When Does 'Voluntary Payment' Preclude Recovery of Overcharges?

When a tenant erroneously pays more rent than a lease requires, can the tenant recover the amount of the excess payments? Answering that question requires exploration of the perplexing voluntary payment doctrine, which continues to rear its head in New York cases.

The Problem

Suppose a lease requires a tenant to pay rent, but obligates the landlord to provide heat without charge to the tenant. The landlord then sends monthly invoices to the tenant, itemizing the rent reserved under the lease, with an additional charge for heat. If the tenant pays the rent only, but not the charge for heat, the landlord will not be entitled to collect for the heat, because the lease itself makes it clear that the tenant is not obligated to pay for it. But suppose the tenant pays the full amount of the invoice, and later seeks to recover the amounts it has erroneously paid to landlord. Shouldn't the lease control here as well, permitting tenant to recover? The voluntary payment doctrine, applied by New York courts in a number of leading cases, suggests that the answer is “no.”

The Cases

Gimbel Bros., Inc. v. Brook Shopping Centers, 118 A.D.2d 532, articulated and applied the voluntary payment doctrine. Gimbel leased department store premises in the Cross County Center in Yonkers at a time when New York's blue laws prohibited department store operations on Sundays. The lease itself, however, did not prohibit operations on Sundays, and did not indicate that Gimbel would be obligated to pay extra for Sunday operations. With the demise of the blue laws, Gimbel began Sunday operations, and its landlord began including a “Sunday charge” on monthly invoices. Gimbel paid these charges without comment for six months, and then sought a judgment declaring that it was not obligated to pay the Sunday charge, and that it was entitled to reimbursement for Sunday charges it had already paid. The Second Department agreed with Gimbel that the lease did not entitle the landlord to impose a Sunday charge, but held that Gimbel was not entitled to reimbursement for amounts paid because Gimbel had made those payments voluntarily, without protest.

The Gimbel court suggested that the voluntary payment doctrine would be inapplicable if the tenant made the payment because of a mistake in fact, but the court could find no mistake in fact; the invoices clearly labeled the charge as a Sunday charge, and Gimbel paid it. Underlying the court's opinion was a sense that Gimbel should bear responsibility for its “marked lack of diligence” in ascertaining its contract rights. The court articulated the broader principle that “[w]hen a party intends to resort to litigation in order to resist paying an unjust demand, that party should take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.” The court also emphasized that the relief Gimbel was seeking ' restitution ' was equitable in nature, implicitly suggesting that Gimbel's lack of diligence constituted unclean hands barring equitable relief.

The First Department has also applied the doctrine to bar tenants from recovering overcharges paid to a landlord without protest. In Eighty Eight Bleecker Co. LLC, v. 88 Bleecker Owners, Inc., 34 A.D.3d 244, the court barred a commercial tenant from recovering overcharges in rent and tax escalation fees because the tenant had failed, for over 20 years, to make inquiry into the computations that led to the alleged overcharges. Concluding that the computations would not have been unduly burdensome for the sophisticated commercial tenant, the court held that the voluntary payment doctrine barred recovery. More recently, in Citicorp North America, Inc. v. Fifth Avenue 58/59 Acquisition Company, LLC, 70 A.D.3d 408, the court applied the voluntary payment doctrine to bar a commercial tenant's claim for $564,531 in overcharges attributable to landlord's supposed miscalculation in wage escalation charges. The court emphasized the tenant's lack of diligence in making no inquiry, for more than nine years, about the accuracy of the rent charges it was paying.

The Doctrine's Limits

All of the leading cases applying the voluntary payment doctrine involve sophisticated commercial tenants who blindly paid whatever the landlord billed them without any investigation or complaint. The doctrine certainly does not apply to residential tenants who seek to recover rents in excess of those permitted by rent regulation laws. First, the rent regulations themselves expressly contemplate overcharge proceedings. Second, residential tenants are not the “sophisticated business entities” who can be expected to investigate the lawfulness of monthly rent charges before writing monthly rent checks. Third, a landlord's attempt to evade rent regulations overcomes, in the minds of most judges, whatever dereliction one might attribute to tenants who pay rent without investigating the lawfulness of the charges.

It should not be surprising then, that in one very recent case, Morton v. 338 West 46th Street Realty, LLC, NYLJ 9/10/14, the court did not even discuss the residential landlord's contention that the voluntary payment doctrine barred the tenant's overcharge claim. In Morton, tenants, who had been paying market rents, contended that they were entitled to rent-stabilization protection, and refund of alleged overcharges, because a prior owner's alleged rehabilitation of the building ' which took place more than a decade earlier ' did not qualify to remove the building's apartment from rent stabilization. The landlord raised a number of defenses, including the fact that the tenants had voluntarily paid the allegedly unlawful rents. Civil Court denied summary judgment on tenant's treble damages claim, holding that questions of fact remained ' implicitly indicating that voluntary payment would not preclude tenant from recovering overcharges.

Even outside the rent regulation context, however, courts rarely apply the voluntary payment doctrine to bar recovery by the tenant absent the tenant's persistent payment of the landlord's invoices without any effort to investigate alleged overcharges. So, for instance, in Daval-Ogden, LLC v. Highbridge House Ogden, LLC, 103 A.D.2d 442, the First Department held that the voluntary payment doctrine did not bar the tenant from recovering its security deposit and first month's rent after the tenant discovered that another party held a lease that precluded the tenant from taking possession. The court emphasized that the tenant had operated under a mistake of fact, making the voluntary payment doctrine inapplicable. (Of course, in all of the cases invoking the doctrine, the tenant alleged that it made the payment based on its mistaken belief, at the time, that the invoices were accurate).

What distinguishes Daval-Ogden is that the tenant would have had to look beyond provisions in the lease to discover that the landlord was not entitled to payment ' making the tenant's failure to contest the payment ahead of time less “blameworthy.” Nevertheless, questions remain about the appropriate scope of the doctrine.

Stewart E. Sterk , Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

When a tenant erroneously pays more rent than a lease requires, can the tenant recover the amount of the excess payments? Answering that question requires exploration of the perplexing voluntary payment doctrine, which continues to rear its head in New York cases.

The Problem

Suppose a lease requires a tenant to pay rent, but obligates the landlord to provide heat without charge to the tenant. The landlord then sends monthly invoices to the tenant, itemizing the rent reserved under the lease, with an additional charge for heat. If the tenant pays the rent only, but not the charge for heat, the landlord will not be entitled to collect for the heat, because the lease itself makes it clear that the tenant is not obligated to pay for it. But suppose the tenant pays the full amount of the invoice, and later seeks to recover the amounts it has erroneously paid to landlord. Shouldn't the lease control here as well, permitting tenant to recover? The voluntary payment doctrine, applied by New York courts in a number of leading cases, suggests that the answer is “no.”

The Cases

Gimbel Bros., Inc. v. Brook Shopping Centers , 118 A.D.2d 532, articulated and applied the voluntary payment doctrine. Gimbel leased department store premises in the Cross County Center in Yonkers at a time when New York's blue laws prohibited department store operations on Sundays. The lease itself, however, did not prohibit operations on Sundays, and did not indicate that Gimbel would be obligated to pay extra for Sunday operations. With the demise of the blue laws, Gimbel began Sunday operations, and its landlord began including a “Sunday charge” on monthly invoices. Gimbel paid these charges without comment for six months, and then sought a judgment declaring that it was not obligated to pay the Sunday charge, and that it was entitled to reimbursement for Sunday charges it had already paid. The Second Department agreed with Gimbel that the lease did not entitle the landlord to impose a Sunday charge, but held that Gimbel was not entitled to reimbursement for amounts paid because Gimbel had made those payments voluntarily, without protest.

The Gimbel court suggested that the voluntary payment doctrine would be inapplicable if the tenant made the payment because of a mistake in fact, but the court could find no mistake in fact; the invoices clearly labeled the charge as a Sunday charge, and Gimbel paid it. Underlying the court's opinion was a sense that Gimbel should bear responsibility for its “marked lack of diligence” in ascertaining its contract rights. The court articulated the broader principle that “[w]hen a party intends to resort to litigation in order to resist paying an unjust demand, that party should take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.” The court also emphasized that the relief Gimbel was seeking ' restitution ' was equitable in nature, implicitly suggesting that Gimbel's lack of diligence constituted unclean hands barring equitable relief.

The First Department has also applied the doctrine to bar tenants from recovering overcharges paid to a landlord without protest. In Eighty Eight Bleecker Co. LLC, v. 88 Bleecker Owners, Inc., 34 A.D.3d 244, the court barred a commercial tenant from recovering overcharges in rent and tax escalation fees because the tenant had failed, for over 20 years, to make inquiry into the computations that led to the alleged overcharges. Concluding that the computations would not have been unduly burdensome for the sophisticated commercial tenant, the court held that the voluntary payment doctrine barred recovery. More recently, in Citicorp North America, Inc. v. Fifth Avenue 58/59 Acquisition Company, LLC , 70 A.D.3d 408, the court applied the voluntary payment doctrine to bar a commercial tenant's claim for $564,531 in overcharges attributable to landlord's supposed miscalculation in wage escalation charges. The court emphasized the tenant's lack of diligence in making no inquiry, for more than nine years, about the accuracy of the rent charges it was paying.

The Doctrine's Limits

All of the leading cases applying the voluntary payment doctrine involve sophisticated commercial tenants who blindly paid whatever the landlord billed them without any investigation or complaint. The doctrine certainly does not apply to residential tenants who seek to recover rents in excess of those permitted by rent regulation laws. First, the rent regulations themselves expressly contemplate overcharge proceedings. Second, residential tenants are not the “sophisticated business entities” who can be expected to investigate the lawfulness of monthly rent charges before writing monthly rent checks. Third, a landlord's attempt to evade rent regulations overcomes, in the minds of most judges, whatever dereliction one might attribute to tenants who pay rent without investigating the lawfulness of the charges.

It should not be surprising then, that in one very recent case, Morton v. 338 West 46th Street Realty, LLC, NYLJ 9/10/14, the court did not even discuss the residential landlord's contention that the voluntary payment doctrine barred the tenant's overcharge claim. In Morton, tenants, who had been paying market rents, contended that they were entitled to rent-stabilization protection, and refund of alleged overcharges, because a prior owner's alleged rehabilitation of the building ' which took place more than a decade earlier ' did not qualify to remove the building's apartment from rent stabilization. The landlord raised a number of defenses, including the fact that the tenants had voluntarily paid the allegedly unlawful rents. Civil Court denied summary judgment on tenant's treble damages claim, holding that questions of fact remained ' implicitly indicating that voluntary payment would not preclude tenant from recovering overcharges.

Even outside the rent regulation context, however, courts rarely apply the voluntary payment doctrine to bar recovery by the tenant absent the tenant's persistent payment of the landlord's invoices without any effort to investigate alleged overcharges. So, for instance, in Daval-Ogden, LLC v. Highbridge House Ogden, LLC , 103 A.D.2d 442, the First Department held that the voluntary payment doctrine did not bar the tenant from recovering its security deposit and first month's rent after the tenant discovered that another party held a lease that precluded the tenant from taking possession. The court emphasized that the tenant had operated under a mistake of fact, making the voluntary payment doctrine inapplicable. (Of course, in all of the cases invoking the doctrine, the tenant alleged that it made the payment based on its mistaken belief, at the time, that the invoices were accurate).

What distinguishes Daval-Ogden is that the tenant would have had to look beyond provisions in the lease to discover that the landlord was not entitled to payment ' making the tenant's failure to contest the payment ahead of time less “blameworthy.” Nevertheless, questions remain about the appropriate scope of the doctrine.

Stewart E. Sterk , Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.