Airbnb and Rent Stabilization: A Survey

Over the past several years, rent-stabilized tenants have turned to Airbnb and similar services to monetize their below-market leases and earn extra income. Landlords seeking to evict such tenants for profiteering have been largely successful. This article examines the state of “Airbnb” jurisprudence to date, focusing on the First Department's recent 3-2 decision in Goldstein v Lipetz (150 AD3d 562 [1st Dept 2017]).

The Equities

The theoretical underpinning of all profiteering cases was set forth over 30 years ago in a much-cited quotation from Continental Towers Ltd. Partnership v Freuman (128 Misc.2d 680, 680-81 [App. Term First Department 1985)]:

The integrity of the rent stabilization scheme is obviously undermined if tenants, who themselves are the beneficiaries of regulated rentals, are free to sublease their apartments at market levels and thereby collect the profits which are denied the main landlord.

* * *

This practice, which the Rent Stabilization Law was designed to prevent, is not to be condoned by permitting the tenant to remain after the fraud has been found out.

Subtenants or Roommates?

Rent-stabilized tenants are allowed to sublet their apartments under certain conditions. See RPL § 226-b; RSC § 2525.6. RSC § 2525.6(b), however, prohibits a tenant from charging a subtenant more than the stabilized rent, plus a 10% surcharge if the apartment is furnished.

Rent-stabilized tenants are also allowed to have roommates. See RPL § 235-f; RSC § 2525.7. Because a rent-stabilized tenant can be evicted for profiteering with respect to a subtenant, but not with respect to a roommate, see First Hudson Capital LLC v Seaborn (54 AD3d 251 [1st Dept 2008]), tenants in profiteering cases will often claim that their multiple short-term occupants are roommates, not subtenants.

In the pre-Airbnb case of 220 W. 93rd St., LLC v Stavrolakes (33 AD3d 491 [1st Dept 2006]), the First Department held that renting to “short-term transient” occupants was “in the nature of subletting rather than taking in roommates.” Since then, courts have consistently deemed short-term occupants to be subtenants, thus making rent-stabilized tenants subject to eviction. See, e.g., Goldstein; 355-7 LLC v Steele (53 Misc 3d 150(A) [App. Term, 1st Dept 2016]); Brookford, LLC v Penraat (47 Misc 3d 723 [Sup. Ct. New York County 2014]).

What Is Profiteering?

The majority in Goldstein discussed in some depth the issue of when profiteering has occurred. The court began by observing that RSC § 2525.6(b) allows a rent-stabilized tenant to charge a subtenant a maximum 10% premium for a furnished apartment. Because apartments rented to short-term occupants are necessarily furnished, the rent charged to the subtenant will be measured against the previous rent, plus the 10% surcharge, to determine whether the tenant has profiteered.

The next issue is the timeframe in question. The tenant in Goldstein argued that her “profiteering was insubstantial” when her Airbnb rate was measured against her stabilized rent on a monthly basis. The majority, however, took a per-diem approach:

Defendant sublet her apartment on a daily basis and, perforce, she had less Airbnb revenue in months during which her apartment was sublet for fewer days. To determine defendant's profit from subletting, her income from the subletting should be compared to the share of her rent attributable to the days she was actually hosting a subtenant in the apartment, not to her rent for the entire month during which the subletting occurred.

Based on this methodology, the majority held that the tenant had “realized a 72% profit” for the 338 days she rented out the apartment, which represented “about seven times the 10% premium.” See also 335-7 LLC, 42nd and 10th Assocs., LLC v Ikezi (50 Misc 3d 130(A) [App. Term, 1st Dept 2015]); PWV Acquisition, LLC v Poole (2017 WL 550196 [Sup. Ct. New York County]); Brookford.

In Goldstein, the tenant also argued that her profiteering was “'insubstantial when viewed in the context of a forty (40) year tenancy.'” The majority rejected this claim out of hand, stating:

The implication of this analysis, in which whether the unlawful conduct of sufficient duration to be considered material is determined by comparison to the total length of tenancy, has the effect of rendering lawful for a longstanding tenant the exact same conduct that would be unlawful for tenant who has a shorter history in his or her apartment.

* * *

In our view, subletting of an apartment at an excessive rental rate for 338 days over a year and a half, has taken place … for a substantial period of time, and thus constitutes unlawful profiteering, regardless of the duration of the tenancy before the unlawful conduct began.

Can Profiteering Be Cured?

In Goldstein, the majority held that First and Second Department case law “establishes that, once substantial profiteering has been established, the tenant is subject to eviction without any right to cure, as a matter of law.” The court distinguished the case at bar, wherein the tenant had engaged in profiteering for 18 months, from cases, such as Cambridge Dev. LLC v Staysna (66 AD3d 614 [1st Dept 2009]), where the illegal conduct had taken place over a shorter period:

While there are cases in which tenants who have overcharged their subtenants have nevertheless been permitted to cure, in such cases … the illegal subletting generally has been of short duration. Moreover, in this context, 'cure' does not mean simply the termination of the illegal subletting, but also the refund to the subtenants of the overcharges (internal citations omitted).

See also 42nd and 10th Assocs., LLC; PWV Acquisition, LLC.

The Effect of Short-Term Renters on Other Tenants

Courts are usually reluctant to evict tenants, especially rent-regulated tenants. That is not the case, however, with profiteering, where short-term rentals negatively impact other tenants in the building. This was a factor in the majority opinion in Goldstein:

Defendant's exploitation of her rent-stabilized leasehold disregarded, not only the rights of her landlord, but also the rights of all of her fellow permanent residents of the building, whether shareholders or lessees. The other residents did not bargain to share the building where they made their homes with a continuous stream of transient strangers (to defendant no less than to themselves) of unknown character and reputation, drawn to the building from all over the world by Internet advertising.

See also 335-7 LLC.

Practitioners should keep two things in mind. First, the tenant in Goldstein has claimed an as-of right appeal to the Court of Appeals based on the First Department's split decision. The Court of Appeals, however, has yet to determine whether it has jurisdiction. Second, as the sharing economy grows, there will be more tenants subletting their apartments, leading to more decisions, more clarified rules, and, perhaps, more exceptions.

*****
Jeffrey Turkel, a member of this Newsletter's Board of Editors, is a partner in the Manhattan Real Estate Law Firm of Rosenberg & Estis, P.C. Mr. Turkel represented the prevailing owner in Brookford.