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Belkin Burden Wenig & Goldman, LLP

E D I T O R S

Magda L. Cruz Aaron Shmulewitz

UPDATE

Kara I. Rakowski

JANUARY | FE BRUARY 2015 | VOL U M E 3 3

F I R M U P DAT E

INSIDE THIS ISSUE FIRM UPDATE RENT REGULATION:

RENT REGULATION: SOME EMERGING ISSUES TO CONSIDER IN 2015

SOME EMERGING ISSUES TO CONSIDER IN 2015.........1 LITIGATION UPDATE THE TENANT’S OBLIGATION TO MAINTAIN CARBON MONOXIDE AND SMOKE DETECTORS.........................3 LITIGATION UPDATE RENT ACCELERATION CLAUSE: PENALTY OR DAMAGES...........................3 TRANSACTIONAL UPDATE CENTRAL PARK VIEWS ­­–  THE HIGH PRICE OF LIGHT & AIR...................4 CO-OP | CONDO CORNER BY AARON SHMULEWITZ....5 ADMINISTRATIVE LAW UPDATE DEREGULATE RENT REGULATED APARTMENTS THROUGH HIGH INCOME HIGH RENT DEREGULATION IN 2015.....6 NOTABLE ACHIEVEMENTS..................7

Counseling and representing owners and managers of rent regulated properties is one of the principal focuses of BBWG’s practice. In the coming year, there are a number of legal events and emerging issues that may impact these properties. Most notably, the rent laws are due to sunset in June 2015. In the past, the state legislature has always voted to extend the laws. This time, there

is, likewise, an expectation that Governor Cuomo’s administration will strongly urge the legislature to extend the laws. However, in view of the new Republican majority in the State Senate, in order for an extension to pass, there will likely be great pressure to ensure that any further extension of the rent laws serves to encourage and advance the development and preservation of rental housing, not continue the debilitating course of anti-owner over-regulation. continued on page 2

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F IRM UPDATE

RENT REGULATION: SOME EMERGING ISSUES TO CONSIDER IN 2015 continued from page 1

Anti-owner over-regulation is what DHCR set out to do in January of last year when it enacted a multitude of amendments to the Rent Stabilization Code, including the addition of the Tenant Protection Unit (“TPU”), which conducted open-ended and seemingly arbitrary “audits” of owners’ rental operations without affording due process protections to the targeted owners. These amendments and TPU audits are the subject of a lawsuit brought by a number of owners and real estate industry organizations, entitled Portofino Realty Corp., et al. v. DHCR. BBWG is co-counsel. In November 2014, the Supreme Court denied DHCR’s motion to dismiss the lawsuit, and directed that it comply with discovery on the owners’ major claims. These discovery proceedings will take place in the early part of 2015. DHCR will be questioned about the underpinnings of its regulatory actions and unilateral investigations. Owners will seek to establish that the amendments and TPU audits are invalid and an unlawful exercise of state regulatory power. The consequences of two surprising and far-reaching Court of Appeals decisions are also matters on the horizon. In the first, Santiago-Monteverde v. Pereira, the Court of Appeals ruled that tenant rights under the rent laws, such as the right to indefinite renewal leases, below-market rents, and family member succession, are a “local public assistance benefit” akin to food stamps, governmental rental subsidies, and Medicaid. Does this mean that private rental property has now been transformed into a public entitlement? The possibility of such claims being raised in countless scenarios involving rent regulated leases and rents is no longer remote speculation. A second ruling by the Court of Appeals also turned core provisions of the rent laws on their head. In three cases jointly appealed known as Borden, Gudz, and Downing, the Court of Appeals allowed tenant rent overcharge claims to be brought as class actions for the first time in rent regulatory history. In reaching that conclusion, the Court of Appeals determined that tenants could elect to waive seemingly unwaivable rights, such as the right to treble damages, in order to maintain the class action. Normally, under state law, class actions cannot assert a cause of action for recovery under a statute that provides for punitive damages. The rent overcharge sections of the Rent Stabilization Law and Code appeared to be precisely that type of statute. However, the Court of Appeals construed the express penalty language in the rent overcharge statute and regulation as non-mandatory and non-penal in the absence of a willful overcharge, allowing the cases to proceed as class actions to the severe detriment of the defending owners. Thus, on the legislative, administrative, and judicial fronts, 2015 will be a year in which owners and managers of rent regulated properties will likely continue to confront a number of changes and challenges. BBWG is dedicated to finding solutions and opportunities in this maelstrom of government intervention in rental housing. With sincere wishes for a safe, healthy, and prosperous New Year,

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The Editors of the BBWG Update

Magda L. Cruz | Aaron Shmulewitz | Kara Rakowski


L ITIGATION UPDATE

THE TENANT’S OBLIGATION TO MAINTAIN CARBON MONOXIDE AND SMOKE DETECTORS By Jordi Fernandez Residential landlords are required to cure Housing Ma intena nc e C ode violations within statutorily prescribed periods of time. Those times vary from “immediately” (in the case of a “C” violation), to 90 days (in the case of an “A” violation). After curing the violation, the landlord is required to certify the correction of the violation with the New York City Department of Housing Preservation and Development (“HPD”). HPD will not remove a violation which has issued until the landlord certifies that the violation has been corrected. The landlord should be aware that some violations are actually the tenant’s obligation to cure. Pursuant to Housing Maintenance Code §27-2045 and 27-2046.1, it is the

becomes defective during the tenancy of a prior tenant who vacates the premises, and a new tenant(s) leases the apartment, then the landlord is obligated to provide or replace an operational smoke detector and/or carbon monoxide detector under the Housing Maintenance Code.

duty of the tenant to keep and maintain a smoke detector and/or carbon monoxide detector in good repair and replace any and all devices which are either stolen, removed, missing or rendered inoperable during the tenant’s occupancy. However, the landlord is required to provide an operational smoke detector or carbon monoxide detector when the tenancy begins. If a smoke detector or carbon monoxide detector is removed or

In light of these shifting obligations, it is prudent for a landlord to keep thorough records concerning the installation and maintenance of smoke detectors and carbon monoxide detectors. In the event that the landlord is threatened with a fine for the failure to correct these violations, the landlord’s compliance with the Housing Maintenance Code, coupled with the tenant’s failure to comply with the Housing Maintenance Code, may help mitigate any fines. Jordi Fernandez (jfernandez@bbwg.com) is an associate in the firm’s Litigation Department.

L ITIGATION UPDATE

RENT ACCELERATION CLAUSE: PENALTY OR DAMAGES By Jeffrey L. Goldman T he N YS Cour t of Appeals, in a December 2014 decision, wa s called upon to answer whether a standard rent acceleration clause was a liquidated damage provision or an unenforceable penalty. The fact pattern is similar to what most owners face following a default by a commercial tenant that results in a summary proceeding to recover possession.

In 172 Van Duzer Realty Corp. v Globe Alumni Student Assistance Association, In c ., t he ow ne r, a f t e r obt a i n i n g p o s s e s sion t h rou g h a s u m m a r y proceeding, commenced an action in Supreme Court for damages consisting of all rent and additional rent due for the balance of the lease term. The Appellate Division, First Department affirmed the lower court’s finding that the provision was not an unenforceable penalty and rejected the tenant’s res judicata claim that the owner could have recovered its damages in the Civil Court action.

However, while reaffirming that an owner has no duty to mitigate and that parties are free to agree to a liquidated damages clause, the Court of Appeals held that such a clause will not be enforceable if it is unconscionable or contrary to public policy. Where a clause is found to be a penalty, the recovery is limited to actual damages proven. The tenant argued that it was a penalty because it permitted the owner to hold possession and immediately collect all continued on page 4

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TRA NSACTIONAL UPDAT E

CENTRAL PARK VIEWS ­­– THE HIGH PRICE OF LIGHT & AIR

By Robert Jacobs In their request to provide what many consider the ultimate residential amenity in Manhattan, developers are seeking Central Park views for luxury buildings on streets that do not border Central Park. One solution is to construct buildings of enormous height that merely overshadow their neighbors facing Central Park. However, because intervening mammoth buildings could someday block these much soughtafter views, developers are seeking light and air easements from buildings bordering Central Park. A luxury cooperative building (the “Coop”) on Central Park South was recently represented by BBWG in the transfer of a light and air easement to a developer. The developer had broken ground to construct a luxury condominium building on 58th Street. However, between the building site and Central Park are the relatively tall buildings lining Central Park South. In order to ensure a view for its higher floors, the developer approached the Coop about purchasing a light and air easement. After much negotiation, the Coop agreed to sell a light and air

easement to the developer. The light and air easement commences at a horizontal limiting plane over the highest point of the Coop’s roof, which is the Coop’s water tower. The Coop was amenable to providing a light and air easement because, under current zoning regulations, the building is already over-built. (In fact, although over-built, the Coop had previously sold its excess development rights to a predecessor of the developer that was able to increase the Coop’s floor area by procuring Inclusionary Housing Certificates [which provide a 20% floor area bonus]). As a result of the huge windfall gleaned by the Coop on the current sale, the Coop was able to pay off its underlying mortgage, and the Coop is now debt free. Bottom line—the Coop turned thin air that the Coop had no foreseeable use for into hard cash, thus benefitting all of its current and future shareholders by retiring its debt, permanently. This article was written by Robert Jacobs, a partner in the Transactional Department at BBWG who was involved in the transaction. For information on light and air easements or the sale of development rights, please contact Mr. Jacobs at rjacobs@bbwg.com.

L ITIGATION UPDATE

RENT ACCELERATION CLAUSE: PENALTY OR DAMAGES continued from page 3

rent due which is grossly disproportionate to the owner’s actual damages. The Court of Appeals agreed, finding this to be a compelling argument since “the ability to obtain all future rent due in one lump sum, undiscounted to present-day value, and also enjoy uninterrupted possession of the property” permits the owner to “double-dip” and gives the owner “more 4

than the compensation attendant to the losses flowing from the breach.” Upon reversal, the Court remanded the matter to enable the tenant to present evidence on this issue. However, the Court of Appeals re-affirmed its prior holding that an acceleration clause in a commercial lease, which

accelerates all rent due under the lease in the event of a material breach of lease, in the course of a continuing leasehold [where the tenant remains in possession] to ensure the tenant’s compliance with material provisions of a lease, is enforceable. Jeffrey L. Goldman (jgoldman@bbwg.com) is the co-head of BBWG’s Litigation Department.


CO-OP | CONDO CORNER By Aaron Shmulewitz Aaron Shmulewitz heads the Firm’s co-op/condo practice, consisting of more than 300 co-op and condo boards throughout the City, as well as sponsors of condominium conversions, and numerous purchasers and sellers of coop and condo apartments, buildings, residences and other properties. If you would like to discuss any of the cases in this article or other related matter, you can reach Aaron at 212-867-4466 or (ashmulewitz@bbwg.com).

CONDO CAN SUE SPONSOR FOR UNDER-FUNDING STATUTORY NYC RESERVE FUND; CALCULATION SHOULD HAVE BEEN BASED ON LAST PRICES BEFORE EFFECTIVENESS

Board of Managers of Cathedral Tower Condominium v. Sendar Associates LLC Supreme Court, Nassau County COMMENT | The Court also held that the principals of the sponsor were not personally liable for the deficiency merely because of their signed sponsor certification in the offering plan.

Skyline Terrace Cooperative, Inc. v. Ortiz-Robles Appellate Term, 2nd Department COMMENT | Courts in the 2nd Department have traditionally been more liberal toward purportedly unauthorized occupancies than have been the courts that govern Manhattan co-ops.

CONDO CANNOT PIERCE CORPORATE VEIL TO PURSUE ALLEGED SPONSOR AFFILIATE FOR CONSTRUCTION DEFECT CLAIMS

Board of Managers of The Gansevoort Condominium v. 325 West CONDO’S CLAIMS AGAINST DESIGNER, MANUFACTURER AND INSTALLER OF CURTAIN WALL SYSTEM DISMISSED FOR LACK OF PRIVITY, NO STATUS AS THIRD-PARTY BENEFICIARIES

The Board of Managers of The A Building Condominium v. 13th &

13th, LLC Appellate Division, 1st Department COMMENT | The Court held that the Board failed to satisfy traditional proof requirements for showing interconnectedness of entities.

14th Street Realty, LLC Appellate Division, 1st Department COMMENT | Curtain walls are popular, and curtain wall leaks are a not-uncommon occurrence, in newly constructed buildings; Boards and Unit Owners are often left without an effective remedy, as this case illustrates.

MOST OF CONDO’S CONSTRUCTION DEFECT CLAIMS AGAINST SPONSOR AND PRINCIPALS DISMISSED, BUT SPONSOR CAN BE SUED FOR BREACH OF CONTRACT, AND SPONSOR AND PRINCIPALS CAN BE SUED FOR FRAUD

Board of Managers of The South Star v. WSA Equities, LLC Supreme Court, New York County

CONDO UNIT OWNER NOT ENTITLED TO BE RESTORED TO POSSESSION AFTER ILLEGAL LOCKOUT BY BOARD

Penaf lorida v. The Copley Condominium Civil Court, New York County COMMENT | The Court held that restoration would be pointless, in light of pending a foreclosure and the fact that the unit had been vacant for years.

COMMENT | In a rare instance of holding that a sponsor’s principals can be sued, the Court also ruled that the statute of limitations for breach of contract starts to run at the first unit closing.

CO-OP SHAREHOLDER CAN BE SUED BY NEIGHBOR FOR ALLEGED NUISANCE CONDITIONS CREATED BY SUBTENANT

Clarke v. 6485 & 6495 Broadway Apartment Inc. Appellate Division, CO-OP ENTITLED TO LEGAL FEES IN ARTICLE 78 PROCEEDING THAT SUCCESSFULLY ANNULLED DHR DECISION FOR SHAREHOLDER’S RETENTION OF UNAUTHORIZED DOG BASED ON DISABILITY DISCRIMINATION

1st Department COMMENT | Be careful to whom you rent; you’re on the hook for bad behavior.

East River Housing Corporation v. NYS Division of Human Rights Supreme Court, New York County COMMENT | In a more recent development in this long, winding case, the U. S. Attorney obtained an injunction to bar eviction of the shareholder and her unauthorized dog, based on federal disability discrimination laws.

CO-OP CANNOT EVICT DAUGHTER OF DECEASED SHAREHOLDER WHO MOVED IN PRIOR TO DEATH

CO-OP LIABLE TO SHAREHOLDER FOR FAILING TO MAINTAIN EXTERIOR OF APARTMENT

Kosovsky v. Park South Tenants Corp. Supreme Court, New York County COMMENT | The Court’s ruling was based largely on a prior ECB decision that the co-op had failed to maintain the building’s exterior in safe condition; damages are to be determined at trial. This was the second significant and prominent litigation loss this year for this ill-starred co-op.

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A D MINISTRATIVE LAW UP DAT E

DEREGULATE RENT-REGULATED APARTMENTS THROUGH HIGH INCOME HIGH RENT DEREGULATION IN 2015 By Joshua G. Losardo Rent-regulated apartments with a legal or maximum monthly rent that reach or exceed $2,500 as of May 1, 2015 may be petitioned for High Income Rent Deregulation (“Luxury Deregulation”) this year. Luxury Deregulation is an administrative proceeding commenced at the New York State Housing and Community Renewal (“DHCR”) that results in the deregulation of a rent-regulated apartment if (1) the legal/ maximum rent is $2500.00 per month or more, and (2) the federal adjusted gross income, as reported on N.Y.S. income tax returns, of all persons occupying an apartment as a primary residence on other than a temporary basis, exceeded $200,000.00 for the two preceding years. Current exceptions to Luxury Deregulation are (a) buildings currently receiving J-51 or 421-a tax benefits; and (b) rent controlled units in buildings that had previously received J-51 tax benefits. BBW&G recommends that owners file for Luxury Deregulation against all rent regulated apartments (both rent stabilized and rent controlled), if the apartment’s legal or maximum rent is $2,500.00 or more as of May 1st. It does not matter if a tenant is paying a preferential rent of less than $2,500.00, as long as the apartment’s legal rent is $2,500.00 or more. An owner may also combine the legal rent of different apartments rented by the same family to reach the $2,500.00 threshold. Owners who have previously filed Luxury Deregulation proceedings should review whether DHCR has already determined whether an apartment’s household 2013 income met the $200,000.00 level. If DHCR has already determined that 2013 income was below $200,000.00, calendar to file for Luxury Deregulation again in 2016. Timing is important when preparing Luxury Deregulation petitions. • On or before May 1st, an owner must serve an Income Certification Form (“ICF”) upon an apartment with a legal 6

or maximum rent of $2,500.00 or more (the ICF cannot be served until the apartment’s rent is $2,500.00 or more). The ICF requires tenants to answer whether their household’s annual income (defined by the Rent Stabilization Code as the Federal adjusted gross income as reported on a N. Y.S. income tax return), exceeded $200,000.00 in 2013 and 2014. The ICF also requires tenants to identify all persons occupying their apartment. • On or before June 30th, owners must file a “Petition by Owner for High Income Rent Deregulation” with DHCR for each tenant the owner seeks to deregulate. The owner’s High Income Rent Deregulation Petition requests that DHCR do one of the following: • Issue an order deregulating an apartment based upon a tenant’s admission that the total annual household income exceeded $200,000.00; or • Seek verification of the tenant’s answer in the ICF because the owner contests it; or • Seek verification of a tenant’s household income because a tenant failed to properly answer the ICF. If an owner seeks verification of a tenant’s answer in the ICF, DHCR will, with the cooperation of the New York State Department of Taxation and Finance, determine whether a tenant’s Federal Adjusted annual household income was above or below $200,000.00 in both years preceding the year that the owner’s petition is filed. If it is determined that the household income is $200,000.00 or more, DHCR will issue an Order of Deregulation, thereby removing the apartment from rent regulation. Orders of Deregulation may also be issued based upon a tenant’s failure to answer a Luxury Deregulation petition. Generally, the verification process takes about eighteen (18) months from filing the petition to receiving an order from DHCR. This article was written by Joshua G. Losardo (jlosardo@bbwg. com), a partner in BBW&G’s Administrative Law and Bankruptcy Departments. For more information regarding luxury deregulation, please contact Mr. Losardo.


NOTABLE ACHIEVEMENTS Sherwin Belkin, a partner in the firm’s Administrative Law and Appeals Departments, was quoted in a year-end article in the Real Estate Section of the New York Times on December 26: “What’s Up Next in New York? – Airbnb and Rent Regulation Will Be Hot Topics. ”

David Skaller, a partner in the firm’s Litigation Department, was quoted in a front-page article in the December 3 New York Law Journal with regard to the firm’s successful representation of an owner in dismissing a rent-controlled tenant’s suit that sought to remove an adjoining building that the tenant claims interferes with light and air circulation to his apartment. Aaron Shmulewitz, a partner who heads BBWG’s Co-op and Condo practice, responded to an inquiry in the New York Times on-line “Q & A” feature on October 18 regarding a co-op’s right to reject a purchaser because the purchase price was too low.

Matthew Brett, a partner in the firm’s Litigation Department, addressed a December 2 continuing legal education seminar sponsored by the Rent Stabilization Association at the New York County Lawyers Association entitled “Navigating Housing Court;” Mr. Brett spoke about Airbnb issues, the end of deemed leases, and tenant buyouts. Magda Cruz and Joshua Losardo, partners in BBWG’s Appeals and Administrative Law Departments, were featured panelists at a December 9 continuing legal education seminar sponsored by the Community Housing Improvement Program at the New York County Lawyers Association, whose topic was “A DHCR Primer,” addressing the issues of amending registrations, TPU investigations, treble damages, and legal challenges to the Rent Stabilization Code amendments.

At the NYCLA Annual Dinner on 12/17/14, Litigation Associate, Christina Simanca-Proctor, meets U.S. Supreme Court Justice Sonia Sotomayor.

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Please Note: This newsletter is intended for informational purposes only and should not be construed as providing legal advice. This newsletter provides only a brief summary of complex legal issues. The applicability of any or all of the issues described in this newsletter is dependent upon your particular facts and circumstances. Prior results do not guarantee a similar outcome. Accordingly, prior to attempting to utilize or implement any of the suggestions provided in this newsletter, you should consult with your attorney. This newsletter is considered “Attorney Advertising� under New York State court rules.

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BBWG January | February 2015 Newsletter  
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