Landlord & Tenant

Landlord leased to tenant a 2,600 square-foot space in the Woodbury Common shopping center for a term to expire on May 31, 2018. The lease contains a relocation provision, which states that “in the event the Demised Premises consist of 1,500 square feet of space of less, Landlord shall be entitled to relocate” the tenant if landlord determines that relocation is in the best interest of the shopping center. In December 2014, landlord notified tenant that it intended to relocate tenant to a new food court area, and indicated that if tenant intended to cancel the lease rather than relocating, it should notify landlord within 10 days.

Tenant refused to move and brought this declaratory judgment action. Supreme Court denied landlord's summary judgment motion, but also denied tenant's summary judgment motion because of a dispute about whether another corporate entity owned by tenant had breached its short-term lease for kiosk space within the shopping center. Tenant's lease provides that default by tenant or any of its affiliates under any other lease with landlord would constitute an event of default.

In affirming, the Appellate Division started by holding that because the express terms of the lease allowed landlord to relocate tenant only if the demised premises consisted of 1,500 square feet or less, landlord was not entitled to invoke the lease's relocation provision. The court then turned to the cross-default provision, and noted that landlord had not eliminated questions of fact about tenant's alleged default of the kiosk space, and had also not established that the cross-default provision allowed landlord to terminate the subject lease without giving tenant prior notice and an opportunity to cure the default. At the same time, the court also concluded that tenant had not eliminated questions of fact about breach of the kiosk space lease. As a result, tenant was not entitled to summary judgment dismissing landlord's counterclaims.

Alterations Remove Apartment from Rent Stabilization

Dixon v. 105 W. 75th Street LLC
NYLJ 4/3/17, p. 19, col. 3 AppDiv, First Dept. (4-1 decision; memorandum opinion; dissenting opinion by Gesmer, J.)

In tenant's action for a judgment declaring his apartment illegal, or in the alternative declaring that the apartment is subject to rent stabilization, tenant appealed from Supreme Court's dismissal of the complaint based on documentary evidence. The Appellate Division modified to declare that the apartment is legal and not subject to rent stabilization, holding that landlord had adequately documented alterations to the apartment that removed the apartment from rent stabilization.

Tenant entered into a market-rate lease for the subject apartment in May 2013 at a rent of $3,200. Tenant's predecessor also paid market rent. In 2014, after obtaining a rental history indicating that the apartment had been registered as rent-stabilized in 2002, at a rent of $1117.42 per month, tenant asked landlord why he was being charged market rate. Landlord responded that after 2002, it had converted the apartment into a duplex, entitling landlord to charge first rent. Alternatively, landlord asserted that the renovations were sufficiently expensive that, applying one-fortieth of the costs to the monthly rent brought the apartment above the high-rent vacancy deregulation threshold.

Tenant then brought this action challenging landlord's right to market rent, asserting that landlord had not significantly changed the size of the apartment and had not expended enough funds to justify high-rent vacancy deregulation. Supreme Court dismissed the complaint, relying on an affidavit from landlord's principal asserting that he had created an addition on the roof to transform two apartments, including the subject apartment, into duplexes; and also relying on work permits, an invoice from the contractor who performed the work, and checks made out to the contractor, and to a plumbing and heating contractor. The court concluded that landlord had adequately established both that it had expanded the apartment to qualify for first rents, and that its $200,000 renovations entitled landlord to remove the apartment from rent stabilization. Tenant appealed.

In affirming, the Appellate Division majority rejected tenant's claims that the documents considered by Supreme Court were inauthentic. The court concluded that the documents collectively established that landlord's work changed the identity of the living space in the apartment, and also established that landlord had properly claimed a rent increase based on the cost of its project to increase the apartment's living space. Justice Gesmer dissented, contending that the documents submitted by landlord were not sufficient to foreclose questions of fact about the nature and extent of landlord's improvements.

COMMENT

Although Rent Stabilization Code 2522.4[a][1] allows a landlord to seek a rent increase when an apartment is modified to substantially increase its space, the Code provides no explicit authority for a landlord to charge a “first rent” at the market rate. Despite the absence of language in the Code, DHCR articulated a policy providing that if landlord “significantly changes the perimeter and dimensions of an existing housing accommodation, … the DHCR may find that the resultant housing accommodation was not in existence on the applicable base date.” (Emphasis added.) Such a finding “may” entitle landlord to charge first rent. DHCR Office of Rent Administration, Operational Bulletin 95-2 at 4 (Dec. 15, 1995).

In general, courts have permitted landlords to recover first rent when they engage in new construction that expands the size of an existing apartment. Thus, in 446-450 Realty Co., L.P. v. Higbie, 30 Misc. 3d 71, 73), the Appellate Term allowed landlord to charge “first rent” because he established, prima facie, that he made significant dimensional changes, moving an outer wall and converting a single floor apartment to create a new duplex apartment.

By contrast, when landlord changes the dimensions of an apartment without substantial new construction, courts are less likely to conclude that landlord is entitled to first rent. When landlord's reconfiguration reduces the size of the apartment, landlord will almost certainly not be entitled to first rent. For instance, in Devlin v. N.Y. State Div. of Hous. & Cmty. Renewal, 309 A.D.2d 191, 194, the court annulled DHCR's determination that landlord was entitled to “first rent” when he moved one perimeter wall and decreased the apartment size by 86 square feet. The court noted the irony of a DHCR determination that would allow the landlord to double or triple the rent while shrinking the apartment's square footage. But even when a landlord substantially increases the size of an apartment, landlord may not be entitled to first rent if the change does not involve new construction. In Velazquez v. DHCR, 130 A.D.3d 1045, a sharply divided Second Department upheld DHCR's
determination that landlord was not entitled to first rent even though landlord had unsealed a door, adding two bedrooms to what had previously been a two-bedroom apartment. The court's majority deferred to DHCR's determination that the landlord had not constructed a new apartment unit by unsealing the doorway.

Tenant Remains Liable Under Original Lease

Dee Cee Associates LLC v. 44 Beehan Corp.
NYLJ 4/3/17, p. 20., col. 3 AppDiv, First Dept. (memorandum opinion)

In commercial landlord's action for rent arrears and attorneys' fees, landlord appealed from Supreme Court's denial of its summary judgment motion and partial grant of tenant's summary judgment motion. The Appellate Division modified to grant landlord's summary judgment motion as to liability, holding that when neither party could produce a letter agreement signed by the parties, the tenant remained liable for rent under the lease.

On Feb. 1, 1998, the parties entered into a 15-year lease for restaurant space to begin on June 1, 1998 and to end on May 31, 2013. The lease provided for annual rent increases. Three guarantors signed “good guy” guarantees. On Jan. 8, 1999, landlord and tenant entered into a letter agreement that might have postponed both the beginning and the ending dates of the lease by six months, but neither party could produce the agreement, and neither side submitted an affidavit reconstructing its terms. Tenant fell behind in the payment of rent, and in 2001, the parties agreed to a payment schedule for the rent arrears. The agreement was preceded by a “whereas” clause, which recited that the lease began on Dec. 1, 1998, and ended Nov. 30, 2013, and the agreement also reaffirmed that all of the terms of the original lease (other than those explicitly altered), remained in effect.

In 2006, tenant had again accumulated rent arrears, and landlord agreed to discount the rent in return for a right to terminate the lease on Jan. 31, 2009 or any time thereafter upon payment of $2 million less rent arrears. If landlord never exercised the right, the rent arrears through Sept. 30, 2006 would be forgiven. Landlord never exercised the termination right. As of June 1, 2013, tenant had accumulated rent arrears of $479,601. Six days later, tenant surrendered the premises, and landlord accepted the surrender pursuant to an agreement reserving to landlord all rights and remedies with respect to rent arrears accrued through June 7, 2013.

Landlord then brought this action seeking $244,733.11 in rent arrears through 2006, $479,601 for the period from July 1, 2009 through June 7, 2013, and attorneys' fees pursuant to a lease provision entitling landlord to attorneys' fees incurred in the process of collecting rent. Supreme Court awarded summary judgment to tenant on the claim for pre-2006 rent, and denied summary judgment to both parties with respect to the post-2009 rent and the attorneys' fees.
In modifying, the Appellate Division started by upholding the grant of summary judgment to tenant with respect to the pre-2006 rent, noting that the 2006 agreement explicitly forgave that rent if landlord did not exercise its termination right. But the court then held that landlord was entitled to summary judgment with respect to the other two claims. The court rejected tenant's argument that the absence of the 1999 letter agreement precluded summary judgment, holding that tenant's speculation about what that agreement might reveal was insufficient to raise a question of fact about tenant's liability under the original lease, especially in light of the subsequent 2001 agreement which reaffirmed the terms of the original lease.

Landlords Not Entitled To Vacate HPD Liens

Rivera v. Department of Housing Preservation and Development
NYLJ 4/5/17, p. 26, col. 4 Court of Appeals (Opinion by Garcia, J.)

In two proceedings, landlords sought to vacate liens imposed by the Department of Housing Preservation and Development (HPD) to cover the cost of relocation of tenants forced to vacate their apartments because of building violations. The Court of Appeals held that landlords could not obtain summary discharge of the liens on the ground that the claimed expenses were unreasonable.

In one of the two cases, the Fire Department issued a vacate order affecting tenants in one landlord's building. In the other case, the Department of Buildings issued a vacate order affecting tenants in the other landlord's building. In both cases, HPD relocated the affected tenants in single-room occupancy hotels, and then filed a lien against the landlords' property to cover relocation expenses. The respective liens covered shelter costs for one to four years. Landlords then sought to vacate the liens as unreasonable. In each case, the trial court granted HPD's motion to dismiss landlord's petition. In the Second Department case, the Appellate Division affirmed, but in the First Department case, the court reversed, holding that HPD's financing of tenant's residence in hotel was unreasonable, and that payment of hotel expenses did not quality as “temporary shelter benefits” for which HPD was entitled to reimbursement.
In affirming the Second Department's decision and reversing the First Department's decision, the Court of Appeals held that HPD's liens were facially valid, and as a result, were not subject to summary discharge. The court rejected landlords' contention that hotel expenses incurred to relocate tenants are not lienable, and also rejected the contention that the duration of the relocation expenses rendered the liens facially invalid. Turning to the reasonableness of the charges, the court held that issues of reasonableness should be determined after a trial in the course of lien foreclosure proceedings, not in the context of a motion for summary discharge.

Questions of Fact Remain About Whether Breach Triggered Cross-Default Provision

Saran v. Chelsea GCA Realty Partnership, L.P.
NYLJ 3/31/17 AppDiv, Second Dept. (memorandum opinion)

In an action by commercial tenant for a declaration of the rights of the parties with respect to leased premises, both parties appealed from a Supreme Court order denying their respective summary judgment motions. The Appellate Division affirmed, holding that questions of fact remained about whether tenant's affiliate had breached a lease for other premises, triggering the subject lease's cross-default provision.

Landlord leased to tenant a 2,600 square-foot space in the Woodbury Common shopping center for a term to expire on May 31, 2018. The lease contains a relocation provision, which states that “in the event the Demised Premises consist of 1,500 square feet of space of less, Landlord shall be entitled to relocate” the tenant if landlord determines that relocation is in the best interest of the shopping center. In December 2014, landlord notified tenant that it intended to relocate tenant to a new food court area, and indicated that if tenant intended to cancel the lease rather than relocating, it should notify landlord within 10 days.

Tenant refused to move and brought this declaratory judgment action. Supreme Court denied landlord's summary judgment motion, but also denied tenant's summary judgment motion because of a dispute about whether another corporate entity owned by tenant had breached its short-term lease for kiosk space within the shopping center. Tenant's lease provides that default by tenant or any of its affiliates under any other lease with landlord would constitute an event of default.

In affirming, the Appellate Division started by holding that because the express terms of the lease allowed landlord to relocate tenant only if the demised premises consisted of 1,500 square feet or less, landlord was not entitled to invoke the lease's relocation provision. The court then turned to the cross-default provision, and noted that landlord had not eliminated questions of fact about tenant's alleged default of the kiosk space, and had also not established that the cross-default provision allowed landlord to terminate the subject lease without giving tenant prior notice and an opportunity to cure the default. At the same time, the court also concluded that tenant had not eliminated questions of fact about breach of the kiosk space lease. As a result, tenant was not entitled to summary judgment dismissing landlord's counterclaims.

Alterations Remove Apartment from Rent Stabilization

Dixon v. 105 W. 75th Street LLC
NYLJ 4/3/17, p. 19, col. 3 AppDiv, First Dept. (4-1 decision; memorandum opinion; dissenting opinion by Gesmer, J.)

In tenant's action for a judgment declaring his apartment illegal, or in the alternative declaring that the apartment is subject to rent stabilization, tenant appealed from Supreme Court's dismissal of the complaint based on documentary evidence. The Appellate Division modified to declare that the apartment is legal and not subject to rent stabilization, holding that landlord had adequately documented alterations to the apartment that removed the apartment from rent stabilization.

Tenant entered into a market-rate lease for the subject apartment in May 2013 at a rent of $3,200. Tenant's predecessor also paid market rent. In 2014, after obtaining a rental history indicating that the apartment had been registered as rent-stabilized in 2002, at a rent of $1117.42 per month, tenant asked landlord why he was being charged market rate. Landlord responded that after 2002, it had converted the apartment into a duplex, entitling landlord to charge first rent. Alternatively, landlord asserted that the renovations were sufficiently expensive that, applying one-fortieth of the costs to the monthly rent brought the apartment above the high-rent vacancy deregulation threshold.

Tenant then brought this action challenging landlord's right to market rent, asserting that landlord had not significantly changed the size of the apartment and had not expended enough funds to justify high-rent vacancy deregulation. Supreme Court dismissed the complaint, relying on an affidavit from landlord's principal asserting that he had created an addition on the roof to transform two apartments, including the subject apartment, into duplexes; and also relying on work permits, an invoice from the contractor who performed the work, and checks made out to the contractor, and to a plumbing and heating contractor. The court concluded that landlord had adequately established both that it had expanded the apartment to qualify for first rents, and that its $200,000 renovations entitled landlord to remove the apartment from rent stabilization. Tenant appealed.

In affirming, the Appellate Division majority rejected tenant's claims that the documents considered by Supreme Court were inauthentic. The court concluded that the documents collectively established that landlord's work changed the identity of the living space in the apartment, and also established that landlord had properly claimed a rent increase based on the cost of its project to increase the apartment's living space. Justice Gesmer dissented, contending that the documents submitted by landlord were not sufficient to foreclose questions of fact about the nature and extent of landlord's improvements.

COMMENT

Although Rent Stabilization Code 2522.4[a][1] allows a landlord to seek a rent increase when an apartment is modified to substantially increase its space, the Code provides no explicit authority for a landlord to charge a “first rent” at the market rate. Despite the absence of language in the Code, DHCR articulated a policy providing that if landlord “significantly changes the perimeter and dimensions of an existing housing accommodation, … the DHCR may find that the resultant housing accommodation was not in existence on the applicable base date.” (Emphasis added.) Such a finding “may” entitle landlord to charge first rent. DHCR Office of Rent Administration, Operational Bulletin 95-2 at 4 (Dec. 15, 1995).

In general, courts have permitted landlords to recover first rent when they engage in new construction that expands the size of an existing apartment. Thus, in 446-450 Realty Co., L.P. v. Higbie , 30 Misc. 3d 71, 73), the Appellate Term allowed landlord to charge “first rent” because he established, prima facie , that he made significant dimensional changes, moving an outer wall and converting a single floor apartment to create a new duplex apartment.

By contrast, when landlord changes the dimensions of an apartment without substantial new construction, courts are less likely to conclude that landlord is entitled to first rent. When landlord's reconfiguration reduces the size of the apartment, landlord will almost certainly not be entitled to first rent. For instance, in Devlin v. N.Y. State Div. of Hous. & Cmty. Renewal , 309 A.D.2d 191, 194, the court annulled DHCR's determination that landlord was entitled to “first rent” when he moved one perimeter wall and decreased the apartment size by 86 square feet. The court noted the irony of a DHCR determination that would allow the landlord to double or triple the rent while shrinking the apartment's square footage. But even when a landlord substantially increases the size of an apartment, landlord may not be entitled to first rent if the change does not involve new construction. In Velazquez v. DHCR , 130 A.D.3d 1045, a sharply divided Second Department upheld DHCR's
determination that landlord was not entitled to first rent even though landlord had unsealed a door, adding two bedrooms to what had previously been a two-bedroom apartment. The court's majority deferred to DHCR's determination that the landlord had not constructed a new apartment unit by unsealing the doorway.

Tenant Remains Liable Under Original Lease

Dee Cee Associates LLC v. 44 Beehan Corp.
NYLJ 4/3/17, p. 20., col. 3 AppDiv, First Dept. (memorandum opinion)

In commercial landlord's action for rent arrears and attorneys' fees, landlord appealed from Supreme Court's denial of its summary judgment motion and partial grant of tenant's summary judgment motion. The Appellate Division modified to grant landlord's summary judgment motion as to liability, holding that when neither party could produce a letter agreement signed by the parties, the tenant remained liable for rent under the lease.

On Feb. 1, 1998, the parties entered into a 15-year lease for restaurant space to begin on June 1, 1998 and to end on May 31, 2013. The lease provided for annual rent increases. Three guarantors signed “good guy” guarantees. On Jan. 8, 1999, landlord and tenant entered into a letter agreement that might have postponed both the beginning and the ending dates of the lease by six months, but neither party could produce the agreement, and neither side submitted an affidavit reconstructing its terms. Tenant fell behind in the payment of rent, and in 2001, the parties agreed to a payment schedule for the rent arrears. The agreement was preceded by a “whereas” clause, which recited that the lease began on Dec. 1, 1998, and ended Nov. 30, 2013, and the agreement also reaffirmed that all of the terms of the original lease (other than those explicitly altered), remained in effect.

In 2006, tenant had again accumulated rent arrears, and landlord agreed to discount the rent in return for a right to terminate the lease on Jan. 31, 2009 or any time thereafter upon payment of $2 million less rent arrears. If landlord never exercised the right, the rent arrears through Sept. 30, 2006 would be forgiven. Landlord never exercised the termination right. As of June 1, 2013, tenant had accumulated rent arrears of $479,601. Six days later, tenant surrendered the premises, and landlord accepted the surrender pursuant to an agreement reserving to landlord all rights and remedies with respect to rent arrears accrued through June 7, 2013.

Landlord then brought this action seeking $244,733.11 in rent arrears through 2006, $479,601 for the period from July 1, 2009 through June 7, 2013, and attorneys' fees pursuant to a lease provision entitling landlord to attorneys' fees incurred in the process of collecting rent. Supreme Court awarded summary judgment to tenant on the claim for pre-2006 rent, and denied summary judgment to both parties with respect to the post-2009 rent and the attorneys' fees.
In modifying, the Appellate Division started by upholding the grant of summary judgment to tenant with respect to the pre-2006 rent, noting that the 2006 agreement explicitly forgave that rent if landlord did not exercise its termination right. But the court then held that landlord was entitled to summary judgment with respect to the other two claims. The court rejected tenant's argument that the absence of the 1999 letter agreement precluded summary judgment, holding that tenant's speculation about what that agreement might reveal was insufficient to raise a question of fact about tenant's liability under the original lease, especially in light of the subsequent 2001 agreement which reaffirmed the terms of the original lease.

Landlords Not Entitled To Vacate HPD Liens

Rivera v. Department of Housing Preservation and Development
NYLJ 4/5/17, p. 26, col. 4 Court of Appeals (Opinion by Garcia, J.)

In two proceedings, landlords sought to vacate liens imposed by the Department of Housing Preservation and Development (HPD) to cover the cost of relocation of tenants forced to vacate their apartments because of building violations. The Court of Appeals held that landlords could not obtain summary discharge of the liens on the ground that the claimed expenses were unreasonable.

In one of the two cases, the Fire Department issued a vacate order affecting tenants in one landlord's building. In the other case, the Department of Buildings issued a vacate order affecting tenants in the other landlord's building. In both cases, HPD relocated the affected tenants in single-room occupancy hotels, and then filed a lien against the landlords' property to cover relocation expenses. The respective liens covered shelter costs for one to four years. Landlords then sought to vacate the liens as unreasonable. In each case, the trial court granted HPD's motion to dismiss landlord's petition. In the Second Department case, the Appellate Division affirmed, but in the First Department case, the court reversed, holding that HPD's financing of tenant's residence in hotel was unreasonable, and that payment of hotel expenses did not quality as “temporary shelter benefits” for which HPD was entitled to reimbursement.
In affirming the Second Department's decision and reversing the First Department's decision, the Court of Appeals held that HPD's liens were facially valid, and as a result, were not subject to summary discharge. The court rejected landlords' contention that hotel expenses incurred to relocate tenants are not lienable, and also rejected the contention that the duration of the relocation expenses rendered the liens facially invalid. Turning to the reasonableness of the charges, the court held that issues of reasonableness should be determined after a trial in the course of lien foreclosure proceedings, not in the context of a motion for summary discharge.