Landlord & Tenant

Subtenant Lombardo then filed a rent overcharge complaint against the tenant LLC and its principal, alleging that the principal was an illusory tenant and was overcharging the subtenant. The Rent Administrator granted the complaint and assessed damages, including treble damages, in the amount of $201,593.29. That amount was based on a base date of February 2005 and a base date rent of $1524.32, the amount the landlord was collecting from the tenant LLC. The Rent Administrator imposed no liability on landlord because there was no proof that landlord received any of the overcharge. The Deputy Commissioner agreed.

Sixteen months later, DHCR, on its own motion, reversed course and remanded the matter to the Rent Administrator, concluding that the earlier determination was internally inconsistent. On remand, the Rent Administrator found an illusory tenancy and held that the landlord was jointly and severally liable with the prime tenant for an overcharge of $263, 942.29. That number reflected the conclusion that the apartment's rent history could not be considered in assessing the legal rent. Instead, the Rent Administrator computed the legal rent using the default method developed in Thornton v Baron, 5 N.Y.3d 175, for cases involving fraud. DHCR upheld the determination, prompting landlord to bring the Article 78 proceeding. Supreme Court, in turn, upheld DHCR's determination.

In modifying, the Appellate Division upheld Supreme Court's conclusion that DHCR's determination to impose liability on landlord was rational. Although the rent stabilization provisions do not expressly provide for landlord liability when a tenant overcharges a subtenant, the court concluded that DHCR's interpretation of those statutes to provide for landlord liability, and for treble damages, was rational under the circumstances of the case. The court emphasized that landlord had constructive knowledge of the prime tenant's scheme because the building staff kept a registry for prime tenant's sublets. The court, however, held that DHCR and Supreme Court had erroneously applied the Thornton v. Baron formula for computing the overcharge because in this case, the initial rent charged by the landlord was a legal one, and the rent registration records for the apartment were reliable. As a result, the Rent Administrator's initial computation of damages was correct.

Comment

In general, landlords are liable for rent overcharges collected by others only when landlords are chargeable with notice of the overcharge. The issue arises most frequently with overcharges by predecessor landlord, where Rent Stabilization Code §2526.1 explicitly provides that landlords are liable for overcharges collected by prior landlords, but includes an exception when, in connection with a sale of property at a judicial proceeding, there are no “sufficient records” to establish the legal regulated rent In Gaines v. New York State Div. of Hous. and Community Renewal, 90 NY2d 545, the Court of Appeals applied the statutory exception to protect not merely a judicial sale purchaser, but a subsequent purchaser from that purchaser. In Gaines, a bankruptcy court reached a settlement between the predecessor landlord and a mortgagee resulting in a transfer of title to the mortgagee free of encumbrances. The mortgagee then transferred the property to a subsequent purchaser. When a tenant who had been overcharged by the predecessor sought to recover from the subsequent purchaser, the court held that DHCR had properly denied the overcharge petition. The court focused on the “common unavailability of prior rental records where a judicial sale has occurred” as a reason to excuse the subsequent owner from liability for the overcharge. See also, Matter of Grimm v. NYSHCR, 4 A.D.3d 295, where the court applied the code exception to excuse a foreclosure sale purchaser from liability for an overcharge collected by a predecessor.

Outside the context of overcharges by predecessor landlords, there is little authority for imposing liability on a landlord for overcharges the landlord did not collect. In the 339 E. 49th case, the court relied heavily on Avon Furniture Leasing Inc. v. Popolizio, 116 A.D.2d 280, for its imposition of liability on the landlord. Avon, however, provides weak support for imposition of overcharge liability on landlords who have not actually collected the overcharge. First, it was clear that the landlord in Avon, was collecting rent well in excess of the lawful stabilized rent from the prime tenant, who was using the apartment to extract even higher rent from the subtenant. Second, the subtenant's primary objective was not overcharge liability, but instead establishing that the main tenant was an “illusory tenant” so that the subtenant could obtain the right to subscribe to a plan of cooperative ownership.

Federal Pre-Emption Exempted Apartments from Rent Stabilization

435 Central Park West Tenant Assn. v. Park Front Apartments, LLC NYLJ 8/6/18, p. 18, col. 5 AppDiv, First Dept. (memorandum opinion)

In an action by tenants' association for a declaration that the tenants apartments were subject to rent stabilization, landlord appealed from Supreme Court's grant of summary judgment to tenants' association. The Appellate Division modified, holding that federal pre-emption exempted the apartments from rent stabilization until April 11, 2011, but that the apartments became rent stabilized as of April 12.

In 1969, landlord gut renovated the building site, which previously consisted of nine tenement buildings, and created a single apartment building for low and moderate income families. Landlord financed the renovation with a loan subsidized by a federal agency. That loan was schedule to mature in April 2011. In 1980, landlord obtained a federal subsidy grant from HUD pursuant to a financial assistance contract that required landlord to maintain the low and moderate income character of the project until April 11, 2011. In 2000, landlord paid off the federally-assisted mortgage, and the building became subject to a use agreement with HUD. That agreement required landlord to maintain the low and moderate affordability restrictions until April 1, 2016, and provided that the agreement would continue HUD's pre-emption of state and local rent regulation. In this action, the tenants' association contends that federal pre-emption ended in 2000 when the landlord paid off the mortgage. The association contends that the apartments became stabilized at that time. Supreme Court agreed.

In modifying, the Appellate Division rejected landlord's argument that the use agreement itself pre-empted state and federal rent regulation. But the court also rejected the argument by tenants' association that payoff of the mortgage terminated federal pre-emption. Instead, the court held that the agreement with HUD evinced HUD's intent to maintain its affordability restrictions until the date when the original mortgage term would have expired. Because landlord could not simultaneously comply with the HUD restrictions and the rent stabilization law, the federal regulations pre-empted local rent regulation. But the court found no authority for HUD to extend pre-emption beyond the expiration of the original mortgage term, when the project ceased to be subject to the HUD handbook. As a result, the apartments became subject to rent regulation in April 2011.