Landlord & Tenant

Mitchell-Lama Subtenant Entitled to Recover Excess Rents Paid

Berkovich v. Mostovaya

NYLJ 2/24/09, p. 36, col. 1

AppTerm, 2nd, 11th & 13th Districts

(memorandum opinion)

In an action by proprietary leaseholder of a Mitchell-Lama apartment seeking use and occupancy from a subtenant, subtenant appealed from the Civil Court's grant of summary judgment to leaseholder on the use and occupancy claim, and on subtenant's counterclaim for excess rents paid. The Appellate Term modified to deny the summary judgment motions, holding that the Private Housing Finance Law barred collection of excess rents.

The proprietary lease and stock certificate for the subject apartment are subject to the provisions of the Private Housing Finance Law and ' 58 of the Public Housing Law. Proprietary leaseholder had leased the apartment to long-term subtenants. In March 2005, leaseholder and subtenant entered into a stipulation is settlement of a prior summary holdover proceeding. The stipulation provided that in return for subtenant's surrender of the premises by Oct. 30, 2005, leaseholder would waive use and occupancy for January 2005 through October 2005. The stipulation also provided that if subtenant did not surrender as agreed, subtenant would be liable for use and occupancy at $690 per month. When subtenants did not vacate, leaseholder brought this action to enforce the stipulation. Subtenants defended by contending that the sublet was illegal, and that $690 exceeded the maximum rent collectable for the subject apartment. Subtenant also counterclaimed for excess rents paid. Civil Court granted leaseholder summary judgment on the claim for use and occupancy, and on subtenant's claim for excess rents.

In modifying, the Appellate Term started by emphasizing that the statute did not permit subletting or assigning of leases at rents greater than those approved by the supervising agency (Private Housing Finance Law, ' 311[1][a]), and noting that HPD's regulations did not permit subletting at all except with HPD's prior written approval, which could be given only in exceptional circumstances. At the same time, however, the court noted that subtenants had received the benefits of occupation of the premises for 12 years, and should equitably be required to pay for that occupation. But the court held that whatever the terms of the stipulation, leaseholder could not recover more than the lawfully approved rents as use and occupancy, and that subtenants were entitled to recover all amounts leaseholder had collected in excess of the approved rents. The court remanded to Civil Court for a determination of how much of the $690 per month constituted an overcharge.

COMMENT

The Mitchell-Lama Law and the HPD (Dept. of Housing and Preservation Development) Rules promulgated pursuant to the Mitchell-Lama Law are both silent as to a landlord's remedies when a leaseholder illegally sublets covered premises. The Mitchell-Lama Law (officially the Private Housing Finance Law) ' 31(1)(a) expressly makes it illegal for leaseholders to sublet apartments at higher rates than those approved by the commissioner or the HPD. In addition, the HPD rules expressly require a leaseholder to secure prior written approval from both the HPD and the housing company before subletting a Mitchell-Lama apartment, and without such permission the leaseholder must maintain the apartment as the primary residence. 28 RCNY ' 3-02(n)(2),(4).

When a Mitchell-Lama leaseholder illegally sublets an apartment, New York courts have held that the landlord may evict both the leaseholder and the subtenant. In Waterside Redevelopment Co. v. Dept. of HPD, 270 A.D.2d 87 (2000), the Appellate Division annulled HPD's determination denying landlord a certificate of eviction when tenant had overcharged subtenant and had failed to obtain written permission from HPD. The court relied on 28 RCNY ' 3-18(b), which provides that “a breach of lease ' involving ' illegality shall not be subject to any opportunity to cure '” Similarly, in Matter of Schorr v NYC Dept. of Hous. Preserv.,10 N.Y.3d 776 (2008), the Court of Appeals upheld landlord's eviction of an illegal Mitchell-Lama subtenant (the vacated tenants' adult child), holding that such an eviction was in accordance with the strict guidelines for tenant eligibility and succession under the Mitchell-Lama Law.

The Mitchell-Lama Law and HPD Rules are also silent as to a subtenant's right to recover overcharges after having paid a leaseholder more than the maximum legal rent. Berkovich addressed this matter of first impression and held that a Mitchell-Lama subtenants can maintain a cause of action for rent overcharges. Because the Mitchell-Lama Law, unlike the rent stabilization and rent control schemes, does not provide a statutory remedy for rent overcharges, the Berkovich court relied in part upon the 57 year-old case Estro Chemical Co. v. Falk, 303 N.Y. 83 (1951), as authority for holding a subtenant has a cause of action for rent overcharges even in the absence of a statutorily provided remedy. In Estro, the Court of Appeals held that under the N.Y. Commercial (Emergency) Rent Law of 1945, which expressly prohibited exceeding maximum rents and forbade tenants' rights to waive a benefit conferred under the statute, the tenant could not waive his right to the return of moneys paid in excess of maximum rent. The court based this decision on the policy ground that landlords were more likely to comply with the maximum rent statute if a cause of action for rent overcharge recovery existed.

Lease Agreement an Assignment, Not a Sublease

I & T Petroleum, Inc. v. LaScalia

NYLJ 2/18/09, p. 30, col. 3

Supreme Ct., Nassau Cty.

(Austin, J.)

In an action by subtenant/assignee against landlord for breach of the terms of the lease agreement and for an injunction requiring replacement of underground storage tanks, landlord moved to dismiss, contending that the subtenant had no right to occupy the premises and was not in privity of estate with landlord. The Supreme Court denied the motion, concluding that landlord had waived its right to object to the sublease/assignment, and that the agreement between tenant and the subtenant/assignee was an assignment, not a sublease, placing the parties to the dispute in privity of estate.

In 2000, landlord leased the property to Continental for a 5-year term with an option to renew for an additional five years. The lease provided that landlord was responsible for all repairs and maintenance, including maintenance of underground gas storage tanks. The lease also provided that if landlord could not afford replacement, tenant would have the option to share in the cost of replacement, or would have the right to cancel the lease. The lease agreement also gave Continental the right to sublease or assign with prior approval of the landlord, which would not be unreasonably withheld. Continental assigned to Delta in 2003, with the written consent of the landlord.

Later in 2003, Delta entered into an agreement with Venket. This agreement, denominated a “Sub-lease ' ” provided that neither sublessor nor sublessee would be responsible for replacement of the gasoline storage tanks if replacement was the result of a lawful mandate by the state or the county, and provided that replacement would be subject to the terms of the prime lease. The In 2006, Venket assigned the “ Sub-lease” to Venketachari. Later in 2006, Venketachari assigned the “Sub-lease” to I & T. Landlord did not consent to Delta's original “Sub-lease” to Venket, or to either of the assignments of the “Sub-lease.” The State Department of Environmental Conservation has directed landlord to replace the underground storage tanks because they are not ethanol compliant. I & T then brought this action against landlord and Delta, as the prime tenant. With respect to landlord, I & T sought damages for breach of the “Sub-lease” agreement with Delta, and an injunction requiring replacement of the tanks. Landlord moved to dismiss.

In denying landlord's motion, the court first held that landlord had waived the requirement that it consent to the sublease or assignment by I & T because landlord had accepted rent with knowledge of the subtenancy. In particular, landlord continued to occupy a portion of the premises for its own business purposes, and shared a restroom with I & T. Under these circumstances, the court imputed knowledge of the sublease to landlord, and held that landlord had waived the lease requirement that it provide written consent to any sublease or assignment. The court then held that the “Sub-lease” agreement was in fact an assignment because the agreement gave the then-sublessee the right to possession until June 30, 2010, the date on which the original lease expired after its five year extension. Because Delta did not retain any rights to the premises, I & T was an assignee in privity of estate with landlord and entitled to maintain this action for breach of the lease agreement.

Landlord May Not Seek Indemnification from Tenant When Landlord Has Already Collected from Insurer

Diaz v. Lexington Exclusive Corp.

NYLJ 3/2/09, p. 27, col. 2

AppDiv, First Dept.

(memorandum opinion).

In a personal injury action against landlord and tenant, tenant appealed from the Supreme Court's denial of its summary judgment motion on landlord's third party claim for contractual indemnification. The Appellate Division reversed and granted summary judgment to tenant, holding that tenant was not liable to indemnify landlord for amounts reimbursed by landlord's liability insurer.

The lease requires tenant to procure liability insurance for landlord's benefit, and provides that tenant will hold landlord harmless from all liabilities “for which Owner shall not be reimbursed by insurance.” Tenant never purchased the insurance required by the lease, but landlord did purchase its own insurance. When this personal injury action was brought against landlord and tenant, landlord sought contractual indemnification from tenant, and tenant moved to dismiss the contractual indemnification claim. The Supreme Court denied tenant's motion, holding that tenant had failed to establish that landlord's purchase of its own insurance required dismissal of landlord's contractual indemnification claims. Tenant appealed.

In reversing, the Appellate Division concluded that because the words “reimbursed by insurance” did not include any limit on the source of insurance coverage, tenant would not be liable for indemnification for amounts reimbursed by landlord's own insurance. The court concluded that the lease contained no ambiguity, and held that landlord may recover no more than out-of-pocket expenses for breach of the agreement to procure insurance ' an amount landlord did not seek in this case.

COMMENT

When a commercial tenant breaches an agreement to provide liability insurance for the benefit of the landlord, the landlord's damages are limited to the loss actually suffered as a result of the breach. In Inchaustegui v. 666 5th Ave. Ltd. Partnership, 96 N.Y.2d 111 (2001), the court rejected the landlord's argument that the collateral source rule ' under which a personal injury award may not be reduced or offset by the amount of any compensation that the injured person may receive from a source other than the tortfeasor ' should apply. Rather, the court held that the landlord's recovery was limited to out-of-pocket expenses, i.e., the premiums and any additional costs such as deductibles, co-payments and increased future premiums. Inchaustegui at 114. Had the landlord been uninsured, it could have recovered the full amount of the underlying tort liability and defense costs from the tenant. Id. Although the landlord in Diaz argued that the contract language afforded it a right to full recovery from the tenant, it appears that the contract language was largely indistinguishable from that in Inchaustegui.

The Inchausetegui rule allows the landlord to recover its out-of-pocket expenses, thus placing it in as good a position as it would have been had the tenant performed ' the goal of contract damages. The application of the collateral source rule ' a tort law principle with punitive aspects ' is not necessary to provide an additional incentive for the tenant to perform, because there are already powerful incentives in place. The tenant risks eviction if it breaches the lease, and it also risks exposure to liability if it is uninsured; a tenant obligated by contract to procure insurance is unlikely to forego compliance in the hope that the landlord will obtain its own adequate coverage. Finally, if the landlord's insurer were allowed to recover from the tenant, it would receive a windfall, because the insurer is in the business of assessing risk and pricing its premiums. For this reason, if the lease provided that the landlord was entitled to recover the full amount of any loss from the tenant even if the landlord's insurer paid a claim, a court might well provide the lease provision unenforceable.

Landlords Must Accept Section 8 Vouchers from All Tenants

Timkovsky v. 56 Bennett LLC

NYLJ 3/4/09, p. 26, col. 1

Supreme Ct., N.Y. Cty.

(Goodman, J.)

In an action by tenants to compel their landlords to accept Section 8 vouchers in partial payment of their rent obligations, tenants sought summary judgment. The court granted tenants' motion, holding that both the J-51 Law and the New York City Human Rights Law require landlords to accept Section 8 vouchers from all potential and current tenants.

New York City Local Law 10 provides that a landlord may not refuse to rent to any person “because of any lawful source of income of such person” and may not discriminate “against any person ' because of any lawful source of income of such person.” Tenants entered into possession of their current apartments before enactment of Local Law 10, and landlords contend that the provision does not apply to these tenants, but only to new tenants and to those current tenants from whom landlord had previously agreed to accept Section 8 vouchers. Similarly, the J-51 Law (New York City Administrative Code, ' 11-243(k)) prohibits owners accepting J-51 tax abatements from denying dwelling accommodations to persons participating in the Section 8 voucher program. Again, landlords argue that the provision applies to tenants in residence only if landlord had previously agreed to accept section 8 vouchers from those tenants.

In granting summary judgment to tenants, the court relied on the broad and unambiguous statutory language, rejecting landlords' contention that the statutes were designed to make it easier for potential tenants to find apartments, but was not designed to apply to current tenants. The court also rejected landlords' argument that the J-51 law was pre-empted by federal law because the federal law makes participation in the Section 8 program voluntary.

Mitchell-Lama Subtenant Entitled to Recover Excess Rents Paid

Berkovich v. Mostovaya

NYLJ 2/24/09, p. 36, col. 1

AppTerm, 2nd, 11th & 13th Districts

(memorandum opinion)

In an action by proprietary leaseholder of a Mitchell-Lama apartment seeking use and occupancy from a subtenant, subtenant appealed from the Civil Court's grant of summary judgment to leaseholder on the use and occupancy claim, and on subtenant's counterclaim for excess rents paid. The Appellate Term modified to deny the summary judgment motions, holding that the Private Housing Finance Law barred collection of excess rents.

The proprietary lease and stock certificate for the subject apartment are subject to the provisions of the Private Housing Finance Law and ' 58 of the Public Housing Law. Proprietary leaseholder had leased the apartment to long-term subtenants. In March 2005, leaseholder and subtenant entered into a stipulation is settlement of a prior summary holdover proceeding. The stipulation provided that in return for subtenant's surrender of the premises by Oct. 30, 2005, leaseholder would waive use and occupancy for January 2005 through October 2005. The stipulation also provided that if subtenant did not surrender as agreed, subtenant would be liable for use and occupancy at $690 per month. When subtenants did not vacate, leaseholder brought this action to enforce the stipulation. Subtenants defended by contending that the sublet was illegal, and that $690 exceeded the maximum rent collectable for the subject apartment. Subtenant also counterclaimed for excess rents paid. Civil Court granted leaseholder summary judgment on the claim for use and occupancy, and on subtenant's claim for excess rents.

In modifying, the Appellate Term started by emphasizing that the statute did not permit subletting or assigning of leases at rents greater than those approved by the supervising agency (Private Housing Finance Law, ' 311[1][a]), and noting that HPD's regulations did not permit subletting at all except with HPD's prior written approval, which could be given only in exceptional circumstances. At the same time, however, the court noted that subtenants had received the benefits of occupation of the premises for 12 years, and should equitably be required to pay for that occupation. But the court held that whatever the terms of the stipulation, leaseholder could not recover more than the lawfully approved rents as use and occupancy, and that subtenants were entitled to recover all amounts leaseholder had collected in excess of the approved rents. The court remanded to Civil Court for a determination of how much of the $690 per month constituted an overcharge.

COMMENT

The Mitchell-Lama Law and the HPD (Dept. of Housing and Preservation Development) Rules promulgated pursuant to the Mitchell-Lama Law are both silent as to a landlord's remedies when a leaseholder illegally sublets covered premises. The Mitchell-Lama Law (officially the Private Housing Finance Law) ' 31(1)(a) expressly makes it illegal for leaseholders to sublet apartments at higher rates than those approved by the commissioner or the HPD. In addition, the HPD rules expressly require a leaseholder to secure prior written approval from both the HPD and the housing company before subletting a Mitchell-Lama apartment, and without such permission the leaseholder must maintain the apartment as the primary residence. 28 RCNY ' 3-02(n)(2),(4).

When a Mitchell-Lama leaseholder illegally sublets an apartment, New York courts have held that the landlord may evict both the leaseholder and the subtenant. In Waterside Redevelopment Co. v. Dept. of HPD, 270 A.D.2d 87 (2000), the Appellate Division annulled HPD's determination denying landlord a certificate of eviction when tenant had overcharged subtenant and had failed to obtain written permission from HPD. The court relied on 28 RCNY ' 3-18(b), which provides that “a breach of lease ' involving ' illegality shall not be subject to any opportunity to cure '” Similarly, in Matter of Schorr v NYC Dept. of Hous. Preserv.,10 N.Y.3d 776 (2008), the Court of Appeals upheld landlord's eviction of an illegal Mitchell-Lama subtenant (the vacated tenants' adult child), holding that such an eviction was in accordance with the strict guidelines for tenant eligibility and succession under the Mitchell-Lama Law.

The Mitchell-Lama Law and HPD Rules are also silent as to a subtenant's right to recover overcharges after having paid a leaseholder more than the maximum legal rent. Berkovich addressed this matter of first impression and held that a Mitchell-Lama subtenants can maintain a cause of action for rent overcharges. Because the Mitchell-Lama Law, unlike the rent stabilization and rent control schemes, does not provide a statutory remedy for rent overcharges, the Berkovich court relied in part upon the 57 year-old case Estro Chemical Co. v. Falk, 303 N.Y. 83 (1951), as authority for holding a subtenant has a cause of action for rent overcharges even in the absence of a statutorily provided remedy. In Estro, the Court of Appeals held that under the N.Y. Commercial (Emergency) Rent Law of 1945, which expressly prohibited exceeding maximum rents and forbade tenants' rights to waive a benefit conferred under the statute, the tenant could not waive his right to the return of moneys paid in excess of maximum rent. The court based this decision on the policy ground that landlords were more likely to comply with the maximum rent statute if a cause of action for rent overcharge recovery existed.

Lease Agreement an Assignment, Not a Sublease

I & T Petroleum, Inc. v. LaScalia

NYLJ 2/18/09, p. 30, col. 3

Supreme Ct., Nassau Cty.

(Austin, J.)

In an action by subtenant/assignee against landlord for breach of the terms of the lease agreement and for an injunction requiring replacement of underground storage tanks, landlord moved to dismiss, contending that the subtenant had no right to occupy the premises and was not in privity of estate with landlord. The Supreme Court denied the motion, concluding that landlord had waived its right to object to the sublease/assignment, and that the agreement between tenant and the subtenant/assignee was an assignment, not a sublease, placing the parties to the dispute in privity of estate.

In 2000, landlord leased the property to Continental for a 5-year term with an option to renew for an additional five years. The lease provided that landlord was responsible for all repairs and maintenance, including maintenance of underground gas storage tanks. The lease also provided that if landlord could not afford replacement, tenant would have the option to share in the cost of replacement, or would have the right to cancel the lease. The lease agreement also gave Continental the right to sublease or assign with prior approval of the landlord, which would not be unreasonably withheld. Continental assigned to Delta in 2003, with the written consent of the landlord.

Later in 2003, Delta entered into an agreement with Venket. This agreement, denominated a “Sub-lease ' ” provided that neither sublessor nor sublessee would be responsible for replacement of the gasoline storage tanks if replacement was the result of a lawful mandate by the state or the county, and provided that replacement would be subject to the terms of the prime lease. The In 2006, Venket assigned the “ Sub-lease” to Venketachari. Later in 2006, Venketachari assigned the “Sub-lease” to I & T. Landlord did not consent to Delta's original “Sub-lease” to Venket, or to either of the assignments of the “Sub-lease.” The State Department of Environmental Conservation has directed landlord to replace the underground storage tanks because they are not ethanol compliant. I & T then brought this action against landlord and Delta, as the prime tenant. With respect to landlord, I & T sought damages for breach of the “Sub-lease” agreement with Delta, and an injunction requiring replacement of the tanks. Landlord moved to dismiss.

In denying landlord's motion, the court first held that landlord had waived the requirement that it consent to the sublease or assignment by I & T because landlord had accepted rent with knowledge of the subtenancy. In particular, landlord continued to occupy a portion of the premises for its own business purposes, and shared a restroom with I & T. Under these circumstances, the court imputed knowledge of the sublease to landlord, and held that landlord had waived the lease requirement that it provide written consent to any sublease or assignment. The court then held that the “Sub-lease” agreement was in fact an assignment because the agreement gave the then-sublessee the right to possession until June 30, 2010, the date on which the original lease expired after its five year extension. Because Delta did not retain any rights to the premises, I & T was an assignee in privity of estate with landlord and entitled to maintain this action for breach of the lease agreement.

Landlord May Not Seek Indemnification from Tenant When Landlord Has Already Collected from Insurer

Diaz v. Lexington Exclusive Corp.

NYLJ 3/2/09, p. 27, col. 2

AppDiv, First Dept.

(memorandum opinion).

In a personal injury action against landlord and tenant, tenant appealed from the Supreme Court's denial of its summary judgment motion on landlord's third party claim for contractual indemnification. The Appellate Division reversed and granted summary judgment to tenant, holding that tenant was not liable to indemnify landlord for amounts reimbursed by landlord's liability insurer.

The lease requires tenant to procure liability insurance for landlord's benefit, and provides that tenant will hold landlord harmless from all liabilities “for which Owner shall not be reimbursed by insurance.” Tenant never purchased the insurance required by the lease, but landlord did purchase its own insurance. When this personal injury action was brought against landlord and tenant, landlord sought contractual indemnification from tenant, and tenant moved to dismiss the contractual indemnification claim. The Supreme Court denied tenant's motion, holding that tenant had failed to establish that landlord's purchase of its own insurance required dismissal of landlord's contractual indemnification claims. Tenant appealed.

In reversing, the Appellate Division concluded that because the words “reimbursed by insurance” did not include any limit on the source of insurance coverage, tenant would not be liable for indemnification for amounts reimbursed by landlord's own insurance. The court concluded that the lease contained no ambiguity, and held that landlord may recover no more than out-of-pocket expenses for breach of the agreement to procure insurance ' an amount landlord did not seek in this case.

COMMENT

When a commercial tenant breaches an agreement to provide liability insurance for the benefit of the landlord, the landlord's damages are limited to the loss actually suffered as a result of the breach. In Inchaustegui v. 666 5th Ave. Ltd. Partnership, 96 N.Y.2d 111 (2001), the court rejected the landlord's argument that the collateral source rule ' under which a personal injury award may not be reduced or offset by the amount of any compensation that the injured person may receive from a source other than the tortfeasor ' should apply. Rather, the court held that the landlord's recovery was limited to out-of-pocket expenses, i.e., the premiums and any additional costs such as deductibles, co-payments and increased future premiums. Inchaustegui at 114. Had the landlord been uninsured, it could have recovered the full amount of the underlying tort liability and defense costs from the tenant. Id. Although the landlord in Diaz argued that the contract language afforded it a right to full recovery from the tenant, it appears that the contract language was largely indistinguishable from that in Inchaustegui.

The Inchausetegui rule allows the landlord to recover its out-of-pocket expenses, thus placing it in as good a position as it would have been had the tenant performed ' the goal of contract damages. The application of the collateral source rule ' a tort law principle with punitive aspects ' is not necessary to provide an additional incentive for the tenant to perform, because there are already powerful incentives in place. The tenant risks eviction if it breaches the lease, and it also risks exposure to liability if it is uninsured; a tenant obligated by contract to procure insurance is unlikely to forego compliance in the hope that the landlord will obtain its own adequate coverage. Finally, if the landlord's insurer were allowed to recover from the tenant, it would receive a windfall, because the insurer is in the business of assessing risk and pricing its premiums. For this reason, if the lease provided that the landlord was entitled to recover the full amount of any loss from the tenant even if the landlord's insurer paid a claim, a court might well provide the lease provision unenforceable.

Landlords Must Accept Section 8 Vouchers from All Tenants

Timkovsky v. 56 Bennett LLC

NYLJ 3/4/09, p. 26, col. 1

Supreme Ct., N.Y. Cty.

(Goodman, J.)

In an action by tenants to compel their landlords to accept Section 8 vouchers in partial payment of their rent obligations, tenants sought summary judgment. The court granted tenants' motion, holding that both the J-51 Law and the New York City Human Rights Law require landlords to accept Section 8 vouchers from all potential and current tenants.

New York City Local Law 10 provides that a landlord may not refuse to rent to any person “because of any lawful source of income of such person” and may not discriminate “against any person ' because of any lawful source of income of such person.” Tenants entered into possession of their current apartments before enactment of Local Law 10, and landlords contend that the provision does not apply to these tenants, but only to new tenants and to those current tenants from whom landlord had previously agreed to accept Section 8 vouchers. Similarly, the J-51 Law (New York City Administrative Code, ' 11-243(k)) prohibits owners accepting J-51 tax abatements from denying dwelling accommodations to persons participating in the Section 8 voucher program. Again, landlords argue that the provision applies to tenants in residence only if landlord had previously agreed to accept section 8 vouchers from those tenants.

In granting summary judgment to tenants, the court relied on the broad and unambiguous statutory language, rejecting landlords' contention that the statutes were designed to make it easier for potential tenants to find apartments, but was not designed to apply to current tenants. The court also rejected landlords' argument that the J-51 law was pre-empted by federal law because the federal law makes participation in the Section 8 program voluntary.