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Claim of Non-Purchasing Tenant Status Rebuffed
When developers convert occupied buildings to condominiums or, less frequently, cooperative ownership, non-purchasing tenants are protected from eviction. When tenants in those buildings acquire vested rights as non-purchasing tenants is significant for developers, because the timing dictates the number of units that will be available for sale to outside purchasers. It is, therefore, no surprise that this is a highly charged and contested issue. Kessler v. Carnegie Park Associates, et al., represents the most recent effort by a group of tenants to expand their rights and to retain possession of otherwise unregulated units. In Kessler, plaintiffs unsuccessfully claimed that eligible senior citizens and eligible disabled persons are entitled to non-purchasing tenant status under the Martin Act upon acceptance of a non-eviction offering plan for filing. The Supreme Court and the Appellate Division made short-shift of their baseless claims and dismissed the complaint on a pre-answer motion to dismiss, recognizing that plaintiffs had ignored the statutory differences between eviction plans and non-eviction plans.
General Business Law 352-eeee sets forth the rights of tenants in occupancy, as well as the obligations of sponsors, with respect to conversions of occupied properties. A non-purchasing tenant obtains the right to remain in possession for so long as he or she chooses, subject to not unconscionable rent increases. Non-purchasing tenants may not be evicted, other than for cause (e.g., breach of a substantial obligation of their tenancy or nuisance). In MH Residential I, LLC. v. Barrett, 78 AD3d 99 (1st Dept. 2010), the First Department determined that market tenants whose leases expired prior to the effective date of an offering plan were not entitled to non-purchasing tenant status. Against that backdrop, the plaintiffs in Kessler asserted a new and unique theory as a pathway to non-purchasing tenant status. The four named plaintiffs in Kessler asserted that they were entitled to non-purchasing tenant status as eligible senior citizens and eligible disabled persons within the meaning of GBL 352-eeee(1)(f) and (1)(g). Plaintiffs commenced their action in Kings County against 11 defendants, without regard to the location of the properties at issue. The HFZ defendants were the sponsors of four conversions in Manhattan, and none of the plaintiffs resided in any of the HFZ defendants' properties.
Plaintiffs' complaint alleged that eligible senior citizens and eligible disabled persons acquired non-purchasing tenant status as soon as the offering plan was accepted for filing by the New York State Attorney General. First, plaintiffs claimed that the Martin Act does not draw any distinction between the rights afforded to eligible senior citizens and eligible disabled persons in Eviction Plans and Non-Eviction Plans. Second, plaintiffs relied on a memorandum issued by the Real Estate Finance Bureau of the Attorney General of the State of New York, dated Aug. 31, 2016, which revised its regulations related to the rights of eligible senior citizens and eligible disabled persons.
The Martin Act affords developers two paths to conversion of an occupied property – Eviction Plans and Non-Eviction Plans. Under Eviction Plans, the Martin Act provides that 51% of "tenants in occupancy" must purchase their respective units in order for the plan to be declared effective. Eligible senior citizens and eligible disabled persons are specifically excluded from the definition of "tenants in occupancy." As relates to Eviction Plans only, the Martin Act goes on to provide:
" … no eviction proceedings will be commenced at any time against either eligible senior citizens and eligible disabled persons." GBL 352-eeee(2)(d)(i)."
No comparable protection for senior citizens or disabled persons appears in GBL 352-eeee(2)(c), the section applicable to non-eviction plans. In Kessler, plaintiffs all resided in buildings which were converted pursuant to Non-Eviction Plans. Because eligible senior citizens and eligible disabled persons are subject to statutory protections as non-purchasing tenants far earlier in the conversion process under Eviction Plans (i.e., when the AG accepts a plan for filing in the case of an Eviction Plan, as opposed to when it declares a plan effective under a Non-Eviction Plan), plaintiffs strained to eviscerate the distinctions between the two.
Plaintiffs' arguments focused purely on the definitions of eligible senior citizens and eligible disabled persons, to the exclusion of the substantive sub-sections of the Martin Act. Although GBL 352-eeee(1) sets forth relevant definitions, Plaintiffs' argument (and the AG's Memorandum) ignored the fact that those defined terms appear only in GBL 352-eeee(2)(d) (Eviction Plans) and nowhere in GBL 352-eeee(2)(c) (Non-Eviction Plans).
Both Supreme Court and the Appellate Division rejected Plaintiffs' claims, focusing on the differences between the text of the two subsections. The Appellate Division held:
We reject plaintiffs' textual arguments in light of the structure of 352-eeee. Special rights for eligible senior citizens and disabled persons are identified only in section 352-eeee(2)(d), which governs eviction plans. Thus it would be contrary to rules of interpretation to apply them to non-eviction plans. As we have previously determined "General Business Law §352-eeee (2)(d), by its terms, applies only to eviction plans" (internal citations omitted).
While the Appellate Division did not expressly speak to the validity of the AG's Memorandum because the regulations adopted by the AG applied to offering plans accepted for filing after the offering plans were filed in Kessler, the strong language of the holding calls into question the validity of the regulations and whether they are, in fact ultra vires (i.e., beyond the AG's rule making authority). As such, as to offering plans filed prior to Sept. 1, 2016, eligible senior citizens and eligible disabled persons unquestionably enjoy no additional rights as non-purchasing tenants under Non-Eviction Plans. Developers who have and will file Non-Eviction Plans after Sept. 1, 2016 will have to make the choice of complying with the AG's regulations or pursuing a challenge.
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Deborah E. Riegel, a partner at Rosenberg & Estis, P.C., represented the owners in the Kessler case.
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