'one or more' housing units for personal use meant just that: the owner could attempt to recover one, more than one, or all of the stabilized units in the building. The First Department also rejected the tenants' argument that an owner's attempt to recover all of the stabilized apartments in the building qualified as a 'withdrawal' application, and thus required DHCR pre-approval.

The Court of Appeals

The Court of Appeals granted the tenants leave to appeal on Oct. 23, 2007. Notwithstanding, the court unanimously affirmed the Appellate Division. In an opinion authored by Judge Theodore T. Jones, the court first rejected the tenants' 'withdrawal' claim:

Section 2524.5(a)(1)(i), by its plain terms, is triggered only when there is an attempt to withdraw any or all housing accommodation from the rental markets and where the owner requires the units for use in connection with a business he or she owns or operates, or because the cost of removing violations filed by government agencies is equal to or exceeds the value of the property. Where, as here, withdrawal from the rental market is not for one of those above-stated purposes, section 2524.5(a)(1)(i) does not apply. (italics in original).

The court next rejected the tenants' argument that the words 'one or more' did not mean what they said, or that their literal interpretation would somehow violate the intent of the RSL:

Plaintiffs' legislative intent argument presumes an ambiguity in the Rent Stabilization Code's owner-occupancy provisions with respect to defendants' actions. Of course, the Legislature intended to make more rental housing available, but it also intended to allow owners to live in their own buildings if they choose to do so. The unambiguous language of 9 NYCRR 2524.4(a) was chosen by the Legislature to reconcile these conflicting policies, and we give effect to the plain meaning of that language.

The court's decision seems unremarkable; reading the plain language of the RSL and RSC, the court ruled that there was no limit on the number of apartments a landlord could attempt to recover from owner occupancy, and that owner occupancy was not the equivalent of withdrawal from the rental market. What, then, is the significance of Pultz v. Economakis? A close reading of the decision provides the answer.

In Pultz, the Court of Appeals did not declare the RSL to be a tenant protection statute that must be interpreted in favor of tenants at all costs. Instead, the court saw the RSL as granting benefits to landlords and tenants alike. The court held that the benefits granted to landlords ' i.e., the right to live in one's own property and the right to recover an unlimited number of apartments ' were to be respected, not ignored in favor of amorphous 'legislative intent.' Put simply, the Court of Appeals did not view owner occupancy as a 'loophole' to the RSL, but as a fundamental part of the statute itself.

Tellingly, Pultz comes on the heels of another recent Court of Appeals decision favorable to landlords. In
its Feb. 7, 2008, determination in Riverside Syndicate, Inc. v. Munroe, the Court of Appeals held that a landlord's purported waiver of its right to evict a tenant based on non-primary residence was unenforceable as against public policy. The court ruled that under appropriate circumstances, permanent deregulation of a rent-stabilized unit was a good thing:

'It is the policy of the rent stabilization laws that apartments should either be rented at no more than the legal maximum or deregulated. Deregulation, when the conditions for it are met, serves public policy by increasing the availability of housing on the open market. Agreements like the one at issue here distort the market without benefiting the people the rent stabilization laws were designed to protect.'

Conclusion

Thus, Pultz continues a trend ' see also, IG Second Generation Partners L.P. v. New York State Division of Housing and Community Renewal (infra, page 6) wherein the Court of Appeals, on May 6, 2008, declared that DHCR was not empowered to forgive a rent-stabilized tenant's rental arrears based on 'equity' ' in which the Court of Appeals has interpreted the RSL so as to enforce owner rights and clamp down on tenant abuses. It remains to be seen whether this trend will continue.

Jeffrey Turkel, a member of this newsletter's Board of Editors, is a partner in the Manhattan real estate law firm of Rosenberg & Estis, P.C. He represented the prevailing owner in Riverside Syndicate, Inc. v. Munroe, and along with Todd A. Rose of Rose & Rose, represented the prevailing owners in Pultz v. Economakis.