Landlord & Tenant

Estate of Deceased Tenant Has Contract Right

Russo v. Rozenholc

NYLJ 7/13/15, p. 19, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action by the estate of a former rent-stabilized tenant against a group of other tenants and the group's lawyer, alleging breach of contract and malpractice by the latter, defendant tenants and lawyer appealed from Supreme Court's denial of their motions to dismiss. The Appellate Division affirmed, holding that even if the estate had no succession rights to the apartment, it had properly alleged a contract right to part of a settlement negotiated with the building's landlord.

In 2006, the building's landlord applied to demolish the building. A group of rent-stabilized tenants formed an association to fight demolition, and hired a lawyer to represent them. The retainer agreement recited that they had agreed to share equally in any settlement offer made by the landlord, and recited that each apartment represented a single share, except that one tenant ' the estate's decedent ' would receive two shares and pay two shares of any legal fees owed. This provision reflected the fact that the decedent tenant had combined two apartments into one. DHCR issued an order permitting demolition of the building, but tenants then brought an article 78 proceeding challenging the order. Decedent then died, but counsel for the estate wrote to the lawyer representing the tenants, authorizing the lawyer to continue to represent the estate. Ultimately, the tenants settled with the landlord for more than $33 million. At about the same time, the estate entered into an agreement with the building owner and the decedent's girlfriend by the terms of which the estate conceded that it had no claim to the apartment after decedent's death, but the building owner agreed to pay the girlfriend one share of the $33 million settlement, which amounted to about $1.56 million.

After learning of the terms of the retainer agreement between the tenants and the lawyer, the estate brought this action alleging malpractice by the lawyer and breach of contract by the tenants, asserting that under the terms of the retainer agreement, the estate was entitled to two shares of the settlement and that the lawyer committed malpractice by failing to notify the estate of the terms of the agreement. Supreme Court denied defendants' motions to dismiss, and they appealed.

In affirming, the Appellate Division held that the Rent Stabilization Code did not defeat the estate's breach of contract claim. Even if the estate had no further right to the apartment after decedent's death, the estate's complaint stated a claim that the tenants were liable under the contract provision requiring that decedent be paid two shares of any settlement. The court also held that the estate's waiver of its rights to the apartment did not necessarily constitute a waiver of its right to the settlement, especially since the lawyer had never informed the estate of the retainer agreement's existence. Similarly, the court concluded that the complaint asserted a plausible malpractice claim when it alleged that but for the lawyer's failure to inform the estate of the retainer agreement, the estate would never have consented to a settlement that did not provide the estate with two shares of the total proceeds.

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Landlord Not Entitled To First Rent

Matter of Velazquez v. DHCR

NYLJ 7/31/15, p. 31, col. 2

AppDiv, Second Dept.

(3-1 decision; memorandum opinion; dissenting opinion by Skelos, J.)

In tenant's article 78 proceeding to review a rent overcharge determination by DHCR, landlord appealed from Supreme Court's grant of the petition and remand to DHCR to recalculate the overcharge. The Appellate Division affirmed, rejecting landlord's contention that increasing the apartment's size by two bedrooms entitled landlord to a “first stabilization rent.”

The prior tenant of the subject apartment paid a monthly rent of $831.20 for a two-bedroom apartment. Landlord subsequently rented the apartment to petitioner tenant, and, at tenant's request, unsealed a door and performed electrical work that added two bedrooms to the apartment. (Those two rooms had previously been vacant and unrented). Landlord increased the rent significantly, and tenant brought a rent overcharge proceeding. The Rent Administrator concluded that the legal regulated rent for the apartment was $995.99, and imposed a penalty of treble damages for the overcharge. Landlord filed a petition for administrative review, and the Deputy Commissioner initially modified the determination by eliminating treble damages. On reconsideration, the Deputy Commissioner recalculated the legal regulated rent to be $1,200, reducing the rent overcharge total, but reinstated the imposition of a treble damage penalty for the period between November 2008 and December 2009. Tenant then brought this article 78 proceeding challenging the recalculation of legal regulated rent. Supreme Court granted the petition, annulling the recalculation of the legal regulated rent to be $1200, and remitted for a new calculation pursuant to Rent Stabilization Code section 25422.4(a)(4).

In affirming, the Appellate Division agreed that landlord was entitled to increased rent for adding square footage to the apartment. But the court's majority held that the increased rent had to be calculated pursuant to Rent Stabilization Code section 2522.4(a)(4) ' a computation DHCR did not complete. As a result, Supreme Court had properly remitted to DHCR. But the court denied landlord's counterclaim for elimination of treble damages, holding that landlord had not established that DHCR's determination that the overcharge was willful had no rational basis.

Justice Skelos, dissenting, agreed that DHCR's determination that landlord was entitled to an additional $204.01 per month was arbitrary and capricious in light of section 2522.4(a)(4). But he concluded that because the addition of the two bedrooms essentially created a new perimeter for the apartment, landlord was entitled to a free market rent as a first stabilization rent for the apartment.

COMMENT

When a landlord in a building with 35 or fewer housing accommodations increases dwelling space of an apartment, Rent Stabilization Code (9 NYCRR) ' 2522.4 permits a formulaic monthly rent increase equal to 1/40th of the total cost of the increased space. However, when an apartment's boundary walls have been reconfigured to create what is, in effect, a new apartment, DHCR has created an administrative policy that permits a landlord to charge a “first stabilization rent” unrelated to the rent tenant previously paid. For instance, in 446-450 Realty Co., L.P. v. Higbie, 918 N.Y.S.2d 689 (App. Div.) the landlord converted an apartment from a single floor unit into a duplex, and the court viewed this as enough to qualify for “first stabilization rent.”

In cases where the landlord's reconfiguration has been less drastic, courts have limited landlords to the formulaic rent increases in section 2522.4. In Roker Realty Corp. v. Gross, 1 63 Misc.2d 766, the Appellate Term held that a landlord who added 27 square feet to an apartment (and who also replaced of kitchen and bathroom fixtures) was limited to the code increases and was not eligible for “first stabilization rent.” Similarly, in Matter of 300 W. 49th St. Assocs. v. DHCR, 2 12 AD2d 250, where the landlord renovated an apartment, and allegedly increased square footage without altering the perimeter of the apartment, the court held that landlord was not entitled to a first stabilization rent.

Whether a landlord is entitles to “first stabilization rent” often arises in the context of reviewing a DHCR determination of the issue, and when that happens, the court in 300 West 49th Street emphasized that courts should defer to the agency determination unless its interpretation is irrational or unreasonable. In both Matter of 300 and 446-450 Realty, the court gave deference to the DHCR or lower courts determination. Similarly, the court in Velazquez deferred to the agency determination that landlord had not created a new apartment justifying collection of a first rent .

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Estate of Deceased Tenant Has Contract Right

Russo v. Rozenholc

NYLJ 7/13/15, p. 19, col. 6

AppDiv, First Dept.

(memorandum opinion)

In an action by the estate of a former rent-stabilized tenant against a group of other tenants and the group's lawyer, alleging breach of contract and malpractice by the latter, defendant tenants and lawyer appealed from Supreme Court's denial of their motions to dismiss. The Appellate Division affirmed, holding that even if the estate had no succession rights to the apartment, it had properly alleged a contract right to part of a settlement negotiated with the building's landlord.

In 2006, the building's landlord applied to demolish the building. A group of rent-stabilized tenants formed an association to fight demolition, and hired a lawyer to represent them. The retainer agreement recited that they had agreed to share equally in any settlement offer made by the landlord, and recited that each apartment represented a single share, except that one tenant ' the estate's decedent ' would receive two shares and pay two shares of any legal fees owed. This provision reflected the fact that the decedent tenant had combined two apartments into one. DHCR issued an order permitting demolition of the building, but tenants then brought an article 78 proceeding challenging the order. Decedent then died, but counsel for the estate wrote to the lawyer representing the tenants, authorizing the lawyer to continue to represent the estate. Ultimately, the tenants settled with the landlord for more than $33 million. At about the same time, the estate entered into an agreement with the building owner and the decedent's girlfriend by the terms of which the estate conceded that it had no claim to the apartment after decedent's death, but the building owner agreed to pay the girlfriend one share of the $33 million settlement, which amounted to about $1.56 million.

After learning of the terms of the retainer agreement between the tenants and the lawyer, the estate brought this action alleging malpractice by the lawyer and breach of contract by the tenants, asserting that under the terms of the retainer agreement, the estate was entitled to two shares of the settlement and that the lawyer committed malpractice by failing to notify the estate of the terms of the agreement. Supreme Court denied defendants' motions to dismiss, and they appealed.

In affirming, the Appellate Division held that the Rent Stabilization Code did not defeat the estate's breach of contract claim. Even if the estate had no further right to the apartment after decedent's death, the estate's complaint stated a claim that the tenants were liable under the contract provision requiring that decedent be paid two shares of any settlement. The court also held that the estate's waiver of its rights to the apartment did not necessarily constitute a waiver of its right to the settlement, especially since the lawyer had never informed the estate of the retainer agreement's existence. Similarly, the court concluded that the complaint asserted a plausible malpractice claim when it alleged that but for the lawyer's failure to inform the estate of the retainer agreement, the estate would never have consented to a settlement that did not provide the estate with two shares of the total proceeds.

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Landlord Not Entitled To First Rent

Matter of Velazquez v. DHCR

NYLJ 7/31/15, p. 31, col. 2

AppDiv, Second Dept.

(3-1 decision; memorandum opinion; dissenting opinion by Skelos, J.)

In tenant's article 78 proceeding to review a rent overcharge determination by DHCR, landlord appealed from Supreme Court's grant of the petition and remand to DHCR to recalculate the overcharge. The Appellate Division affirmed, rejecting landlord's contention that increasing the apartment's size by two bedrooms entitled landlord to a “first stabilization rent.”

The prior tenant of the subject apartment paid a monthly rent of $831.20 for a two-bedroom apartment. Landlord subsequently rented the apartment to petitioner tenant, and, at tenant's request, unsealed a door and performed electrical work that added two bedrooms to the apartment. (Those two rooms had previously been vacant and unrented). Landlord increased the rent significantly, and tenant brought a rent overcharge proceeding. The Rent Administrator concluded that the legal regulated rent for the apartment was $995.99, and imposed a penalty of treble damages for the overcharge. Landlord filed a petition for administrative review, and the Deputy Commissioner initially modified the determination by eliminating treble damages. On reconsideration, the Deputy Commissioner recalculated the legal regulated rent to be $1,200, reducing the rent overcharge total, but reinstated the imposition of a treble damage penalty for the period between November 2008 and December 2009. Tenant then brought this article 78 proceeding challenging the recalculation of legal regulated rent. Supreme Court granted the petition, annulling the recalculation of the legal regulated rent to be $1200, and remitted for a new calculation pursuant to Rent Stabilization Code section 25422.4(a)(4).

In affirming, the Appellate Division agreed that landlord was entitled to increased rent for adding square footage to the apartment. But the court's majority held that the increased rent had to be calculated pursuant to Rent Stabilization Code section 2522.4(a)(4) ' a computation DHCR did not complete. As a result, Supreme Court had properly remitted to DHCR. But the court denied landlord's counterclaim for elimination of treble damages, holding that landlord had not established that DHCR's determination that the overcharge was willful had no rational basis.

Justice Skelos, dissenting, agreed that DHCR's determination that landlord was entitled to an additional $204.01 per month was arbitrary and capricious in light of section 2522.4(a)(4). But he concluded that because the addition of the two bedrooms essentially created a new perimeter for the apartment, landlord was entitled to a free market rent as a first stabilization rent for the apartment.

COMMENT

When a landlord in a building with 35 or fewer housing accommodations increases dwelling space of an apartment, Rent Stabilization Code (9 NYCRR) ' 2522.4 permits a formulaic monthly rent increase equal to 1/40th of the total cost of the increased space. However, when an apartment's boundary walls have been reconfigured to create what is, in effect, a new apartment, DHCR has created an administrative policy that permits a landlord to charge a “first stabilization rent” unrelated to the rent tenant previously paid. For instance, in 446-450 Realty Co., L.P. v. Higbie, 918 N.Y.S.2d 689 (App. Div.) the landlord converted an apartment from a single floor unit into a duplex, and the court viewed this as enough to qualify for “first stabilization rent.”

In cases where the landlord's reconfiguration has been less drastic, courts have limited landlords to the formulaic rent increases in section 2522.4. In Roker Realty Corp. v. Gross, 1 63 Misc.2d 766, the Appellate Term held that a landlord who added 27 square feet to an apartment (and who also replaced of kitchen and bathroom fixtures) was limited to the code increases and was not eligible for “first stabilization rent.” Similarly, in Matter of 300 W. 49th St. Assocs. v. DHCR, 2 12 AD2d 250, where the landlord renovated an apartment, and allegedly increased square footage without altering the perimeter of the apartment, the court held that landlord was not entitled to a first stabilization rent.

Whether a landlord is entitles to “first stabilization rent” often arises in the context of reviewing a DHCR determination of the issue, and when that happens, the court in 300 West 49th Street emphasized that courts should defer to the agency determination unless its interpretation is irrational or unreasonable. In both Matter of 300 and 446-450 Realty, the court gave deference to the DHCR or lower courts determination. Similarly, the court in Velazquez deferred to the agency determination that landlord had not created a new apartment justifying collection of a first rent .

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