Landlord & Tenant

(Opinion by Smith, J.)

In an action by landlord against tenant Salvation Army for breach of a lease agreement, the Salvation Army appealed from a divided Appellate Division's reinstatement of the breach of contract claim previously dismissed by Supreme Court. The Court of Appeals reversed and dismissed the complaint, holding that tenant had not breached its obligation to use reasonable efforts to enforce obligations against the City of New York.

The City of New York sought to use landlord's hotel as a homeless shelter. To that end, landlord entered into a lease with the Salvation Army, and the latter entered into a services agreement with the city under the terms of which the city would make payments to the Salvation Army to cover the rent under the lease. The lease itself provided that the Salvation Army's liability was limited to amounts it received from the city. The lease also permitted the Salvation Army to terminate upon payment of a termination fee, which would be paid by the city, and required tenant to leave the premises in the condition that existed at commencement of the lease.

Finally, the lease provided that delivery of the premises in their original condition was a condition precedent to termination. In 2005, the city terminated the services agreement and the Salvation Army terminated the lease. Landlord accepted the $10 million termination fee required by the lease, but then brought this action contending that the Salvation Army had breached the contract and the covenant of good faith and fair dealing by leaving the premises in unacceptable condition. Supreme Court dismissed the complaint. A divided Appellate Division reversed, concluding that landlord had adequately pleaded a breach of the Salvation Army's obligation to use commercially reasonable efforts to enforce its rights against the city. The Salvation Army appealed.

In reversing, the Court of Appeals started by noting that landlord could have refused to accept termination because of the poor condition of the premises, but instead elected to accept the termination fee. As a result, the lease termination itself was effective. The court then could find no provision in the Services Agreement under which the city owes money that the Salvation Army failed to collect. Because the lease itself made it clear that the Salvation Army would only be liable for amounts paid to it by the city, landlord had not established any breach by the Salvation Army.

Fraud Allegations Require Investigation Beyond Four-Year Period

Boyd v. New York State Division of Housing and Community Renewal

NYLJ 10/31/13, p. 22, col. 1
AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by Gische, J.)

In tenant's article 78 proceeding challenging DHCR's denied of her petition for administrative review of a decision denying her rent overcharge complaint, tenant appealed from Supreme Court's denial of the petition and dismissal of the proceeding. The Appellate Division reversed and remanded to DHCR, holding that tenant's allegations of fraud required DHCR to investigate the legal rent beyond the four-year period before tenant filed her complaint.

Tenant moved into the subject apartment in 2007, and is currently paying more than $2,000 per month in rent. In 2009, tenant filed a rent overcharge complaint, alleging that landlord had improperly increased the rent from $572 to $1750 in 2004, when landlord claimed to have made major capital improvements justifying the increase. To justify the increase, landlord would have had to spend $39,000 in improvements. In her complaint, however, tenant alleged that landlord could not have spent that much because the update to the kitchen used low-quality appliances and “inexpensive Home Depot cabinets.”

DHCR initially denied her complaint on the basis that the apartment was not rent-stabilized, and then reopened the matter when the Court of Appeals held that buildings receiving J-51 benefits were subject to rent stabilization. DHCR then determined that there had been no overcharge because the rent on the “base date” ' four years before filing the complaint ' was $1,750. The commissioner then denied her petition for administrative review, and Supreme Court upheld that determination. Tenant appealed.

In reversing, the Appellate Division majority held that tenant's allegations of fraud were sufficient to require DHCR to investigate beyond the four-year “look-back” period. The majority emphasized that the landlord had never submitted any evidence to controvert tenant's claims that landlord did not spend $39,000. Justice Gische, dissenting for herself and Justice Sweeny, emphasized that tenant's evidence of fraud was little more than her personal observation of prices of comparable improvements at big box stores, taking no account of labor costs. She argued that the majority's conclusion that tenant's complaint triggered an obligation to investigate would eviscerate the statutory four-year rule. She also emphasized that when tenant moved into her apartment in 2007, when she was still within the four-year period, she already had available all of the information on which she based her subsequent claim.

COMMENT

In Grimm v. State Div. of Hous. & Cmty. Renewal Office of Rent Admin., 15 N.Y.3d 358, the Court of Appeals held that where a rent-stabilized tenant produces evidence suggesting the alleged overcharge was part of landlord's fraudulent scheme to deregulate the apartment, Division of Housing and Community Renewal (DHCR) must review rent history beyond the four-year statute of limitations. Sylvie Grimm submitted evidence that landlord had charged her predecessor more than the previously registered rent, had failed to give the predecessor a rent stabilization rider, and had stopped filing annual registration statements. The Court of Appeals determined that tenant's evidence, all of events that occurred more than four years before tenant filed her complaint, sufficiently indicated a fraudulent scheme to deregulate the apartment, and required DHCR to investigate the alleged fraud.

In the First Department, a tenant meets Grimm' s evidentiary threshold for alleging a fraudulent deregulation scheme so long as tenant produces some documentary evidence that suggests that landlord collected illegal rent increases. In Bogatin v Windermere Owners LLC, 98 AD3d 896, the court affirmed the lower court's decision to review landlord's rent history beyond the four-year “look-back” period because tenant's overcharge claim alleged the landlord illegally increased rents by fraudulently claiming and valuing apartment improvements. Tenant's evidence ' an affidavit and a contractor's estimate of improvement costs ' was sufficient to defeat landlord's motion to dismiss.

The Second Department's evidentiary threshold is higher; the mere production of evidence suggesting suspect rent increases is insufficient to trigger the fraud-exception to the four-year statute of limitations. In Gomez v New York State Div. of Hous. and Community Renewal, 79 AD3d 878, decided within two months after Grimm , the Second Department held that DHCR properly ignored evidence of fraud derived from records outside the four-year look back period. Although tenant alleged that her initial rent ' set six years before she brought her overcharge complaint ' was part of a fraudulent scheme to deregulate apartments, her only evidence consisted of DHCR rent records from outside the four-year look-back period.

Tenant Did Not Breach Obligation to Use Reasonable Efforts

JFK Holding Co., LLC v. City of New York

NYLJ 11/16/13, p. 23, col. 1
Court of Appeals

(Opinion by Smith, J.)

In an action by landlord against tenant Salvation Army for breach of a lease agreement, the Salvation Army appealed from a divided Appellate Division's reinstatement of the breach of contract claim previously dismissed by Supreme Court. The Court of Appeals reversed and dismissed the complaint, holding that tenant had not breached its obligation to use reasonable efforts to enforce obligations against the City of New York.

The City of New York sought to use landlord's hotel as a homeless shelter. To that end, landlord entered into a lease with the Salvation Army, and the latter entered into a services agreement with the city under the terms of which the city would make payments to the Salvation Army to cover the rent under the lease. The lease itself provided that the Salvation Army's liability was limited to amounts it received from the city. The lease also permitted the Salvation Army to terminate upon payment of a termination fee, which would be paid by the city, and required tenant to leave the premises in the condition that existed at commencement of the lease.

Finally, the lease provided that delivery of the premises in their original condition was a condition precedent to termination. In 2005, the city terminated the services agreement and the Salvation Army terminated the lease. Landlord accepted the $10 million termination fee required by the lease, but then brought this action contending that the Salvation Army had breached the contract and the covenant of good faith and fair dealing by leaving the premises in unacceptable condition. Supreme Court dismissed the complaint. A divided Appellate Division reversed, concluding that landlord had adequately pleaded a breach of the Salvation Army's obligation to use commercially reasonable efforts to enforce its rights against the city. The Salvation Army appealed.

In reversing, the Court of Appeals started by noting that landlord could have refused to accept termination because of the poor condition of the premises, but instead elected to accept the termination fee. As a result, the lease termination itself was effective. The court then could find no provision in the Services Agreement under which the city owes money that the Salvation Army failed to collect. Because the lease itself made it clear that the Salvation Army would only be liable for amounts paid to it by the city, landlord had not established any breach by the Salvation Army.

Fraud Allegations Require Investigation Beyond Four-Year Period

Boyd v. New York State Division of Housing and Community Renewal

NYLJ 10/31/13, p. 22, col. 1
AppDiv, First Dept.

(3-2 decision; memorandum opinion; dissenting memorandum by Gische, J.)

In tenant's article 78 proceeding challenging DHCR's denied of her petition for administrative review of a decision denying her rent overcharge complaint, tenant appealed from Supreme Court's denial of the petition and dismissal of the proceeding. The Appellate Division reversed and remanded to DHCR, holding that tenant's allegations of fraud required DHCR to investigate the legal rent beyond the four-year period before tenant filed her complaint.

Tenant moved into the subject apartment in 2007, and is currently paying more than $2,000 per month in rent. In 2009, tenant filed a rent overcharge complaint, alleging that landlord had improperly increased the rent from $572 to $1750 in 2004, when landlord claimed to have made major capital improvements justifying the increase. To justify the increase, landlord would have had to spend $39,000 in improvements. In her complaint, however, tenant alleged that landlord could not have spent that much because the update to the kitchen used low-quality appliances and “inexpensive Home Depot cabinets.”

DHCR initially denied her complaint on the basis that the apartment was not rent-stabilized, and then reopened the matter when the Court of Appeals held that buildings receiving J-51 benefits were subject to rent stabilization. DHCR then determined that there had been no overcharge because the rent on the “base date” ' four years before filing the complaint ' was $1,750. The commissioner then denied her petition for administrative review, and Supreme Court upheld that determination. Tenant appealed.

In reversing, the Appellate Division majority held that tenant's allegations of fraud were sufficient to require DHCR to investigate beyond the four-year “look-back” period. The majority emphasized that the landlord had never submitted any evidence to controvert tenant's claims that landlord did not spend $39,000. Justice Gische, dissenting for herself and Justice Sweeny, emphasized that tenant's evidence of fraud was little more than her personal observation of prices of comparable improvements at big box stores, taking no account of labor costs. She argued that the majority's conclusion that tenant's complaint triggered an obligation to investigate would eviscerate the statutory four-year rule. She also emphasized that when tenant moved into her apartment in 2007, when she was still within the four-year period, she already had available all of the information on which she based her subsequent claim.

COMMENT

In Grimm v. State Div. of Hous. & Cmty. Renewal Office of Rent Admin., 15 N.Y.3d 358, the Court of Appeals held that where a rent-stabilized tenant produces evidence suggesting the alleged overcharge was part of landlord's fraudulent scheme to deregulate the apartment, Division of Housing and Community Renewal (DHCR) must review rent history beyond the four-year statute of limitations. Sylvie Grimm submitted evidence that landlord had charged her predecessor more than the previously registered rent, had failed to give the predecessor a rent stabilization rider, and had stopped filing annual registration statements. The Court of Appeals determined that tenant's evidence, all of events that occurred more than four years before tenant filed her complaint, sufficiently indicated a fraudulent scheme to deregulate the apartment, and required DHCR to investigate the alleged fraud.

In the First Department, a tenant meets Grimm' s evidentiary threshold for alleging a fraudulent deregulation scheme so long as tenant produces some documentary evidence that suggests that landlord collected illegal rent increases. In Bogatin v Windermere Owners LLC, 98 AD3d 896, the court affirmed the lower court's decision to review landlord's rent history beyond the four-year “look-back” period because tenant's overcharge claim alleged the landlord illegally increased rents by fraudulently claiming and valuing apartment improvements. Tenant's evidence ' an affidavit and a contractor's estimate of improvement costs ' was sufficient to defeat landlord's motion to dismiss.

The Second Department's evidentiary threshold is higher; the mere production of evidence suggesting suspect rent increases is insufficient to trigger the fraud-exception to the four-year statute of limitations. In Gomez v New York State Div. of Hous. and Community Renewal, 79 AD3d 878, decided within two months after Grimm , the Second Department held that DHCR properly ignored evidence of fraud derived from records outside the four-year look back period. Although tenant alleged that her initial rent ' set six years before she brought her overcharge complaint ' was part of a fraudulent scheme to deregulate apartments, her only evidence consisted of DHCR rent records from outside the four-year look-back period.